Most of us can recall what we were doing when major eventsoccurred like when the twin towers came down, when Princess Diana died orduring the stock market crash of 1987. The global financial crisis of 2007/08 isfast shaping up to be one of the defining periods in world history. But theenormity of what is happening on world markets can be hard for New Zealandersto comprehend. Twelve figure sums are being thrown around by governments and massivecompanies are going bankrupt. As we deal with our current economic challenges,the deteriorating world economy has New Zealanders wondering what else may bein store.
In economics, cause and effect often operates with asignificant period of time in between. To take an example, over the last yearwe have witnessed multiple New Zealand finance company failures and a housingmarket slump. As a result property developers have been finding it difficultto get finance and to sell their real estate. In the last few weeks we have nowseen several large property developments go into liquidation, which will makepeople even more nervous about buying into such developments.
Like the finance company failures, the global financialcrisis is the consequence of past events and will itself have far reachingeffects. Overly easy access to credit led to a boom in the US housing market. When the bubble burst in 2007, house prices plunged in America, people started walking away form their homes and banks found themselves more exposed thanthey had realised. Lenders are now nervous about lending to anyone and as aconsequence credit has become much more difficult to obtain. A properlyfunctioning financial system is the life blood of any capitalist economy. Money and resources flow to where they are most valued, jobs are created andincomes rise as people become more productive. With credit markets seized up,governments and central banks around the world are desperately trying to getthe money flowing again.
So how will this affect New Zealand? Because New Zealanderson average borrow more than they save, the difference has to be made up bybanks sourcing funds offshore. This is one area in which New Zealand will find itself exposed to the credit crisis in coming months, as banks struggle tosecure offshore credit at reasonable interest rates. A lack of credit willchoke investment spending and concern about the economy may persuade businessesto defer expansion plans to better times.
For our export sector, the global financial crisis has thepotential to soften world demand for the commodities that we export. Many ofour export markets have been riding the global commodity price boom, as strongworld demand increased the prices we receive for exports such as dairyproducts. Australia is our biggest trading partner and about ten percent ofwhat we export is sold in the US market, but Asian markets are becomingincreasingly important (and part of this growing importance is indirect giventhe importance of Asia to the Australian economy). The high level ofinfrastructure investment in courtiers like China and India will help keep their economies growing at reasonable rates through this crisis. New Zealand’s geographical location is a big advantage in serving these markets and the China free trade agreement has come at a good time for exporters.
While exporters are hoping that people will continue buyingtheir products, businesses serving the New Zealand market are doing the same. Thislatest crisis comes at a time when many consumers are already cutting back onspending as food and energy prices remain elevated and asset prices arefalling. If businesses’ lines of credit dry up, they won’t want to get intoany financial trouble from falling sales. We haven’t seen major New Zealand companies fail yet, but it remains a possibility in these economic conditions. On the positive side, long awaited tax cuts will be timely in putting moremoney into consumer’s pockets and propping up sales for local businesses.
It is difficult to know for certain what kind of long termchanges may come about as a result of the meltdown on world financial markets. New Zealand banks are well capitalised, but will find it hard to secure fundsoffshore over the coming months. The days of easy credit may be behind us andwhen the dust has settled; there will be lessons to be learned. Its has beenso long since New Zealand experienced a major recession that many NewZealanders have forgotten what it is like or are to young to remember. New Zealand will pull through this, probably in better shape than the rest of the developedworld, but it’s still going to be a rough ride.