No one expected the OCR to drop to 1% on Wednesday. Adrian Orr seems to be determined to kickstart the economy by dropping the rate to – almost – as low as it can go. But if he thinks that this will cause the economy to suddenly rebound and everything will be sunshine and rainbows again, well honestly, I think he is dreaming.
Reducing interest rates works well as an economic stimulant when rates are high. It promotes growth and spending when you don’t have to pay so much on the mortgage, on the overdraft, or on the credit card. But with the OCR at an unprecedented 1%, even those who know little about economics know that we are in uncharted waters. The OCR was never this low during the GFC, which was the worst economic recession since the 1930s. These are uncertain times. What do you do when times are uncertain? You close your wallet and hunker down.
There is no doubt that some of this uncertainty comes from overseas. Trump’s trade war with China is creating issues around international trade, and New Zealand stands and falls on its overseas trading. The standoff with Iran is also causing some concern. So is Brexit. But it is clear that a lot of our troubles are home grown. Business confidence dropped as soon as this government took over. Cries that business hates Labour governments came from the left of the political divide; there may even have been some truth in them.
The blindsiding of the oil and gas industry however, made sure that such claims were not without foundation. Since then, we have proposed labour reforms taking us back to the 1970s, a Zero Carbon Bill that will literally take billions out of the economy and will have a serious effect on agriculture, and a Conservation minister who seems hellbent on returning us all to the Stone Age. No wonder there is a lot of uncertainty out there.
The only thing holding up at the moment is employment, and wages have increased, particularly for low paid workers, but employment is always one of the last economic indicators to go rogue. Businesses will only lay off staff if they really have to, but once they do, it can be a while before they hire again and already, the number of firms hiring has fallen significantly.
Adrian Orr might be trying to lure business into investing in new equipment or new ventures, but even with interest rates as low as this, there is significant downside risk. New equipment still has to be paid for if your customer base is reduced by 25% and even low-interest rates cannot soften the blow in that. Most businesses now are not in the mood for expansion. They are rapidly approaching siege mentality.
Adrian Orr also seems to have completely ignored or forgotten about depositors. Anyone with money in the bank nowadays is going backwards and that also got worse on Wednesday. What is a depositor to do? The return is so poor these days that it might be time to look for riskier forms of investment or even to put your money under the mattress. After all, it is giving virtually no return after tax. But if too many people start drawing out their deposited funds, the banking system will be in trouble. What may well happen then is that the government will pass legislation restricting the amount of cash you can withdraw from the bank. That will do wonders for confidence. Welcome to the Greece of the South Pacific.
If we had a government with a few clues on economic matters, we might be able to weather this particular storm. Obviously, there is nothing we can do about overseas events, but we survived the GFC better than a lot of other countries, so with a bit of good economic stewardship, we could do it again.
Unfortunately, with a prime minister that does not know what GDP is and ministers who do not know what the CPI is, let’s just say the economic stewardship we require right now is in short supply. Grant Robertson is not doing a terrible job as finance minister, but that is because he is not as hopeless as most of his colleagues. As finance ministers go, his is not exactly a stellar performance. It seems our current government ministers do not possess a single business or economic paper between them and unfortunately, it shows.
Carmel Sepuloni sneered when asked what CPI was by Louise Upston. Sepuloni, who is Minister of Social Development, had to be told by Phil Twyford what the letters stood for. Sepuloni can sneer all she likes but the demonstration of gross economic ignorance was on display for all to see and she didn’t even try to hide it. That is how far we have fallen.
So, I think Adrian Orr is way off target if he thinks a drop in the OCR of 50 percentage points will kick start the economy. All it has done is to bring to everyone’s attention how really bad things have become. How I long for the days of John Key and Bill English. Whether you loved them or hated them, at least they knew what they were doing. This lot simply doesn’t have a clue.