Eaqub: Time to act to save the economy

The Chinese economy has been slowing for a while now (file)
The Chinese economy has been slowing for a while now (file)

World markets are rallying this morning after China announced it was cutting interest rates to try to give its economy a boost.

The announcement came after the Shanghai Composite Index plunged another 7.5 percent.

Wall Street has risen more than 1 percent this morning, and European stocks have made gains of between 3 and 4 percent, after China cut interest rates for the fifth time since November.

Despite the rally, investors remain cautious about what's happening in the Chinese economy, with many expecting growth of 5 or 6 percent, instead of the previously expected 8 percent.

British advertising executive Sir Martin Sorrell says China's growth has been unrealistic.

"Valuations were just too high, and we all were bemused by it. Commentators were saying that the market had been overblown in China, the stock market has been overblown for many months.

"This is just the realisation that the bubble burst."

Meanwhile in New Zealand, the dairy downturn is being blamed for the softening of the economy. The New Zealand Institute of Economic Research (NZIER) is predicting the effects of reduced farm incomes will reverberate through the remainder of 2015.

But senior economist Christina Leung says while there's been a slump in dairy, other industries look positive.

"Demand for New Zealand beef is reasonably strong. We've also got the kiwifruit industry rebounding from the Psa outbreak a few years ago; the tourism sector is going from strength to strength."

NZIER expects annual GDP growth to dip to 2 percent by the end of the year, before rebounding in 2016.

Ms Leung says business and consumer confidence is down, especially in the regions that rely on dairy.

"Farmers are reining in their spending, so that is going to flow through in terms of spending on farm equipment, and also farm-supporting services."

Alongside the dairy price drop and China's market correction, NZIER says the Auckland housing market is a big risk to the New Zealand economy.

Prime Minister John Key says the country isn't headed for a recession, and nor does economist Shamubeel Eaqub, although he says we should be concerned.

"We're a small, open economy; we're very connected to what's happening in the world," he said on the Paul Henry programme this morning.

"The world feels very scary right now… the slowdown in China is now spreading to other emerging markets in Asia, and Asia has been a really, really big part of our economic resilience in the past few years – a lot of the export growth, a lot of the commodity price strength that had been our support until very recently was very much an Asian story, centred on China."

The Chinese economy has been slowing for a while now, and Mr Eaqub says the past few days have just been the market catching up to what's been happening on the ground for many months.

"Ultimately the China story is very much the epicentre of what's been happening in the global economy, and a slowdown there matters."

He would like the Reserve Bank here to cut interest rates to bring the exchange rate even further down, to help the export sector.

"They did a pretty good job in the aftermath of the global financial crisis – they were slow, mind you – but they were very good at shoring up the economy, shoring up the banking system."

The global financial crisis is generally considered to have begun in early 2008, but it took until January 2009 for the Reserve Bank to lower interest rates to 3 percent, down from 8.25 percent the previous June.

The catch however is lowering interest rates could pour fuel on the sizzling Auckland property market.

"We can't use interest rates to clobber the entire economy because Auckland house prices are up – because this is not just about the house prices here, but it's about jobs right across New Zealand," says Mr Eaqub.

Instead, he wants the Government to invest "significantly" in infrastructure such as state housing and roads, saying there's no better time to do it than when the economy needs a boost.

"There's so much spare capacity in the economy. People are looking for work."

This could come at the expense of the Government posting a surplus, but Mr Eaqub says that's a red herring when it comes to good economic management.

"I don't really care if there's a surplus of $500 million or a deficit of $500 million. But if we're using this opportunity to increase the capacity of our economy, investing in our country, that nation-building stuff, then I think we're heading in the right direction."

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