Economy: overseas instability risk looms

This year could see a geopolitical crisis on the scale of the financial crash a decade ago, a political risk consultancy is warning.

Citing ‘‘daunting’’ global political challenges, New York-based Eurasia Group said: ‘‘If we had to pick one year for a big unexpected crisis – the geopolitical equivalent of the 2008 financial meltdown – it feels like 2018.’’

However, local analysts say that, barring a nasty global misfortune, New Zealand can expect more general stability and solid business conditions this year.

Commenting on the sharemarket, Shane

Solly from Harbour Asset Management said the outlook for equities this year remained ‘‘solid’’, supported by the ‘‘Goldilocks’’ conditions of solid economic growth, low inflation and easy monetary policy settings.

Economically

New Zealand was ‘‘relatively resilient, with prudent government and private-sector debt levels’’.

The two main risks were a modest rise in inflation, and changes to government policy such as migration which could slow the economy, he said.

However, no country is invulnerable to overseas events, and Eurasia said the biggest uncertainty surrounded China’s move to fill a political power vacuum as US influence continued to decline.

‘‘We see a much greater fragmentation of the global marketplace because governments are becoming more interventionist,’’ Eurasia president Ian Bremmer said in a Bloomberg Television interview.

Part of it was ‘‘because the Chinese have an alternative model for their investments and they’re increasingly going to be seen as the most important driver of other economies around the world‘‘.

Eurasia’s concerns include Chinese President Xi Jinping’s successful consolidation of authority, which is helping him to fill the gap created by US President Donald Trump’s move away from Washington-led multilateralism.

In areas such as trade, investment and values, China is setting international standards with less resistance than ever before.

‘‘For most of the West, China is not an appealing substitute,’’ Eurasia said. ‘‘But for most everybody else, it is a plausible alternative. And with Xi ready and willing to offer that alternative and extend China’s influence, that’s the world’s biggest risk this year.’’

There were also too many places where a mis-step could provoke international conflict, including cyber-attacks, North Korea, Syria, Russia and terrorism.

In New Zealand, ASB chief economist Nick Tuffley said most risks for our economy this year stemmed from offshore.

The housing market appeared to be having a ‘‘soft landing’’ and business confidence seemed to be getting back on its feet after the general election. But there was still a question mark over areas such as migration, a key economic driver.

‘‘What we don’t want to be is in the situation where employers who are screaming out for people with particular skills and they just simply can’t find them domestically and if the overseas door gets closed off, then you have opportunity going begging,’’ Tuffley said.

Solly also believed the risks for New Zealand’s economy and sharemarket this year were few.

One risk was modest inflation, which could crimp the earnings of bond-sensitive sectors such as utilities and real estate. Another was the global unwinding of central bank stimulus packages.

Businesses were also likely to be grappling more this year with disruptive technology, Solly said.

‘‘Current low interest rates and easy access to debt mean that merger and acquisition activity may accelerate.’’

But business confidence still supported ‘‘solid economic activity and elevated employment levels’’.

Moreover, Australian business conditions had strengthened over the past year, which was good news for Kiwi companies with exposure to Australia.

For the sharemarket, prices were quite ‘‘elevated’’, so ‘‘the potential is for lower local equity market returns than those that have been generated over 2017’’.

Shares would still offer better returns than cash and bonds, ‘‘until … sustained central bank interest rate hikes constrain growth’’. –with Washington Post

"We see a much greater fragmentation of the global marketplace because governments are becoming more interventionist." Ian Bremmer, Eurasia Group