Dialogue: Ready to ride out the storm

By ROZANNA WOZNIAK

The recent terrorist attacks on the US have increased the risk of a US and global recession. With exports accounting for a third of New Zealand's economy, it would seem naive to hope that it will have no effect on us.

In the immediate aftermath of such a horrific event, there is a risk that objectivity has been overshadowed by emotion. It may, in fact, take several months before an accurate assessment can be made of the medium-term outlook.

There is little doubt that the disruption to the US economy has been significant. A negative result is now expected for September quarter GDP, and probably also for the December quarter. This initial effect will largely be the result of disruptions to production and travel.

Two consecutive quarters of contraction would technically mark a US recession. Given the size of the US economy and already weak growth elsewhere, a global recession is therefore also possible. Increased globalisation and world trade has made many countries increasingly interdependent.

It is the medium-term implications, however, that will determine the longevity of this US recession.

Aggressive easings in monetary policy, further tax cuts, rebuilding activity, increased defence spending, and the American tendency to maintain a strong spirit and patriotism, should deliver a US turnaround. This, in turn, should prompt global growth. This recovery may not come until the middle of next year, however.

Slower global growth will dampen New Zealand's economic growth rate during the coming year. The risk of recession, however, is small. The New Zealand economy has been gaining momentum during the past six months, despite the fact that the global economy was already slowing markedly.

Probably the main impact will come through a change in the distribution of New Zealand's growth.

First, the dichotomy between consumers and businesses may widen. For consumers, increased global concerns should be offset by other positive factors:

* Rising employment, higher wages and lower interest rates have been boosting disposable incomes. Mortgage interest rates fell again last week.

* The migrant outflow is becoming less of a drag on growth and is, in fact, reversing direction. During each of the three months to August, New Zealand had a net inflow of migrants in seasonally adjusted terms. Recent events may even see this inflow increase if more New Zealanders choose to stay (or return) home.

Partly offsetting these positive effects, petrol prices have risen.

It is businesses which will be most affected by the global slowdown, both directly through the tourist and export sectors, and also indirectly through confidence and its possible impact on business investment decisions. It was business investment that was the biggest drag on economic growth during the March quarter.

At this stage, most of the risks lie with non-agricultural exports. Farm incomes should remain strong next year and continue to contribute positively to the economy.

Let's not forget also that the impact of last season's high incomes have only started to feed through the economy.

The impact on travel and tourism has been immediate. In terms of other exports, although there has been some short-term disruption, most of the effects will take much longer to come through.

The transmission to New Zealand of a change in trading partner growth generally occurs with a lag of six to 12 months. This suggests that the slowing in world growth since the beginning of the year may have just started to affect our exports. We may be overstating New Zealand's resilience.

As it is, export volume growth has been disappointing - gains have largely been price driven. If the currency were to rise and/or commodity prices fall, the risks for the New Zealand economy would therefore increase significantly.

In addition, our current account deficit could increase again as quickly as it has declined. At this stage, both remain at favourable levels. In fact, the currency has recently weakened.

New Zealand is therefore in a much better position than most other countries to withstand the deepening global slowdown.

* Rozanna Wozniak is senior economist at ASB Bank.