KEY POINTS:
How the Reserve Bank Governor must wish that calm and considered responses were the norm. Over-reaction is the bane of his life. Alan Bollard spent much of the past few years trying to cajole householders out of a spending binge fuelled by a world awash with cheap money.
Now, he is having to try to talk banks and businesses out of a state of funk. This appeal is as timely as his earlier calls to over-exuberant consumers. There is a real danger of an economic downturn taking on darker-than-necessary shades.
Dr Bollard has called on banks and businesses not to hibernate in the face of tighter credit markets and talk of a slowdown. He said that he would be disappointed if banks held back on quality investment because of credit constraints. The economy remained fundamentally sound and creditworthy. What the central bank saw as cyclical adjustment was being greeted with an undue pessimism. "Because we have been so strong so long, some people have forgotten what a slower economy means," he said.
It is not difficult to locate that despondency. Only 24 hours before Dr Bollard's speech to the Marlborough Chamber of Commerce, the Institute of Economic Research's quarterly survey found that business confidence had plunged to depths last seen during the first oil shock of 1974. Some bank analysis has also been gloomy. The Bank of New Zealand, for example, has predicted a recession in the second half of this year. It says many people are in complete denial, a group that presumably includes the Reserve Bank Governor.
Whether or not the economy lapses into recession may be a close-run thing. On balance, however, the Reserve Bank's analysis seems more cogent than that of the pessimists. The latter tend to underestimate factors underpinning the economy, notably a labour market that is likely to remain strong even if more subdued, very favourable terms of trade based on world dairy prices, and the boost that will be provided domestically by personal tax cuts. Thus far, also, New Zealand's major trading partners in the Asia-Pacific area have been relatively untouched by the turbulence arising from the United States sub-prime mortgage debacle and the international credit crunch.
The major Australian banks and their New Zealand subsidiaries are, of course, having to pay more for money on international wholesale markets. This has had two results: increases in mortgage rates and stricter lending criteria. Dr Bollard is, in effect, saying that banks have no reason to become too Scrooge-like. He has a point. Rating agency Moody's has pointed to the banks' minimal exposure to US sub-prime-related assets, their sound profitability and capitalisation supported by "economic prospects that remain superior to many other developed economies", growing demand for their recent debt offerings, solid growth in deposits and their relatively low exposure to higher-risk mortgage borrowers.
It might have added that banks have enjoyed a sustained period of enormous profitability. That may diminish in a period of slower economic growth. It is hardly, however, a reason for being overly conservative about lending to businesses or households. The only possible excuse for this would be the holding of poor-quality loan portfolios. There is little to suggest that is a widespread problem, however.
Likewise, NZ Inc has benefited from sustained economic buoyancy. It has also just been presented with enormous opportunity, thanks to the breakthrough free trade agreement with China. It is difficult to see why it should be overcome with depression. A slowdown is not the same as a breakdown.
