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History in the making
Fri 10 Oct 2008 by Nigel Pinkerton.

Most of us can recall what we were doing when major events occurred like when the twin towers came down, when Princess Diana died or during the stock market crash of 1987.   The global financial crisis of 2007/08 is fast shaping up to be one of the defining periods in world history.   But the enormity of what is happening on world markets can be hard for New Zealanders to comprehend.     Twelve figure sums are being thrown around by governments and massive companies are going bankrupt.   As we deal with our current economic challenges, the deteriorating world economy has New Zealanders wondering what else may be in store.

In economics, cause and effect often operates with a significant period of time in between.   To take an example, over the last year we have witnessed multiple New Zealand finance company failures and a housing market slump.   As a result property developers have been finding it difficult to get finance and to sell their real estate.   In the last few weeks we have now seen several large property developments go into liquidation, which will make people even more nervous about buying into such developments.

Like the finance company failures, the global financial crisis is the consequence of past events and will itself have far reaching effects.   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 than they had realised.   Lenders are now nervous about lending to anyone and as a consequence credit has become much more difficult to obtain.   A properly functioning financial system is the life blood of any capitalist economy.  Money and resources flow to where they are most valued, jobs are created and incomes rise as people become more productive.   With credit markets seized up, governments and central banks around the world are desperately trying to get the money flowing again.

So how will this affect New Zealand? Because New Zealanders on average borrow more than they save, the difference has to be made up by banks 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 to secure offshore credit at reasonable interest rates.   A lack of credit will choke investment spending and concern about the economy may persuade businesses to defer expansion plans to better times.

For our export sector, the global financial crisis has the potential to soften world demand for the commodities that we export.   Many of our export markets have been riding the global commodity price boom, as strong world demand increased the prices we receive for exports such as dairy products.   Australia is our biggest trading partner and about ten percent of what we export is sold in the US market, but Asian markets are becoming increasingly important (and part of this growing importance is indirect given the importance of Asia to the Australian economy).   The high level of infrastructure 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 buying their products, businesses serving the New Zealand market are doing the same.   This latest crisis comes at a time when many consumers are already cutting back on spending as food and energy prices remain elevated and asset prices are falling.   If businesses’ lines of credit dry up, they won’t want to get into any 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 more money into consumer’s pockets and propping up sales for local businesses.

It is difficult to know for certain what kind of long term changes 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 funds offshore over the coming months.   The days of easy credit may be behind us and when the dust has settled; there will be lessons to be learned.   Its has been so long since New Zealand experienced a major recession that many New Zealanders 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 developed world, but it’s still going to be a rough ride.

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