Pattrick Smellie: How bad will it get in NZ?

Pattrick Smellie

Thursday 12th February 2009

In a new Weekly Column Businesswire commentator Pattrick Smellie gives the NZ economy the sniff test, after spending five weeks overseas.

I just spent five weeks overseas, in Europe and the Middle East. Call me an optimist, but things don�t feel so bad here.

Is it that the credit crunch contagion is still making its way here?

Or could it be that the New Zealand economy � as ever slightly crapulent, less productive and slower-growing than we�d like � has a few things going for it?

I�m beginning to hope the latter.

For a start, the �it�s hitting us later than the rest of the world� argument doesn�t stand up to basic scrutiny. New Zealand was the first OECD country to call a recession, in mid-2008 and we�re now in our fifth recessionary quarter.

My Auckland real estate franchise owner mate wearily observes that his industry has been in recession since the beginning of last year, but he�s still there. A house in my street in Wellington sold last week within two days of listing, with seven offers. From a nostril-twitching perspective, none of this sounds too apocalyptic.

It may be that Australia has yet to catch the global cold, but there�s nothing to suggest that Australia is going to get thumped like banks in the United Kingdom, Europe, Japan and the US, or to the economies of the so-called PIGS group � Portugal, Italy, Greece and Spain.

The mood in England was, wow, bleak! Newspapers carry multi-page �The Recession� coverage, and with interest rates close to zero, much commentary now fixes on �quantitative easing� � a polite expression for �printing money�.

Here, the OCR has plummeted in less than 12 months from a peak of 8.25% to 3.5%, leaving scope to go lower again. Combined with the second round of personal tax cuts due in April, New Zealand�s debt-bloated households are experiencing meaningful cashflow relief.

In France, maybe it�s not so bad, but they start with unemployment at over 8% of the workforce and live in a culture where crippling strikes are a common reaction to economic difficulty.

What�s happening here? Unemployment at 4.6% is still among the lowest in the OECD, and a far cry from the 10%-plus of the long recessionary period between late 1987 and 1991 in New Zealand.

Instead, part-time work is rising, suggesting a flexible workforce able to bend with the economic storm.

In Spain, unemployment is already above 13%, the government is running big budget deficits and has no headroom to spend, and really has nowhere to go on the monetary policy front either, since its interest rates are controlled by European Central Bank.

Here, the government accounts were in great shape when Michael Cullen and then John Key dolloped out what must be the largest personal tax cuts since the 1987 tax reform package, and this time there�s no equivalent to the offsetting introduction of GST. Again, meaningful cash flow is arriving at a good time, and we can afford it � just.

Then there�s who we trade with. This is the moment to thank the Lord for CER and all the effort in recent years to penetrate developing economies, mainly in Asia.

They may buy more milkpowder than camembert, but the economies of China, India, Indonesia, Thailand, and Malaysia are all far less directly exposed to the credit crunch than our rich world trading partners.

Half New Zealand�s exports go to Australia or developing Asian markets. If those economies prove to be somewhat resilient � obviously they are suffering to some degree - then that is good news for us.

Using the �Smellie was there recently� method of research, Australia is harder to read because I�ve only read the papers.

But, observing a recent collapse in newspaper advertising in Australia, News Ltd. chairman Rupert Murdoch said it was �hitting late� in Australia, where conditions were not yet as poor as the UK.

The question is whether they will slump that far, or whether Australia�s economy is also more adaptable and resilient than the larger members of the OECD.

The one thing that can trip us up now is our very high level of foreign borrowing to fund the current Kiwi lifestyle. For many, that lifestyle has come to mean servicing a questionably large mortgage on a wooden home of uncertain age, a second-hand Japanese import or two in the carport, and a respectable array of electronic paraphernalia.

In each of those areas, there are good signs. Housing prices have stalled or are falling. New buyers, at least, are not on the fairyland merry-go-round of the last few years. Car sales are down, too, but our cars are still cheap here compared to many countries, especially Australia.

And all the signs are that the appetite for 40-inch flat screen TV�s, high-end stereos, and European whiteware has all but dried up.

Our current account deficit � our biggest bogey - is still scarily high, at 8.6% of GDP, but that�s a far cry from Iceland at 22% of GDP and still below basketcase Spain, at around 10%. The recent scurrying around the world by Treasury and Reserve Bank officials is all about convincing lenders that the 40% of the current account that gets financed by nervous foreigners� savings is still worth the punt. They should buy the story, especially since the Australasian banks� bad debts reflect recession, rather than years of financial derivative creativity. Their underlying assets look reassuringly dull and susceptible to upturn.

Also in our favour: we don�t subsidise stuff. Our equivalent of the death throes of the American car industry began in 1985 when the farming subsidies and import restrictions were all ripped away. We�ve had that bit of pain, and just have to hope the protectionist urge doesn�t take strong hold and screw us over, along with the Doha WTO Round.

So while the recent fall in dairy prices, particularly, is putting a dent in Southland farmers� appetite for new tractors and flash holidays, dairy commodity prices are tracking historical norms. If the non-Japanese Asian economies recover at all, key commodity prices should at least consolidate, if not rise.

Call me Pollyanna (well, don�t feel obliged to) � but I find myself hoping that this is only going to be bad, rather than awful. Fingers crossed.

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