Chill winds buffet NZ economy

By BRIAN FALLOW economics editor

As economists try to figure out what this year has in store, their crystal balls have seldom been more clouded.

But one thing is clear. How the New Zealand economy fares depends largely on how the rest of the world does.

New Zealand went into last year's global slowdown with a fair head of steam. In the first half of the year, the economy expanded at a brisk pace, equivalent to an annual 4 per cent.

Unemployment is at a 13-year low. Farmers have been flush, and it is only in the past few months that export commodity prices have started to weaken appreciably.

However, you can run but you can't hide. Economists expect New Zealand's trading partners to record little more than 1 per cent growth last year and less than 2 per cent this year.

The two years together would be the world economy's worst performance since the early 1980s.

When the world environment is so frosty, New Zealand's economy is bound to cool.

The average pick among economic forecasters is that the economy will grow 2 per cent in the next March year.

Such a growth rate would be below average but well clear of recession.

Financial markets have been moving - in a two-steps-forward, one-step-back way - to the view that the United States will recover early this year from its first recession for 10 years and that the rest of the world will follow.

This view is based on the belief that the Federal Reserve's extensive easing of monetary policy last year - echoed to varying degrees by other central banks - together with tax cuts and increased government spending, will jolt the US economy back to life.

It also assumes no further shocks like the attacks on September 11.

But not everyone is so sanguine.

The Economist has noted that the average US recession since the Second World War has lasted 11 months. If this one, which officially began in March, runs a similar course it will end in the first quarter of this year.

But unlike other postwar recessions, last year's was not triggered by the Fed stamping on the brakes to fight inflation.

It has more in common, the Economist suggests, with the recessions seen in the century before the war - a financial bubble goes pop and an investment boom turns to bust.

Those pre-war recessions were harder to shake off, lasting an average 21 months.

This recession is not confined to the US. Most Asian economies are in trouble and growth in Europe has slowed to a crawl, making it difficult for the US to export its way out.

That leaves the American consumer, whose spending makes up two-thirds of US gross domestic product, to provide the demand needed to lift the US and world economies out of the mire.

But as job losses continue to mount and memories of the September 11 attacks remain sharp, US consumer confidence is still weak and vulnerable.

New Zealand's largest trading partner, Australia, has performed better than most.

The Reserve Bank of Australia estimates that the Australian economy grew at a rate of about 3 per cent last year.

Its housing industry - and New Zealand timber exporters - benefited from a grant scheme for first-home buyers.

But Reserve Bank of Australia Governor Ian Macfarlane said the dampening impact of global events on other parts of the economy would become increasingly clear this year, at the same time as the housing upswing began to moderate.

Provided that consumer spending and business investment held up, he said, the Australian economy could be expected to continue recording better growth this year than other comparable countries.



In times as uncertain as these, says the NZ Institute of Economic Research, two key indicators to watch to gauge how the New Zealand economy will perform this year are world prices for export commodities and business confidence.

Good export prices, along with a low exchange rate, insulated New Zealand from the global downturn for most of last year.

But the ANZ index, which reflects a basket of New Zealand's export commodities, fell sharply in the closing months of last year.

The prospect of a double-digit drop in export prices this year featured prominently in the Reserve Bank's decision to cut interest rates in November. The need to underpin business confidence was another motive behind the rate cuts, totalling 1 percentage point, which Reserve Bank Governor Don Brash has made since September 11.

Business sentiment appears to be still in a "so far not so bad" phase.

Surveys showed a sharp fall after September 11 in confidence about the outlook this year.

In the National Bank's monthly survey, confidence stabilised after the initial drop, then rebounded last month to the broadly neutral levels it was at before the terrorist attacks.

The economy can shrug off one quarter of negative business sentiment, says the institute, but two quarters of pessimism usually lead to lower growth.

Consumer confidence has also shrugged off the events of September 11.

But as farm incomes decline, employment growth falters and wage inflation comes off the boil, this year could prove more challenging for retailers.

The positive influences on domestic consumption remain surrounded by ifs and buts.

Five interest rate cuts by Dr Brash last year lowered the debt-servicing burden for people with floating rate mortgages. But only a minority of households have mortgages and most mortgage lending is at fixed rates.

Migration flows have turned positive, but the immigrants are generally younger, less affluent and less skilled than those of the mid-1990s migration boom.

Economists expect a shortage of skilled labour to underpin wage growth of 3.5 per cent this year.

Oil prices have fallen, but various possible scenarios in the war on terrorism could reverse that.

On the export front, the Ministry of Agriculture and Forestry is forecasting zero growth in export receipts from the pastoral sector this year- an encouraging outlook in that it implies no slipping from a 50 per cent increase over the past two years.

It expects forestry exports to grow a further 5 per cent in dollar terms.