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Stagflation Has Little To Do With Hunting

Stagflation is a little used term in the vocabulary of most. What is it? Put simply - times of high and rising inflation, alongside a recessionary or very slow growth period. And why would you be worried about that in today’s economy many may be thinking – we’re fine aren’t we? 

When we lift the economic covers there is little doubt we are recession bound – or at least in for a sharp slow down period.  A snap-shot of eight local indicators supports the argument better than just my opinion.

  1. Business confidence is at its lowest since Sept 2001 and reported performance of some better companies is coming in below expectations.
  2. Worsening conditions are reflected in rising prices, slower job growth and failures in financial service providers, as well as much tightening credit conditions also low net migration.
  3. The dollar hit a near all-time high (post float anyway) against the US dollar and is high against the Australian dollar, Euro and Sterling compounded by drought conditions for many primary producers – exporters are or soon will be bleeding.
  4. Oil is now over US$101 a barrel, pump prices petrol and diesel, act as a tax on consumers. Adding insult, much of that energy money is sent to countries that are buying cheaply major world banks and keeping them from bankruptcy.
  5. Home prices continue to fall and home construction is slowing. Mortgagee sales are growing. There is no sign of a bottom in the market and the supply of unsold sections continues to rise.
  6. Commercial real estate has held up well, but there are signs this is about to end, as lending for even better quality commercial real estate is becoming harder to get. Investors are hiding. There are developers already tossing in the towel.
  7. Personal income for the average New Zealander has not risen with inflation and with rising energy and food costs it is no wonder that retail sales are dropping.
  8. Even with a good start to KiwiSaver, the take-up being over 300,000 members, I suggest our savings rate is still poor to negative, which means folk are using savings (housing equity via revolving credit accounts) to maintain their consumption.

To close, a telling précised comment from one of the many US economic blurbs – that has strong parallels with NZ, in my view. "At the beginning of the week we hoped that the monoline insurers, would keep their triple-A ratings – they did. Unfortunately, the markets rallied briefly, but with junk leading the way. The problems affecting the market are running deeper than expected. Credit-related losses are still unravelling, the housing market is free-falling, consumer spending is stalling, commodity prices are hitting new highs, manufacturing appears to be contracting, and overall GDP growth is skidding."

Enough said – it is not black Friday. But, I think we should concede that if we are not in a recessionary phase, it certainly looks and feels like one.  Keep your cash in hand!

Original Article published March 2008

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