Reports about the credit crunch, looming global recession and stock market volatility have dominated economic reports over the past few months. But for most New Zealanders the question will be what does it mean it for me? At its simplest: how safe is my job?
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.
It’s official – New Zealand experienced its first recession in a decade over the first half of 2008. According tothe official statistics the quarterly level of economic activity is down 0.5%on its peak in December (adjusted for seasonal differences).
Real disposable incomes of Kiwi households have been rising on average for a considerable length of time even after taking into account increasing costs of food, fuel and mortgages. This was very clearly demonstrated by a colleague of mine – Chris Worthington – in this column some weeks back. But averages sometimes disguise differences across social strata. Have we all being been enjoying the fruits of growth?
New Zealand is an indebted nation that persistently runs current account deficits. This raises the questions, what is a current account deficit and should we be concerned about it?
Long-time readers of our forecasts willprobably be aware that, over the last seven years, we have typically expectedworld oil prices to settle back down over the medium-term, usually US$10-15below the prevailing level when we’ve been preparing the forecasts. Such aview has not been out of line with the received wisdom. Consensus forecastsfor oil prices over the same period have generally tracked the current oilprice with some downward adjustment expected over the coming year to bring oilprices back to more "normal" levels. The futures market has generally been alittle less sure of any reversal in prices, but even so, an oil price ofUS$120/bl was never on anyone’s radar even 12 months ago.
Improving the productivity of the New Zealand economy is often touted as the key to raising our standard of living from itscurrent position in the bottom half of the OECD. Grasping the "work smarter,not harder" mantra would seem to be particularly apt for a country whereaverage working hours are among the longest in the world.
Michael Cullen has been adamant about the principles that will guide tax cut policy under the Labour government. But his criteria are not nearly as binding as they might initially sound – a point that was forcefully rammed home by the prime minister’s assurance that the criteria would indeed be satisfied and tax cuts will be forthcoming.
A raft of weak indicators over the lastmonth has intensified market fears that the American economy is now in, or theverge of, a recession.
New Zealand doesnot have a long term saving problem. With open capital markets, the decisionto save or borrow is purely a financing decision, and one that is driven by theprice of credit. The international price of credit is very low at present. Taking advantage of these low prices is a rational response by New Zealanders.