KEY POINTS:
It is easy to get swept up by talk of market turmoil and to unthinkingly view this as the harbinger of recession. Only those of cool disposition take the time to differentiate between what is afflicting the markets and the actual state of the economy. That, however, is
exactly what is required if economic confidence is to survive. Indeed, it is imperative right now because while this country cannot be unaffected by ailments in the United States, it will address them from a strong economic foundation.
The differences between the two economies will be particularly apparent today if, as is almost certain, the Reserve Bank Governor, Alan Bollard, holds the official cash rate at 8.25 per cent. This will follow hard on the heels of America's central bank, the Federal Reserve, slashing 0.75 of a percentage point off its funds rate during an emergency session. Driving this cut, the biggest in 24 years, and an earlier White House stimulus package was the urgent need to revive a stalled US economy and to halt heavy sharemarket falls.
The Federal Reserve provided a troubling view of an economy becalmed by fallout from the subprime mortgage crisis. Its reaction to excesses in the US housing market and lax bank lending practices has been described by some as panicked. But its prescription, even if dramatic, is relatively standard fare for tough times. In the short term at least, it has also proved successful, with Wall St and other bourses rallying .
Dr Bollard's focus is rather more prosaic. Inflation, rather than market turmoil and the global credit crunch arising from the subprime mortgage crisis, is his concern. While the New Zealand economy has slowed, persistent inflation pressure remains. In December, the annual inflation rate jumped to a higher-than-expected 3.2 per cent, outside the Reserve Bank's target band. In making today's decision, the Governor has had to balance this with uncertainty about the international outlook. Opting for the status quo is the reasonable response. Following Washington's lead would only be appropriate if fears about the economy were serious enough to take precedence over a pick-up in inflation.
That, clearly, is not the case. Indeed, inflation is likely to remain New Zealand's major economic problem, notwithstanding the swell from the global liquidity crisis. A long overdue correction to the housing bubble is taking place, drawing some of the heat out of proceedings. But wage growth spurred by a record low unemployment, imminent tax cuts, and the dairying payout bonanza are countervailing forces. The latter holds the key to New Zealand riding out any severe international downturn without undue discomfort. Our terms of trade are, in fact, the most favourable since 1974. Add to that the increasing wealth of Asian economies, led by China, the source of most global growth over the past year, and there is even less reason for gloom. China, indeed, is the touchstone for a world no longer as dependent on the US as was once the case.
The local sharemarket has not been immune to panic. It has, however, been more resilient than most. That suggests investors recognise most New Zealand companies are solid. Unsound finance companies have been tripped up, but, by and large, most of the excesses of previous periods of sustained economic expansion seem to have been avoided.
Whether a recession takes hold in the US or, as seems more likely, this is an overdue correction, some countries undoubtedly face a period of significant struggle. Unless panic takes hold, New Zealand need not be one of them.