Today I noticed two very different stories about the outlook for the New Zealand economy. From Bernard Hickey (h.t. Kiwiblog) we have a dramatised version of what ANZ and BNZ are saying about economic conditions. From Berl we have a more moderate story which is closer in form to all the other analysts (such as RBNZ, Westpac, and Infometrics 😉 ).
Now don’t get me wrong – everyone is expecting a slowdown in economic growth. However, the question currently is, are we going to have a technical recession or not?
The main difference between those forecasting doom and those just forecasting gloom is the view of the credit market. The global credit market is relatively important for New Zealand economic growth as we have been consistently running a current account deficit – implying that we have had to borrow heavily from the rest of the world. No doubt this will need to correct at some point – however the doomsayers believe that it will correct sharply now, as investors becomes too scared, or too liquidity constrained to lend money to New Zealand – driving up domestic wholesale interest rates.
I feel that this view is exaggerated. Sure we are currently seeing a surge in the wholesale interest rate – however this is why we see the Fed pumping liquidity into the world economy, and cutting their cash rate. Policy action in this case is focused on reducing the real wholesale rate, and as a result we can’t expect the world economy to give up without a fight. Although people believe the Fed is running out of bullets, lets not forget that the European Central Bank has not cut rates yet – if things get desperate they can also get in on the act.
When people say that the 1 year fixed mortgage rate is going over 10% I believe them – I mean its nearly there now. However, I am doubtful that credit conditions will continue to deteriorate at the rate they have been.
There is one point of agreement between all economists though – stagflation will occur, after all we are suffering from a combination of negative aggregate supply shocks (drought, high oil prices, global inflation, and lower global financial capital). However, I don’t think it does us much good to get scared of it – we can’t help external shocks we just have to get through them.
Note: I am not trying to say growth will not slow – it will. I just feel like some commentators are being a bit melodramatic. Unemployment is at record lows, household savings is improving, the governments fiscal position is healthy, and foreign lenders are still seem happy to lend to us. I can’t see these positive factors deteriorating quickly enough to put us in a technical recession by late 2008.