The US' credit rating downgrade may yet have dramatic repercussions for the world economy.
With the debt concerns of Europe re-emerging, this time in Italy and Spain, and concerns about the growth prospects of the US, world share markets have plunged in recent days.
Early last week news was received of the successful down to the wire efforts to raise the US borrowing limit, which although smaller in size than many had hoped, did act to give markets a boost. This boost was however short lived, with the end of the week bringing heavy falls as nervous investors began selling down equities in light of Europe’s debt concerns and the poor outlook for US growth.
The weekend (NZ time) also saw ratings agency Standard & Poor’s downgrading the US sovereign debt rating from AAA to AA+, with the repercussions of this move expected to be felt over the coming days.
Being a small part of the global economy, New Zealand is very much at the whim of what is happening internationally, and while our share market will most likely be negatively affected by the events in the US and Europe, it will be interesting to see what impact this has on the value of the NZ dollar, which started to fall in value last week after recent strong demand.
This high dollar is great for those travelling to the US, Great Britain, or Euro zone countries, as it means purchases in these countries will be relatively a lot cheaper for holiday makers. The high dollar is also good if you are looking at purchasing imported goods, although some retailers have indicated that these benefits may not be as immediate as some may like, with the forward ordering of stock meaning the cheaper items may flow onto the shelves later in the year.
Those who are hurting from the high Kiwi dollar are our exporters, and while commodity exporters are experiencing some respite due to rising global commodity prices, there are others in the economy who will most definitely be feeling the effects of the current high exchange rate. This had led to calls for the Reserve Bank to intervene and devalue our currency, and with arguments both for and against adopting this strategy, one would imagine the Reserve Bank will wait and see what impact recent events have on the currency before making any decisions.
The Reserve Bank has also been in the spot light recently with regard to interest rates, and just what their next steps will be. Many commentators were predicting a 0.50% rate rise in September, although with the events of the past few days, some have questioned whether this rate rise will materialise. Should this rate rise eventuate, it will push up the cost of borrowing for New Zealanders, and with many households currently on floating mortgage rates; this has been a very topical issue recently. Another effect an interest rate rise may have is to increase the attractiveness of NZ as a place to invest, thus increasing demand for our dollar and pushing the exchange rate higher still.
With many complex issues at play in the global and New Zealand economies, it will be interesting to see how the next few months play out. What will be the ongoing effects of the debt concerns in Europe and the US, how will share markets respond, what will happen to domestic interest rates, and where the NZ dollar get to? We would be interested to hear your thoughts on any of these areas.