NZ economy may only just be feeling Sept 11 effects

By NZPA

Tuesday 10th September 2002

There's an old business adage -- "When New York sneezes, the rest of the world catches a cold."

That truism was borne out after September 11, and New Zealand, although thousands of kilometres away, has not been left untouched. But relative to the rest of the world, it has been relatively immune -- so far.

Economically, the horror which everyone felt when they watched the twin towers of World Trade Centre hurtle towards the ground translated into a major matter of business confidence.

It started with the travel industry -- temporarily grounding flights, testing the nerve of millions of travellers and hurting global aviation and tourism.

Wall St was left in chaos as many of the world's major brokerages and financial consultancies mourned dead and lost records.

And as the world regarded a war on Afghanistan, oil became a major concern, leading to worries about manufacturing and transport.

The US, already under economic pressure, slowed down further and world sharemarkets initially sunk like a stone as investors leered warily at the timeline for recovery.

But New Zealand's economy never really faltered because it is so strongly founded on commodity products such as meat and dairy, which were just coming off a cyclical peak in demand.

The lagged returns from those exports kept farmers' pockets lined and kept the cash registers ringing downstream.

"Basically we were just going into a very strong domestic upturn when the US was basically slow," Westpac economist Donna Purdue said.

"We were starting to reap the benefits of the high commodity prices and low New Zealand dollar and on top of that we had the big migrant flows. It just meant all the stars became aligned and we've had a good 6-9 month run, really."

Anticipating a downturn after the attacks, the Reserve Bank cut interest rates by 100 basis points over the next few months -- "insurance" against the potential falloff in inflationary pressures, a move it has since reversed.

That made New Zealand's interest rates attractive compared to other countries. Although investors initially scurried home to to what they perceived as safer havens, they were soon back to enjoy higher rates than those in the US, which had sunk to 40-year lows.

September 11 also sent many Kiwis home, easing a choking labour shortage and prolonging New Zealand's migration influx.

As they bought property, they helped kickstart a housing and retail boon, which helped offset the downturn exporters were already expecting from a world slowdown before September 11.

After the attacks, "I think most exporters to the States found there was a bit of a lull in that the US buyers were taking stock of the situation," Bob Fenwick, president of the Export Institute's Auckland branch said.

By November exporters were starting to feel a definite "lull," but by February or March orders began to even out again, only to be hit by a new confidence shaker -- the fraud scandals surrounding Enron.

"To me that has probably had a bigger effect than September 11," Mr Fenwick said.

Today export volumes are holding steady but prices particularly for commodity are struggling against a higher dollar. Mr Fenwick expects it will take the rest of the year for volumes to climb back to a pre-September 11 position -- Middle Eastern wars, not withstanding.

Airports, hotels and tourist operators also saw a initial sharp fall in patronage. But by January international tourist numbers were back strongly.

"At the time and after the visual shock had been absorbed, we were very apprehensive as to what it would mean for the tourism industry," John Moriarty, chief executive of the Tourism Industry Association, said.

But by reassuring overseas markets and encouraging domestic tourism, a massive co-ordination effort by the industry's key players saw international tourism actually increase 5 percent this year, although previous forecasts were for up to 12 percent.

That contrasts strongly with Australia which is down 5 percent, still struggling to recover from both the tourism downturn and Ansett's demise.

The New Zealand industry was helped by one of the few silver linings of September 11 -- more Kiwis holidayed at home.

As a result, domestic tourism "never had a better year", up more than 10 percent.

"We're probably one of the only nations in the world to have come out with what I would call significant (tourism) growth," Mr Moriarty said. Economists say it is actually quite difficult to separate the effects of September 11 from the impending global downturn.

"It's very difficult to tell because we don't know what would have happened, had September 11 not occurred," Vhari McWha, senior economist with the New Zealand Institute of Economic Research, said.

"We do know the US economy was in recession well before that, so we were going to have a bad year anyway in terms of the export side of things and in terms of the currency bouncing back, with the US economy growing more slowly than the New Zealand economy, and with interest rates in the US dropping the way they did."

A year on, September 11 seems like almost a blip on the radar of New Zealand's economy. The labour market is still tight, housing continues to rise, unemployment is at a 14-year low and wages are levelling off but still well up on a year ago.

But the gathering clouds over Iraq and the domestic sector is showing signs of slowing. We could be feeling the delayed effects of September 11 only now, according to Westpac's Ms Purdue.

"New Zealand does have the ability to grow out of sync with the rest of the world...but only for a short period of time, and generally it's 6 to 9 months. We can't do it on our own forever and we need the export sector to kick back in."

Westpac is not forecasting any concrete signs of global recovery until early next year. "We are now saying (NZ) interest rates remain on hold for the remainder of this year, probably won't see a hike in interest rates until March and even that's in doubt," Ms Purdue said.

Business confidence is also on the wane. August's National Bank business outlook survey showed that while New Zealanders' confidence about world economic conditions had dropped for the fifth month running, confidence about their own prospect had plummeted for the first time.

A net 16 percent of business leaders expected conditions in their own businesses to improve over the next 12 months, the lowest level since October 2000.

Exporters, too, are aware that although commodity prices may have hit rock bottom, the kiwi dollar will probably continue rising, possibly to US58c by the end of next year, as the US currency corrects itself.

The wild card could be a war in Iraq. "A war's a funny thing," said Bob Fenwick. "In many ways, it can cause a big hiccup in trade, in other ways it can suddenly make a country's economy roar away..

"But a lot of the nervousness is perceptual on the part of the money men of Wall St. The money men around the world seem to see things in a different light than the practical exporters and even the buyers do, and the movements on the stock market sometimes don't reflect what's happening."

There's no denying, however, September 11 continues to leave a deep psychological imprint on investor sentiment. There have been wild swings in the US markets, as recently as last Tuesday, when the Standard and Poor's 500 lost more than 4 percent, its lowest level since its opening after the attacks.

New Zealand Stock Exchange chief executive Mark Weldon said there had been a deep impact on investor behaviour and the type of assets people are investing in.

"You've seen insurance premiums go sky high, you've seen airlines in all sorts of financial difficulties, you see difficulties with things as trivial as transporting art exhibitions around the world now..in all sorts of obvious and non-obvious ways, it's had a very deep effect on our lives."

As a mark of respect, the New Zealand sharemarket, the first market in the world to open, will open two hours late on September 11.

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