Posts Tagged "GDP"

Kiwi in Flight

Posted by on Mar 14, 2014 in Commentary, Featured, Market News

It’s been a long time coming. Of the major currencies commonly traded, there have been no interest rate increases since 2010 when Australia last increased its overnight rates. Australian rates didn’t last long at those levels and were reduced in stages soon afterwards, matching the other major economies. This time though, things feel different. On Wednesday evening this week, the Reserve Bank of New Zealand announced a rise in interest rates from 2.5% to 2.75% (well, Thursday morning in New Zealand at the time). An interest rate increase in any of the major currencies is as rare as New Zealand’s national bird, the kiwi. It’s currency, nick-named the kiwi was already strong and on the announcement, it flew higher. This might not be great news for mortgage holders in New Zealand and it might not get picked up by many commentators, but to me, this is a significant turning point. New Zealand is a small economy, not even in the top 50 in terms of GDP. Yet it’s currency is traded as one of the 8 majors. During the economic crisis and fall out after 2008, interest rates have been slashed. Other major economies went further and adopted measures such as quantitative easing (QE) to stimulate their economies. The talk is still of how to reduce the dependence of measures such as QE and “normalise” economies. In this regard, the Fed has its own tapering programme running at the moment. To me, the significance of the announcement is that it marks the beginnings of what could be called “normal” again. The New Zealand economy has been growing strongly. Export demand is healthy and many economic indicators suggest strong demand in the local economy with the prospect of inflation. How refreshing to see interest rates being used once more as a weapon to protect against inflation. As for the rest of the Western economies, I suspect they’ll be looking enviously at the Kiwi success. In Europe and the USA, the spectre of deflation has not been totally eliminated. In Japan, they are still working at creating inflation. In the UK and USA, we still have greatly indebted consumers, companies and governments. We’ve had the artificial stimulus of ultra-low interest rates for several years to get our economies bumbling along. Let’s hope the kiwi in flight is the light at the end of the tunnel we all hope...

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Kicking the can

Posted by on Nov 29, 2012 in Commentary, Featured, Market News, News

Kicking the can

When it comes to kicking the can down the road, European ministers have shown the world their expertise. Aligned with their ability to fudge issues, it gives markets and commentators plenty of material to write about. This weeks further instalment of the Greek bailout is a case in point. After months of negotiation and discussion, including an open spat with the IMF, European institutions handed over several billion more Euros to Greece as part of their international bailout. IMF participation at this time was deferred. Greece now has the liquidity to meet it’s immediate financial needs and will be kept off the front pages of the newspapers for the time being. Meanwhile, Greek people will be subjected to further austerity and recession. Greek debt is supposed to be capped at 120% of GDP by 2020. Best guesstimates suggest this figure will be missed by a small margin. The figure is meant to be 110% by 2022. That suggests debt repayment at the rate of 5% per annum, an amazing achievement by any standards. To help achieve these goals, interest rates paid by Greece have been cut to the bone. If market interest rates increase, it will have a knock on effect on Greece. A reduction in the amount owed by Greece has been factored in, without any details of how and when this might occur. So there will be future losses to be incurred by the lenders. The plight of the Greek economy is subject to further downturns. Significant structural changes to the economy and state activity are needed, requiring strong political leadership. So far, these structural changes have not been addressed, and it would have been easier to implement them earlier, at a time when the Greek economy was stronger than it is now. All in all, there is still widespread expectation of losses on Greek government borrowing. Much has been left undetermined. Yet Greece will slide out of the headlines for now. Plenty of potential uncertainty for trading the Euro and an expert lesson in kicking the can down the...

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Sovereign debt

Posted by on Nov 26, 2012 in Commentary, Market News, News

Sovereign debt

So Moody’s took the decision to downgrade the sovereign debt ratings for France last week. This is the second ratings agency to strip France of it’s AAA rating, following the decision by Standard & Poors in January. That just leaves Fitch of the major ratings agencies having France with a AAA rating. One of the reasons cited was the level of debt as a percentage of GDP (Gross Domestic Product), which for France, is estimated at 90%. France has made several budget moves in an effort to get current year borrowing down to 3% of GDP for 2013, in line with the requirements of the Maastricht treaty. There are other reasons for the downgrade, including the continued reduction in competitiveness of the French economy. There are some interesting comparisons to be made to the UK economy. OK, in the UK we have our own currency and can set our own monetary policy. UK debt is lower than that of France when expressed as a percentage of GDP. But worryingly, there is no prospect of the UK getting it’s current budget deficit down to 3% of GDP in 2013. That means if France succeeds in sticking to it’s budget, it’s overall debt levels will be increasing at a slower rate than those of the UK. And while the UK has a way to go before it reaches 90% borrowing levels, adding to debt at the current rate of 8% per annum is unsustainable. Put simply, we are living way beyond our means. George Osborne has not really cut the debt as much as he could or should have so far. France is under the spotlight right now. Next week, it will be the UK’s...

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