Here we are near the start of another year and there are a number of pretty encouraging signs. The New Zealand economy has now been officially out of recession for some months; the Australian economy is moving along reasonably briskly; indeed, most of the major economies of the world are officially out of recession now. House prices in New Zealand have recovered most or all of their fall over the last couple of years, and consumers are feeling more confident. The Prime Minister has just made a major speech outlining how the Government hopes to raise living standards to Australian levels over the next 15 years. That’s all good news.
Our part of the world has actually come through the international recession in rather better shape than many other countries. Our own recession has been quite lengthy – it began even before the international recession, partly because of drought – but it has been relatively mild, despite the worse-than-expected unemployment numbers announced recently.
Why? There are several reasons. First, our banks (actually, of course, the Australian banks which provide most of the banking services in New Zealand) have remained in very good shape as compared with their international counterparts. That has meant that there has been a continuing flow of credit to both personal borrowers and businesses.
Second, China has continued to grow strongly throughout the international downturn. China’s growth has directly helped exporters in both New Zealand and Australia, and indirectly helped us too, because of the benefit we get from a buoyant Australian market.
Third, the Reserve Bank of New Zealand reduced interest rates very aggressively as the local recession intensified and, while that certainly reduced the income which those with bank deposits could earn, that helped cushion the New Zealand economy.
And finally, thanks to the budget surpluses which successive governments have run in New Zealand since 1994, our government debt is pretty low by international standards, and that has enabled the present Government to run quite a large budget deficit now. All that has helped maintain economic activity in New Zealand.
Nobody likes to see unemployment but, fortunately for us all, it remains much lower in New Zealand today than it was in the early nineties, and even slightly lower than it was at the time of the Asian crisis in 1998. And it is well below the unemployment in North America and Europe.
But there are some dark clouds on the horizon.
Internationally, many countries are still facing serious economic problems. The US President has just announced his budget for the next 12 months; even if that gets through Congress unscathed, it involves a deficit equivalent to NZ$2.2 trillion, or over 9% of America’s enormous GDP, with total government debt approaching 100% of GDP. The British situation is worse. In Japan, government debt is rapidly approaching 200% of GDP, and rating agency Standard & Poor’s warned a few days ago that the country’s AAA credit rating is at risk. Several countries in Europe – most notably Greece, Spain, Ireland, and Italy – face very difficult budget situations. This means that many countries are faced with scaling back government spending, increasing taxes, or some of both, even though economic recovery in most countries is still quite anaemic.
I have three concerns, two of them for the short-term outlook and one of them for the longer-term outlook.
My first short-term worry relates to the international situation I’ve described. Many countries will be forced to scale back the extent of their fiscal stimulus (the extent of the budget deficits they’re running) because of the sheer enormity of their government debts. If they don’t do that, governments will be faced with rapidly rising longer-term interest rates as bond investors need more and more enticement to get them to buy the avalanche of government debt. These higher long-term interest rates will discourage investment and slow economic growth. On the other hand, if governments do scale back the extent of their fiscal stimulus, that part of the stimulus to economic activity will be removed. It is an extremely tricky balancing act, but the risk of economic activity slowing again in major developed countries is a real one.
My second short-term concern relates to the housing market in New Zealand – and even the housing market in Australia, to the extent that our own economy is significantly influenced by the level of activity in Australia. A recent international survey indicates that, relative to incomes, house prices in New Zealand and Australia are some of the most expensive in the world. That does not mean that they are about to collapse of course, in either country. But whereas house prices in the US and the UK have fallen very sharply over the last couple of years, in New Zealand and Australia they fell quite modestly and now appear to have risen back to much the level they reached two years ago. What happens to them over the next year or two will have a major bearing on economic activity in New Zealand. If they were to rise strongly, or even stabilise at their present level, consumer spending and therefore activity more generally could be expected to be reasonably buoyant. If on the other hand, we were to see prices decline to the sort of level they were, compared with incomes, in the early part of the last decade, the effect on our mood would be serious, and economic activity would be very subdued for some time.
My longer-term concern relates to our capacity to narrow the gap between living standards here and those in Australia – ideally, to eliminate that gap by 2025 as the Government has pledged to do. If we don’t succeed in doing that, we will see an increasing number of New Zealand citizens heading across the Tasman, as has happened over the last few decades. Increasingly, we would see our children and grandchildren growing up cheering for the Wallabies.
Catching Australia is not impossible, as I was surprised to see the Reserve Bank Governor, Dr Alan Bollard, claim on television. But it will require political leadership of the highest order to explain to New Zealanders what needs to be done.
Copyright © 2024 Don Brash.