KEY POINTS:
The next five years are going to be an immensely challenging time for New Zealand businesses, says BNZ senior economist Stephen Toplis.
"This is not to say that the world is about to implode, but rather that it is going to be an environment of mixed signals, potentially rapidly shifting economic conditions and, probably, large moves in asset prices.
"Clearly this will make planning very difficult and businesses will need to be fleet of foot so they can quickly react to conditions as they evolve."
While most were concerned about the potential volatility in the domestic economy, Toplis warned that the international environment also had the potential to be the source of further shocks - positive and negative.
On the positive side, the "greening" of the global economy looked like good news for New Zealand. Concern about food miles would be a nuisance for some but would be relatively short-lived as New Zealand provided evidence that its carbon footprint in food production was low by international standards.
More important, the demand for high-quality food supplies would continue to grow at a time when the costs of production increase and supply came under pressure, he said.
"This development will see grain prices forge higher, forcing up the cost of beef and dairy production and, in some cases, resulting in reduced cow numbers as less competitive farmers are forced out of business. There are already clear signs of this in both the US and China."
New Zealand's meat and dairy production was grass-fed and would remain competitive, provided the growth of biofuels did not take off locally, Toplis said.
In the wider business sector, currency volatility and high interest rates were a concern for many.
At the dollar's present levels, Toplis recommended importers consider locking in the benefits they had for as long as they could, while exporters should focus more clearly on other measures to enhance competitiveness.
"Exporters would be well advised to build in a much higher currency track than they might have in the past and take any depreciation as a bonus.
Having come to grips with a potentially very volatile international environment, New Zealand businesses had a tangled web to negotiate at home.
Either growth stayed lofty, meaning there would be no interest rate relief, continued strength in the dollar and greater pressure on an already overstretched labour market.
Or there would be a slump in the dollar and interest rates but that could only come as a consequence of a marked decline in economic activity accompanied by falling sales, rising unemployment and economic malaise.
"Be careful what you wish for."
- Otago Daily Times
