June 26th 2009 – New Zealand: Recovery or
Not?
Source: TVNZ
More evidence emerged this week that the worst of this global financial crisis could be over.
Locally, net migration levels continued their upward trending providing further hope for a stabilising housing market. Consumer confidence steadied and New Zealand's investment and trade deficit with the world narrowed.
On top of that the OECD revised its outlook for global growth upwards next year and picked
New Zealand to be growing at 0.6% in 2010. In the US, the Federal Reserve also talked of the recession easing.
Even the gloomy Nobel prizing winning economist Paul Krugman was quoted recently as saying a full blown utter collapse had been averted. However, while an increasing number of commentators may now be willing to concede that the worst of the crisis might be behind us, that doesn't mean we are going to have a fast or strong recovery any time soon.
Expect a bumpy ride for some time yet, especially with the huge amount of disagreement there is on the issue of inflation and whether all the borrowing and spending by governments - the US in particular - is going to create an inflation bubble....
There is no sign of the inflation surge just yet... but many are still expecting it too come. When, of course, is the big issue and one which bond markets have become very preoccupied? Debate over what sort of recovery the world is going to have is raging right now.
Will it be a 'V' shaped recovery, will it be a 'U' shaped or perhaps even a square root shaped recovery as
OMF's Nigel Brunel suggested on the NZI Business programme. Some, of course, argue there will hardly be any recovery at all for the average punter.
The Reserve Bank governor Alan Bollard suggested last week that while the economy may improve, it might not feel like much of recovery to many households next year. A couple of weeks ago when the Dow Jones briefly went positive for the year - and let's remember share markets have surged well over 35% since March this year - there was a growing view that perhaps the world was going to bounce back quicker than anticipated.
But that may have been a little over done.
Yes the 'green shoots' in housing and consumer confidence in the US are continuing to come and China is also showing signs of improvement. However, I think much of the data is still a stabilisation process...i.e.
it's still about the rate of decline slowing.
Markets have had a bit of a reassessment since and there have been some fairly big sell-offs in recent days. I sense that a bit more caution and realism is creeping back in with investors accepting that a real sustained recovery is still actually some way off.
President Obama contributed to this sense of realism by stressing that the recovery is still not really underway properly yet, and that while economic fundamentals might be stabilising in the US, unemployment is still on the rise and will hit 10% in the next few months.
Unemployment is a key factor and we saw this come to the fore in New Zealand this week when
Prime Minister John Key talked of 1,000 extra people going on the dole every week.
According to economists, unemployment usually lags behind other economic indicators. The effect of this is that rising unemployment will keep the focus on job security over the next year.
So its unlikely consumers are going to suddenly start spending up large again on big ticket items. Remember, demand for big ticket items like cars and fridges have plummeted during the recession. Workers are also facing wage freezes, with many now focused on paying off debt. This doesn't bode well for
consumers leading the economy to recovery in the short term.
Some commentators will argue that is a good thing as New Zealand's large current account deficit, while shrinking, is still large by OECD standards. They say a correction was needed.
Hopefully exports in conjunction with plenty of monetary and fiscal stimulus will have a better time of it and lead the country back towards a sustainable recovery.
And there is hope of this happening with the outlook for Australian and China looking better by the day and prices for commodities in general starting to improve, dairy aside.
However, there are risks here too with the currency persistently above 62 US cents. If it goes back towards 70 cents then it could derail an export led recovery.
In general I think we are in for a long slow climb back to a full recovery in New Zealand. By early next year the economy will most likely be growing again, but it will be muted. I think most firms realise this and are therefore likely to remain focused on cash flow and paying off debt for the time being. Survival for most will remain the name of the game for a bit longer yet. It's possible some of the stronger firms with cash on their books will perhaps be starting to look for opportunities soon.
Next month's reporting season should give us a better gauge on the health of corporate New Zealand and this will be closely watched. Especially those crucial debt levels. However it's worth remembering that while New Zealand's recession has been long, it has not been as deep or sharp as others around the world. As one leading economist stressed this to me just this week, New Zealand really is far better off than other similar Western countries.
This is not a reason to be complacent as there are many problems and risks facing the New Zealand economy, not least rising farm debt levels and falling dairy prices.
However, the shallow nature of our recession and the resilience to date of the New Zealand economy is a positive we should hold on to as we grind our way through a long cold winter.
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