By Alan Deans
New York View
Sweet-talk from the Treasurer helps fuel our downunder status in the Big Apple.
Passing through New York this week on probably his last visit as Treasurer, Bill Birch painted a rosy picture of New Zealand's economy. What purse-keeper wouldn't when trying to attract funds from the world's largest money bazaar?
Official tourists from smallish South Pacific archipelagos are normally not the toast of the Big Apple. After all, investors have the pick of the globe's exotic financial fare - rock solid US Treasury bonds, the latest hot Internet offerings and loads of Russian Government debt with which to paper the washroom walls.
These days, however, New Zealand is getting a good hearing. As one US currency trader said over his rubbery salmon omelette at the Treasurer's breakfast briefing: "It's a safe way to play the Asian recovery. New Zealand has a great credit rating, yet will get plenty of upside from any rebound."
The money types have already made up their minds. It is thumbs-up for the kiwi, at least for a while, which explains why it jumped through 55USc - at least temporarily.
It helps, of course, that Birch said all the right things. He predicted that interest rates would be stable at around the 4.5 per cent official cash rate during the next few years, and that inflation would be in the 1 to 1.5 per cent band. GDP growth would move up slowly from around 3 per cent in 2000 to 3.8 per cent in 2002. Budget surpluses would return, after a possible deficit in 1999, and debt would continue to be repaid to meet the Government's goal of cutting it to 15 per cent of GDP.
New Zealand, he says, has a strong and stable economic future. It can only go wrong, apparently, if there are sharp external shocks. (Obviously, Birch is confident that whoever replaces his steady hand after the upcoming election - be they from the Government or opposition benches - will steer the same sure course.)
The risk of external shock is lower compared with late last year. A massive reflationary push by leading central banks has stopped the domino-like chain of economic crises. The most feared of them all, Brazil, is recovering slowly and the Asian victims like Korea and Thailand are doing even better.
A lot of money is being pumped out of US safe havens and into the far reaches of the world where it can attract higher rates of return.
If only the same was true of the US.
It was last year's port in the storm, the stalwart that saved many from drowning. Now, however, its trade balance is deteriorating sharply as cheap imports flood the market. That has yet to impact upon jobs and, indeed, has been a major reason why inflation has remained low.
It is also to be thanked for fuelling the consumer buying spree that now is the main driver of US growth.
There are changes in the wind also on Wall Street. This month investors have finally woken up to the fact that big-name growth stocks like Microsoft, Dell, Lucent and America Online will not always have share prices that reflect the trajectories of a NASA rocket. As the world rebounds and demand for basic commodities like oil improve, investors are realising that there is better value in the old, cyclical industries.
We don't know how this will impact upon small investors, those folks who have been feeling so wealthy because of their unrealised share profits that they have run down their life savings to nothing. There may be nothing, but there could just be enough to stall retail sales.
The Wall Street Journal reported this week about three car mechanics from Nanuet, New York. These guys were overhauling gearboxes while trading stocks on a laptop computer perched on their workbench. One, Stephen Murphy, had a $US25,000 portfolio before the tech rout, but it had since fallen to $US13,000.
He could no longer pay for his wedding and buy a house. He wondered whether his bride might be happy to honeymoon at Coney Island rather than Hawaii.
It doesn't take too many Stephen Murphys for the economy to stall. While many know little about the technology investments that have made them feel rich, they know even less about better alternatives in New Zealand or Brazil. Investor confidence can be very fragile, and their money will most likely either go down the drain or back into their pockets to pay off their credit cards.
Risks still exist, but they have taken a different form. Rising world economic growth should make conditions more certain and less volatile, but dangers still exist, particularly if inflation is stirred when renewed demand boosts prices.
Any such outbreak would quickly lead to the US Federal Reserve lifting interest rates, and that would sharply halt Wall Street's dream run.
* Alan Deans is New York correspondent for the Australian Financial Review.
