Latest Greek crisis “not pretty” for NZ, says NZ Management economist Bob Edlin

The referendum threatens to scupper weeks of negotiations over how to rescue the Greek economy and prevent debt crisis to match the Lehman Brothers crash of three years ago.

Eurozone members had agreed to cut Athens’ debts by 50% and provide €130 billion in additional rescue loans to supplement bailout fund put together with the International Monetary Fund last year.

Greek polling shows voters bridle at the austerity measures that would be part of the bailout bargain, including cuts in the bloated public sector, reductions in pay and pensions, and new taxes.

The renewed eurozone crisis triggered by the Greek decision would only make matters worse, according to economists’ warnings reported in The Guardian.

Andrew Kenningham, senior economist at Capital Economics, said October’s manufacturing surveys showed Europe had been slipping into recession even before the latest twist – “as the eurozone crisis deepens, however, it is likely to drag world growth down further”.

This is recognised in the downside scenario in the Prefu.

It should be considered more of an illustrative outcome than ‘worst case’, the Treasury emphasised, but whatever it might be, the picture is not pretty.

The main set of forecasts assumed the global economy “manages through” in the near term, based on reasonably orderly resolution of the sovereign debt problems in the euro area combined with the adoption of additional fiscal stimulus measures in the United States.

But “the risks to this view are skewed to the downside” and the main drivers of the Treasury’s downside scenario included European leaders failing to contain the sovereign debt challenges in the euro area.

The Treasury foresaw that resulting in the US and euro area economies contracting by 1.5% and 2% respectively in the 2012 calendar year, staging relatively weak recoveries thereafter.

The impact on New Zealand would come mainly through lower demand for our goods and services exports (including inbound tourism) and lower prices for our key commodity exports – particularly dairy, meat and forestry products.

Lower export receipts would flow through to more rapid deterioration in the current account balance – the current account deficit would widen to 4.6% of GDP in the year ending March 2013 (compared with 3.6% in the main forecasts) and to 7.9% by the year ending March 2016 (compared with 6.9%).

The exchange rate would drop sharply.

Levels of both consumer spending and market investment would remain below their main tracks throughout the forecast period.

The combination of weaker domestic demand and lower terms of trade would mean nominal GDP was cumulative $35 billion lower through to the year ending June 2016.

Tax revenue would be lower than in the main forecasts, and the total Crown operating balance before gains and losses would remain in deficit throughout the forecast period (a deficit of 0.5% of GDP in the year ending June 2016 compared with 1.2% of GDP surplus in the main forecasts).

Core Crown net debt in the downside scenario would rise to 35% of GDP in the year ending June 2016, some 7% of GDP higher than in the main forecasts.


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