19 Sep

If you live in America, Europe you might be watching the European economic crises quite closely. Rob Oram gives his take on what people in New Zealand need to be looking out for.  There’s a lot of “if’s” in Rod’s story. A sign of these volatile times.

Rugby distracts us from major shifts worldwide.

The Reserve Bank governor delivered a reassuring review of the economy on Thursday. But to do so Dr Alan Bollard used a lot of “ifs” about the deteriorating state of the global economy and its limited impact so far on New Zealand’s.

If the increasing weakness of the US and European economies doesn’t spread to Asia; if the downturn for trading partners continues to have only a “mild” effect on us; if overseas financial contagion doesn’t spread to our banks; and if consumers and business here don’t price high inflation into their behaviour then our economy will continue to perform reasonably well.

Although the words were relatively comforting, the numbers were less so. The Reserve Bank lowered its GDP forecasts for this year and next in the Monetary Policy Statement (MPS).

For the year to next March it forecast GDP will grow 3.6%, versus the 4.4% it forecast in the June MPS; and for the March 2013 year the number is 2.6% versus 3.6%. On a brighter note, it now expects the economy to grow 2.9% in the March 2014 year versus 2.2% forecast in June.

Delay in rebuilding Christchurch was the explanation Bollard gave for slower growth over the next two years. Canterbury construction activity will contribute about one percentage point a year to growth over the period. But even so, GDP growth over the three years to March 2014 will end up nearly a percentage point lower than forecast in June.

There are positives in this overall trend: the domestic economy remains stronger than expected, thanks to wages, consumer spending and the housing market showing a little more life; export prices are easing but remain historically high, while good weather is helping export volumes; and the high dollar is keeping prices of imported goods low.

But there are some negatives.

Even this modest rate of growth will use up most of the spare capacity in the economy in terms of plant and people in the next year or so, Bollard said.

Even though the unemployment rate is expected to remain above 6% for a while, it looks as though there’s a mismatch in skills demand and supply, he added. It is the goods sector that needs people but it is the service sector that has the most available.

Business appetite for investing has increased, according to survey data in the MPS; and the high dollar makes this a good time to import machinery. But so far relatively few companies are doing so and the deteriorating global outlook might deter others, the MPS suggested.

If this happens, then our growth will be even more constrained in the middle of this decade.

Tourism is another drag on the economy. Once the Rugby World Cup is over, the sector will be “subdued” because of low numbers of visitors from the northern hemisphere, the MPS said.

However, these forecasts from the Reserve Bank look plausible only if you assume we remain semi-detached from the world. The trouble is, though, the world is crowding in on us.

The IMF recently downgraded its forecast of US economic growth to 1.6% this year from 2.5% two months ago, and to 2.0% next year from 2.7%. As for Europe, some leading investment banks reckon the odds on renewed recession there are 50-50. Governments and central banks have little ability left to stimulate their economies because of their budget deficit and debt problems.

This, though, is not a repeat of the global financial crisis of 2008-09. That was a liquidity crisis caused by financial markets seizing up. Banks were too scared to lend to each other because they had no idea how much damage sub-prime mortgages and other toxic assets had done to them.

The solution was relatively easy, though unprecedented in scale. Central banks and government pumped vast sums of money into the system, bought piles of bad assets and gave generous guarantees to get financial markets moving again.

Although that dealt with the immediate symptoms, it did little to solve the underlying problems the toxic instruments had created. In particular, consumers and governments in many western countries had availed themselves of the abundant, cheap debt the instruments created to live well beyond their means.

So now those countries have to face reality. For them, this is a deeply structural crisis that will take years to resolve. It requires them to take very painful economic and political decisions to restore some semblance of international competitiveness so they can earn their way back to financial sustainability.

The political will, though, is weak. The governments of Greece in particular, and to a lesser extent Italy and Spain, are failing to take the actions they need to reassure investors and to restructure their economies.

The EU talks bravely of increasing fiscal discipline on members. Responding to such crises has always been a driver of greater EU integration, Jose Barroso, president of the European Commission, said during his visit here 10 days ago.

That’s true. But doing so has always taken painful and protracted negotiations between countries and a long time to build grudging voter support. Now investors are demanding bold, immediate action. They want the EU to take steps towards fiscal federalism that would require countries to cede substantial control over their finances. Yet only the most ardent advocates of European integration, whether politicians or voters, support that.

So some form of Greek sovereign default, or at least an orderly restructuring of its government debt, gets nearer by the day. European banks will take a nasty hit on their loan books, increasing voter pressure on governments to support their banks rather than other countries. Investor confidence in the banks and governments will fall, as will business and consumer confidence and economic activity.

In the US, the nexus of politics, debt and economics is not as fraught. But it is more than bad enough to sap confidence and activity, delay critical restructuring of its economy and worsen the global outlook.

If all this seems very remote, it’s only because we’re distracted by the rugby. When it’s over, hopefully, we’ll get back to reality. Above all we must seek the opportunities these profound shifts in the global economy are creating.”

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Other snap shots the Sunday Star Times provides of NZ biz, finance matters, trust matters, budget matters and saving plans in New Zealand news features links are:

~Posted by Horiwood.Com, Aotearoa New Zealand, Polynesia Asia-Pacific. 19.9.11~

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Posted by on September 19, 2011 in Economy


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