The New Normal

The New Normal

The Reserve Bank has left the Official Cash Rate (OCR) unchanged at 2.5 percent. The summary and the accompanying Monetary Policy Statement accompanying the announcement make for interesting ‘reading of the tea leaves’ about what the future might hold for investors, business and households in general.

In a nutshell Reserve Bank Governor Alan Bollard said the New Zealand economy is recovering broadly as expected and growth is predicted to pick-up further through 2010 to about 4 percent next year but this is subdued (words in bold are my emphasis) relative to previous recoveries. Growth outside New Zealand is strongest in China, Australia, and emerging Asia, but is much more muted in other trading partners. At the same time, risks around the global outlook have increased, although not to the extreme levels seen at the height of the crisis.

The Statement went on to say households are still cautious with their spending, house sales and credit growth remaining subdued. Business spending is weak despite much improved confidence.

These descriptions essentially outline the “New Normal”. We will continue for the next 5-7 years to suffer a “double-D” sized hangover - outsized double deficits of income and debt in both the Government’s and households’ books.

Economic activity will remain patchy and subdued as households and Government reduce debt and businesses strengthen their balance sheets. The price of money has risen and its availability has reduced as banks are more cautious in their lending and development funding has substantially dried up. This will also impede growth.

The silver lining to these gloomy clouds is that as ‘risk’ has been re-priced and as corporates and local authorities have needed to extend their funding bases there are improved income opportunities for investors.

My Mum used to say “there’s nothing new under the sun” maybe the New Normal is just a return to how things used to be….