Wednesday, September 19, 2012

The Economic Outlook for New Zealand

This morning I went to a breakfast lecture given by ANZ Bank chief economist, Cameron Bagrie.  The high point of the morning was the excellent buffet breakfast, which is not to say Bagrie didn't speak very well - it was just that his message was very downbeat.  That makes him an unusual beast in the economist herd at the moment, with many of his profession both here and overseas being little more than mouthpieces for their profligate governments.

The message was simple: New Zealand is one of the most indebted nations in the world (when public and private debt is included), up there with Spain and Greece.  While New Zealand is enjoying economic growth in the 1 - 2 % range, even that modest level growth is built on record high commodity prices in recent years, which are now heading south very quickly.  Add to that the very slow recovery of our second largest city, Christchurch, from its devastating earthquakes and the fact that all our key export markets are in a worse economic state than ourselves, and you have solid evidence for a poor economic outlook.

Bagrie saw the solution as being conservative economic management combined with growth from natural resource-based industries such as mining, water and energy.  He said that finance markets saw both Finance Minister Bill English and opposition finance spokesman David Cunliffe as fiscally conservative and I suppose when you compare them with Ben-$400Bn-QE-per-month-Bernancke in the United States and the new President of France who wants to increase the government's share of GDP from 50% to 60%, they do look pretty conservative. Personally, I see Bill English's expectation of a balanced NZ government budget by 2014/15 (on the condition that we achieve 4 - 5 % economic growth) as a long odds gamble, but it's all relative, I suppose.

The problem with Bagrie's solution to our grim economic outlook is that he was preaching to the choir.  The audience was made up of ANZ Bank's business banking customers.  These are predominantly owners and managers of small to medium sized businesses.  I imagine that almost everyone in the audience agreed with Bagrie - let's exploit our natural resources to drive economic growth.  But New Zealanders in general, and the National Government in particular, do not seem to really care about economic growth and would rather be dictated to by minority interest groups to whom exploiting natural resources is heresy.  In the past three years that it has been in power, John Key's Government has:

  • Backed down on opening up even very small areas of our national parks to mining
  • Allowed various interest groups to hold up the partial privatisation of energy companies, thereby stymying new investment in the sector
  • Brought in an emissions trading scheme that has made investment in the energy sector far less attractive
  • Got into a fight with Maori tribes about ownership of water rights.
If this type of political incompetence and spinelessness is any indication, New Zealand has as much chance of building economic growth through exploitation of natural resources as has the entire country of suddenly floating to the equator. 

So, where does this leave us?  I don't think there is much doubt that Bagrie's prognosis, in the absence of a radical increase in political courage by our leaders and a sudden Road to Damascus economic enlightenment on the part of the New Zealand voting public, is correct.  We are a train headed for a broken bridge - an economic wreck in the making.  And the problem with economic wrecks, as the likes of Greece, Spain and Portugual are discovering (or re-discovering in the case of all three countries), is that they quickly become social and political wrecks too, with riots on the streets and the rise of opportunistic political despots.

New Zealanders are complacent.  We think we're immune to the economic 'flu that ails the rest of the world.  You don't need to be a noted economist to know that we're not.  We are going to catch a very serious cold at least, and we are very poorly prepared to deal with it.