Fran O'Sullivan: Bearish sentiment a sign to ease up

On Wall St the topic du jour is the possible return of the Goldilocks economy.

The "not too hot ... not too cold ... just right" conditions that under-pinned America's great share-market boom of the 1990s.

But in Shortland St (Auckland ) - and along what passes for Wellington's Golden Mile, the talk is about how New Zealand is again out of sync with the global economy.

This time round the economy is not favourably out of sync as our politicians used to boast when furnishing their excuses for not using the golden weather of the early noughties to re-engineer our economy.

Economic indicators such as inflation and the balance of payments went pear-shaped well before Christmas.

Now business confidence is plummeting.

Talk Stateside is about what factors might (if there is a run of bad luck) get in the way of a soft landing. Here the sentiment is simply negative.

Wellington take note.

The image that resonates with me over New Zealand's economy is not Goldilocks but the reaction of the three bears coming home to find their plates are empty. Think about it.

It's surely not too much to hope that Reserve Bank Governor Alan Bollard will be getting back to work with a renewed determination to take what steps he can to stop the New Zealand economy hitting rock bottom.

Or do the Calvinists down in Wellington believe this is the recession New Zealand "needs to have"?

Are they hell bent on raising interest rates to whip all us so-called spendthrifts into line at the expense of New Zealand's future economic health?

Two reports released over the last two days should have persuaded Bollard that the economy doesn't need further braking through the imposition of yet another round of interest hikes next week.

The New Zealand Institute of Economic Research which he used to head - was first up with a survey showing confidence had dropped to a 20-year low the worst level since March 1986.

Even the subsequent sharemarket crash and the 1997 Asian crash did not affect confidence so badly.

But now a net 61 per cent of local firms expect business conditions to deteriorate. Tellingly, that loss of confidence is across the board.

It affects all sectors and regions. Even the tight labour market looks a little shaky.

The NZIER suggests the economy could be in a potentially acute slowdown.

It even suggests it is time its old boss took his foot off the economic brake and begins pumping a bit more juice into the economic engine through a series of interest rate cuts.

Yesterday, the loss of confidence was magnified by the release of a Grant Thornton survey which pointed to the deepening perception that shrinking margins are killing profits - one of the prime reasons for the slump in business confidence.

The Grant Thornton survey is particularly useful because it shows New Zealand business confidence is below the international benchmark.

Grant Thornton NZ chairman Peter Sherwin says the difference in just one year is huge and is not a good sign for us as a country.

So what will Bollard do about it?

If he's got any sense he will drop the official cash rate from 7.25 per cent next week down by a least 50 basis points and begin a jawboning exercise aimed directly at the Beehive to get the Government to put its own finances in order.

If ever Finance Minister Michael Cullen needed any ammunition to get his colleagues into line on Government spending then surely these surveys provide him with a ready arsenal.

The underlying message from the two surveys is that an about-face is necessary to increase business confidence and avert disaster.

I find it difficult to believe that Cullen has bought the line that a hard landing is necessary. He's under pressure from Revenue Minister Peter Dunne to introduce business-friendly tax changes that will persuade the country's wealth-producing sector to invest more rather than tighten up

But there's still no sign that either politician has got the message that the changes must be introduced this year not next.

The business lobbies don't have long to push their own barrow on this. But they do need to persuade Cullen and Dunne to bring forward their planned tax changes to this year's Budget to provide incentives for investment.

Say what we like about the US (and mostly in New Zealand we do - as top politician Trevor Mallard proved at the recent election) but its economy is still the world's major international growth motor.

If the US economy does manage to chortle along and grow at 3.5 per cent for the second year in a row it will underpin the international outlook.

Let's not forget that it is one bright spot underpinning New Zealand's future.