John Roughan: Economy could do with a swine dose

John Roughan

Thank heaven for the swine flu. After nine months of global recession it is good to have something harmless to worry about.

They say the new flu is no worse than any other if you catch it. You'll feel rotten for a day or two and get over it.

The reason the World Health Organisation is in pandemic mode is that the flu is new and populations lack resistance. It's a problem for society, not individuals.

If it spreads as quickly as these things can, the economy could be disrupted for six weeks. If only the recession was a pandemic.

Actually, it may be. Recessions happen about as often as new flu strains appear. There is no connection but remember the dotcom crash and the bird flu a few years ago? Maybe not. The Hong Kong flu? Several Asian flus? None of them came to much here.

This country is as well-geared to ride out a recession, too. We missed the last one. We are weathering this one fairly well. The last slump we felt was the one after the Asian currency crisis of 1997.

The longest in living memory was the one that followed the global stockmarket crash of 1987, though the one around 1977 was worse. The economy shrank by 4 per cent, more than the Reserve Bank predicts for this contraction.

What is it with the sevens? I dimly recall a wool price collapse in 1967 that ended the prosperity of that decade, though not the balance of payments crisis of 1957. Now we have been laid low by a house price bubble that burst in 2007.

It burst in this country a couple of months before the subprime mortgage collapse in the United States and our recession last year was mild until the US contagion sent the world financial system into shock.

This recession is like a new flu. There hasn't been a financial seizure on this scale in the lifetime of everybody under 80. We have reeled to reminders of the Wall St crash of 1929 and governments in the US and Europe have done what economic virologists say should have been done then. Maybe the massive infusions of money have worked. Maybe closing schools will contain the swine flu.

Or maybe the cure is worse than the disease. Maybe containment can be too successful.

The flu has been rather fun for schools this week - no worse than a change of routine for a few where pupils were told to stay home. Nobody got seriously ill, and tonight the Westlake girls can go to the ball.

But if this goes on for another week, the novelty will wear thin. Principals could be asking the Ministry of Health whether the disease really warrants the disruption.

And the ministry might be quietly asking itself whether a little less success might be better for the population's immunity in the long run. Already it has decided to supply less of the antidote.

Recession doctors, too, have begun to face the possibility that they could be too successful. The credit crisis was a "correction" in their terms, a punishment for folly and greed, a necessary lesson in the true value of investment, production and saving, as distinct from speculation, consumption and debt.

As glimmers of life return to world finance and stockmarkets, governments are getting more anxious to reform financial regulation. President Obama announced his this week.

In this country Reserve Bank Governor Alan Bollard has been trying to talk down optimism for some time. This week when he scanned the horizon for new scare material the best he could find was swine flu.

"It looks likely this will impact the economy by hitting staffing, through sickness, childcare and precautionary behaviour. If the incidence is severe, it would delay recovery," he said.

Dr Bollard spent years trying to stop the property boom. It was inflationary, it encouraged excessive household borrowing and spending, it was built on investment that banks were raising abroad and thus it was keeping the dollar's value high, making it tough to export.

Now he would like a recovery to be accompanied by an "economic rebalancing". For that we need new antibodies in the national blood against residential property investment in particular.

How far do house prices need to fall before New Zealanders cease to put so must of their savings and borrowings into property?

First-home buyers need prices to come back to a level about three times the average annual income. If that means halving the value houses had reached by April 2007, prices still have a long way to descend. I doubt the recession alone will do it.

The economy needs an effective capital gains tax to spread future investment in productive directions. It would not be popular.

We need a strong politician to be the swine.