On the money
Why Sir John Key was right about the risks of an economic downturn
Sir John Key is right about the risk of an economic downturn. New Zealand’s economy is cyclical and we are coming to the end of the current economic cycle.
Whether you believe that has much to do with the current Government probably depends on your politics.
But Key was speaking at the National Party conference and did not shy away from making the point that the low confidence that business has in the coalition was likely making things worse.
New Zealand’s economy is ultimately fuelled by exports but it feels most like an economic boom when the domestic part of the economy is humming.
We’ve seen record immigration and a housing boom driving the domestic economy for several years and it has created a powerful wealth effect for many New Zealanders — even if it has created a widening inequality gap with those who were not set up to benefit.
But with a small population base, there are limits to how far New Zealand’s domestic economy can drive growth.
We inevitably hit capacity after a few years of growth above 3 per cent.
That means we hit skilled labour shortages and our infrastructure gets log jammed, immigration drops off . . . business gets frustrated.
At this point, we typically become vulnerable to an external shock.
Whether it’s the 2008 global financial crisis, the 1997 Asian financial crisis or the stock market crash of 1987 — we have become accustomed to taking a big hit and resetting our economic course.
What’s weird about this cycle is that it has been slower and longer than most — and there has been no external shock . . . yet.
Key also highlighted international risks.
China’s economy has been wobbly this year — its stock markets some of the worst performers — and could slow further if a trade war with the United States escalates to tariffs on all its exports.
If a trade war causes global commodity prices to keep falling (they are off about 9 per cent in the six weeks since Donald Trump upped his trade war rhetoric) then New Zealand could find itself facing a sharper downturn than expected.
That will require some quick and innovative thinking by the
While New Zealand’s growth is declining, it is possible an external shock could push us into recession.
Government to navigate.
Key, of course, with his National Party hat on doesn’t think the coalition has the right policies to manage that.
But let’s not panic.
Even the gloomiest economists only see New Zealand’s growth rate slowing to 2 per cent this year.
That’s a long way from a recession — or a typical economic downturn for this country.
And there is near consensus among economists that the next six to nine months will be the lowest point in the cycle.
We do have a centre-left Government with money in the bank. So there will be stimulus flowing in to boost the economy.
That’s just taking a bit longer to deliver than it might have if it had been delivered via a National Party tax cut.
We also have a Reserve Bank with considerable scope to cut interest rates and even pep up the housing market by lifting lending restrictions.
Forecasts suggest GDP growth will head back above 3 per cent next year.
It’s also worth noting that US economic growth just hit an annualised rate of 4.1 per cent.
You can make a strong case for the longer-term folly of Trump’s economic strategy but, for now, he has super-charged the US economy with massive tax cuts.
China has also started to stimulate its economy.
Key is correct that we are vulnerable right now.
While New Zealand’s growth is declining, it is possible an external shock could push us into recession.
Key has said he remains hopeful this doesn’t happen.
He knows full well the complexity of the economic outlook we currently face.
But his assessment of the risks was not overblown.