No reason for panic says Cullen

The economy is in a strong position to absorb some of the damage from war in Iraq, says Finance Minister Michael Cullen.

In a speech yesterday to the Remuera Men's Probus Club, Cullen said the most likely outcomes of war would include lower export demand and prices, higher oil prices, lower confidence and more volatile financial markets.

"It needs to be said, however, that the New Zealand economy is well placed to absorb some of these initial impacts," said Cullen.

Most firms' balance sheets were in good shape, Government debt was low and domestic demand should remain strong enough to offset any external weakness.

Despite problems overseas, he said, there was no case for any stimulus of this country's economy.

"There is no reason for panic," Cullen said.

"I would stress that at the moment the economy is still buoyant and there is no case for any stimulus."

If a downturn did occur, scope was available in the public finances to ride it out.

Unlike in Japan and the United States, interest rates were still modestly high in this country.

Public debt had fallen further and faster than planned or forecast, and the Government was running strong and rising fiscal surpluses, Cullen said.

At the same time, climatic conditions had caused problems for farmers and fruitgrowers.

Prices for agricultural commodities were a mixed bag, with those for wool and kiwifruit better than many had expected, but those for dairy, beef and venison falling below expectations.

Globally, the prospect of a double-dip recession in the United States posed some risks, the minister said.

But he was confident that the fundamentals of the US economy remained sound.

"Most forecasters agree that recovery [in the United States] will come inevitably, but that we will not begin to see an improvement until late 2003 at the earliest."

Cullen sounded less optimistic about two other major world economies, Germany and Japan.

Indicators for Germany were firmly in negative territory, while Japan continued to struggle to restart its moribund domestic economy.

On the upside, China's entry into the World Trade Organisation promised major positive changes in regional trade, Cullen said.

Most importantly for this country, Australia had managed to sidestep the worst of the global downturn.

"So, to sum up, the weak economic outlook in Europe, the US and Japan means the New Zealand economy may find itself flying through dead air for the first half of 2003," the Finance Minister said.

"The global situation should improve in the third quarter of the year, with a positive impact on the prices paid for New Zealand products.

"However, the possibility of a further appreciation of the New Zealand dollar may counteract any price rises into 2003-04."

- NZPA