NZ resilience in face of doom loop
It’s maddening how knuckleheaded some of the commentary on declining local business and consumer sentiment has become. Sure, there are plenty of business leaders wandering about in a funk because they either don’t trust, understand or like what the Labour-led Government is doing and who reasonably fear it could fall apart because Labour’s junior coalition partner, NZ First, lacks discipline.
However, the New Zealand economy’s biggest problem continues to be that it’s choking on its own growth. Infrastructure and skills bottlenecks are far greater barriers than anything the Government is getting up to, unless you happen to be in the oil and gas sector.
Nothing’s perfect, but budget surpluses, low inflation, low unemployment, low government debt, rising wages, enviable annual growth rates compared with our peers, and a reaffirmed Aaa credit rating are proof the economy is in reasonable nick.
The real trouble is the rest of the world, where the risks of trade wars and real wars are spiralling upwards.
‘‘I’ve never known a time when the potential sources of volatility have been so widespread geographically,’’ Frederick Kempe, the chief executive of Washington-based think-tank the Atlantic Council, said ahead of this week’s annual United Nations General Assembly in New York.
Prime Minister Jacinda Ardern’s response at the assembly is to appeal to the tattered fabric of global rules and institutions.
But that message has been drowned out by United States President Donald Trump, whose economic nationalist agenda is driving so much of the current global turmoil and is making it entirely rational to be less confident about the economic outlook for New Zealand in an unsettled world.
No-one can know exactly how these chaotic influences will play out.
However, one analyst worth hearing from is Nouriel Roubini, the Clinton-era White House economic adviser who foresaw the global financial crisis a decade ago.
Writing for Project Syndicate earlier this month, Roubini’s gloomy thesis is simple: the US economy is being pumped up by unsustainable levels of fiscal stimulus and will run out of steam in 2020. When that happens, current US growth above 3 per cent will fall below 2 per cent.
At the same time, US interest rates will surge, because the current stimulus is poorly timed and will prove surprisingly inflationary.
As US interest rates rise in response, other central banks will follow suit, and global growth rates will slow.
Meanwhile, US trade disputes will escalate, disrupting global supply chains and limiting technology transfer. Muddle-headed policies to stem inward migration will further dampen US growth.
Elsewhere, China is likely to slow down as it cools its debt-driven domestic economic expansion, while other emerging market economies will ‘‘feel the pinch from protectionism and tightening monetary policy in the US’’, Roubini says.
In Europe, populist movements will prevent difficult economic adjustment and exacerbate the ‘‘unresolved ‘doom loop’ ’’ of governments and banks holding vast quantities of public debt created to prevent a global recession after the GFC.
The risk of a big European economy such as Italy leaving the eurozone would grow.
Into this mix throw ‘‘frothy’’ global equity market valuations and over-priced residential property and the scene is set for a major asset repricing in 2019.
‘‘Unlike in 2008, when governments had the policy tools needed to prevent a free fall, the policymakers who must confront the next downturn will have their hands tied while overall debt levels are higher than during the previous crisis,’’ Roubini writes. ‘‘When it comes, the next crisis and recession could be even more severe and prolonged than the last.’’
How might an increasingly beleaguered Trump Administration respond to all this?
Nourini predicts more destabilising attacks on domestic economic institutions, especially the US Federal Reserve, while the temptation to create diversions abroad – think war with Iran – will grow.
New Zealand is simply too small to influence any of this, but current economic policy settings at least imply resilience if the worst comes to the worst.
Particularly important are a strong Crown balance sheet, conventional monetary policy settings with room to cut interest rates, and a relatively competitive economy.
Today’s chorus of opposition to dismiss the value of the current Budget Responsibility Rules will be exposed as a short-sighted fad if some or all of the risks above play out.
–BusinessDesk
The New Zealand economy’s biggest problem continues to be that it’s choking on its own growth . . . The real trouble is the rest of the world.