Treasury sees risks for NZ in global stress

Treasury sees belt-tightening by governments around the world affecting New Zealand's export markets and warns of risks from possible government defaults on sovereign debt.

In a special topic section in its monthly economic indicator report, Treasury says the impact of austerity programmes by governments around the world may lower the volume and value of New Zealand exports but the country's increasing links to faster-growing economies in Asia mean that the external stimulus remains relatively strong.

It sees risks for New Zealand's ability to fund its needs in international markets. There are fears that some governments might eventually prefer to default on debt. A serious default could trigger a more serious global funding crisis.

"From New Zealand's perspective, heavily dependent on continued access to international funding markets, the risk of harm from a significant re-intensification of global financial stresses would be much greater than that from a concerted European fiscal consolidation programme in isolation."

Treasury noted that fiscal stabilisation programmes were under way in Greece, Portugal and Spain and that fiscal consolidation momentum had spread to other core European states.

The British Government has also introduced an emergency Budget aimed at delivering fiscal savings.

While the move by many European governments to put their fiscal positions on a more sustainable footing would benefit the global economy longer term, the drop in demand in the near term was likely to have a negative impact on growth in these economies.

New Zealand was likely to experience reduced impacts because a floating exchange rate enabled nominal currency depreciation and therefore increased competitiveness.

"Despite expected slower growth in the euro-zone, New Zealand's increasing links to faster-growing economies in Asia mean that the external stimulus remains relatively strong," Treasury said. New Zealand's economic growth, at least in the short run, would continue to benefit from a strong rebound in Asia and Australia, which together account for more than 60 per cent of our merchandise exports.

"There are, however, signs that the strength of the recovery in China may be beginning to ease, partly as the authorities reduce their support measures."

- NZPA