Confidence about the economic outlook picked up on all fronts in the September quarter; or rather, on all fronts measured by regular surveys of business people, consumers and employees. Yet as Westpac economists observed, there had been “a deluge of bad news” – finance company collapses, tumbling house sales, and rising food and petrol prices. People obviously were focusing more on the positives. Dairy farmers were set to enjoy massive income boosts and employees, and people generally, were heartened that the labour market was still buoyant, helping to prop up wages.
While it’s great to see bubbling optimism, let’s not forget that we have massive overseas debt and our interest rates are second only to Iceland’s among developed countries. Moreover, the Reserve Bank is unlikely to lower the official cash rate in hurry. The downside to bubbling confidence – pointer to consumers wanting to keep up their spending and business people wanting to expand – is that it tends to make central bankers nervous about inflationary pressures.
On the positive side, further good news came from the latest GDP statistics. Economic activity had remained robust and quarterly GDP growth was solid 0.7 percent, resulting in annual growth of 2.2 percent. In banking and monetary policy circles, paradoxically, this was disquieting. GDP growth was higher than they had forecast, heightening Reserve Bank nervousness about inflationary pressures. This will reinforce its reluctance to bring the official cash rate down from 8.25 percent; and the overseas investors who have been pumping their savings into our economy to take advantage of the relatively attractive returns will be wanting to keep pumping in their money. This is pushing up the exchange rate, making the business of exporting that much tougher.
But overseas investors have cause to be nervous, too. big attraction for them, besides our high interest rates, has been the strength of our economic growth. But another quarterly set of statistics, the balance of payments, gives plenty of cause for unease. They show further widening of the country’s current account deficit and increase in its overseas liabilities.
Few commentators were dismayed by the figures, but they did give the Green Party grist for its mill of hostility towards globalisation and free trade. The deficit and the debt illustrated “the dangers of allowing untrammelled foreign investment in New Zealand”, co-leader Russell Norman warned. The country’s overseas debt was mounting rapidly (up almost 14 percent in the June year to reach $149 billion) to cover the “outflow of profits to overseas owners, to finance our spending splurge on housing, and to pay for the merchandise trade deficit”.
Norman called for “an honest appraisal of the downsides of allowing unrestricted direct foreign investment in New Zealand”, rather than Labour and National’s “unthinking cheerleading of foreign investment”. And he noted Labour and National assurances for 20 years that eventually our current account deficit will come right under their laissez-faire foreign investment approach.
It’s tempting to dismiss this as the carping of an alarmist Greenie, but calling for an honest appraisal is hardly unreasonable. The balance of payments figures showed that less than 14 percent of all the profit earned by foreigners from their New Zealand investments was reinvested in New Zealand. They also showed that our net international debt position increased by nearly 14 percent in just 12 months and totalled $149 billion at the end of June. It should not be out of order to contend, as Norman did, that having existing New Zealand businesses bought up by overseas owners “who add nothing to the business and simply extract profits, does nothing for the New Zealand economy or society”.
Actually, it’s wrong to contend these deals do nothing for the economy. One effect is to reduce the share of the national GDP pie to be shared among New Zealanders year by year. At March 1972, annual gross national income (once known as gross national product) was 99 percent chunk of GDP. By March 2006 accounts, it had shrunk to 93 percent.
Then there is our vulnerability to shocks. About $67 billion of our international financial liabilities at 30 June were short-term, 90 days or fewer. This accounted for 34 percent of total financial liabilities. The Trans Tasman newsletter gave rough idea of the magnitude of that figure by matching it against June-quarter gross domestic production: $33.3 billion. Thus our short-term financial liabilities were equivalent to 26 weeks of production. While overseas savers are happy to keep the money here, well and good. But sudden change in their confidence will trigger an outward flight of money and foment financial crisis.
Bob Edlin is regular contributor to Management.
