Reversal of Fortune

Other global economies are jittery; Asia braces itself for falling technology spend, Japan is sick, Europe is grim, and Australia’s economy is going backwards.
Amid the steady drumbeat of woeful tales, we are reminded of the dangers of self-fulfilling prophecy. We hear of global firms scaling back on people and plans, not because they’re already hurting, but because the developing climate of fear convinces them they should batten down the hatches.
The longest economic expansion in American history will come to an end. Corporate spending on technology will wane, the golden touch of venture capitalists will fade – welcome to the old economy, cry the pessimists.
Around the world, they watch and wonder if each upward blip means the US economy has bottomed out. They’re trying to detect the shape of the recession and recovery, with new game called alphabet soup.
If it’s ?V’, it’ll dip then bounce back, ?U’ means it’ll take longer to then come back. ?W’ is double dip, but the dreaded ?L’ means it’s straight plunge that leads to flatline.
Economic reports send mixed messages and many deny the US is in depression at all. recent Economist survey reported that only five percent of economic forecasters predict the American economy is heading into recession. The survey carried the warning that many economists have bias against uttering the dreaded ?R’ word.
Many observers call it slowdown that was coming anyway after the windup of the Y2K spending and the outcome of rationalisation of the dot-com bombs – 210 have disappeared in the last year when the Nasdaq began its spectacular fall leading to loss of NZ$10.71 trillion from US share prices.
The optimists’ spin is that despite the worst market downturn in decade, the US economy will rebound in the second half of the year, boosting tech profits and share prices out of the doldrums. They claim the new economy is more resilient than many imagine, and it has chameleon-like characteristics that will quickly breed fresh innovations.

So how immune is the New Zealand economy?
Can we really stay out of the fallout zone? We put this question to chief economists of our major banks. All agreed that we’re not immune.
“The trick is how bad the fallout will be,” says WestpacTrust’s Adrian Orr.
“At the moment, given our domestic activity is picking up and given the exchange rate is as low as it has been and that commodity prices are holding up, then any impact will be delayed on the New Zealand economy,” says Orr.
He believes people have underestimated how spectacular the international growth has been in the 1990s.
“The US and Australia have been in excess of four percent annual growth. When you start to take that as the norm and base your spending and earnings plans around that, then anything less will severely disappoint.
“We’re looking at one and half percent growth for the US this year rather than five last year – that’s quite turnaround.
“Australia is very similar to the US, almost one for one in their economy. Domestic spending has fallen off and business confidence has spat the dummy on the back of post-GST, post-Olympics and now concerns about change in government.
“So, whereas Australia and the US may be posting one to two percent economic growth, we’re looking at three to three and half percent growth rate for this calendar year, so in cyclical sense we’ll outperform them.”
This doesn’t change the fact that New Zealand survives in the longer term by earning revenue offshore.
“Eventually we’ll need these economies to roar back into action and consume our goods. So if their slowdown proves to be prolonged or even deepens from where it is then you’re looking at slowdown in the New Zealand economy from mid to late this year and at interest rate cuts possibly earlier than that.”
Like economists around the world, Orr has become an expert in the alphabet.
“At the moment most forecasters are putting their money where their mouth is and are sitting in the ?V’ camp, in other words the US economy will pick up steam again by the second half of this year and be back into reasonable growth by next year. They base that view on the fact that monetary policy is being cut aggressively – and the government books are in good order providing room for tax cuts and other things that’ll spur domestic spending.
“If we’re drawn into the alphabet I’d be sitting more in the ?U’ camp, which says ?yes, you will recover but it’ll be longer’.
“We base that on more or less what we’ve seen in our own economy. When the economy slows down because of excessive spending in the household or business sector it takes longer for those balance sheets to correct themselves.
“So you’ll likely go through an l8-month period of sub-potential economic growth, and in the US that means fairly soggy international environment that we’ll be selling our products into.
“But our commodity prices have held up well. They’re at record levels still, so it’s unlikely they’ll come crashing down quickly with thump.”
Bernard Hodgetts, ANZ Bank’s chief economist, agrees we can’t remain totally free from any world fallout.
“I think we’re certainly going to feel some impact from the global scene, and history shows we do suffer to an extent when the rest of the world slows down.
“But in many ways our current situation is little bit unusual because the economy locally seems to be picking up and gaining bit of momentum at time when most of our trading partners seem to be slowing down.”
Hodgetts is picking we’ll see moderate growth this year. “One of the reasons is that although the global economy is softer, we’re still facing very favourable New Zealand dollar and that quite clearly has been major catalyst for the surge in export earnings in the last 12 to 18 months.
“That won’t go away quickly and of course, it does add competitiveness to the export sector that we didn’t have two or three years ago. Secondly, I think when you look at the individual export markets we’re in, some will suffer from weak trading partner growth, for instance areas like forestry and the housing market which is still vulnerable in Australia.
“But when you look at the range of industries in the export sectors – dairy and possibly meat at the moment – there seem to be favourable conditions ostensibly for reasons unrelated to the pace of global activity. For instance in the dairy sector, we’re looking at prices on relatively cyclical high for the world market. This is related to things like reduction of subsidies in Europe, the state of world inventory for dairy products, and switching in demand for protein following the BSE [mad cow disease] scare, which benefited demand for milk protein.”
There’s range of factors going on that don’t have lot to do with global growth, but are still working in favour of the industry at the moment, adds Hodgetts.
“I look at the dairy sector and say how likely is it we’ll see major slowdown in earnings this year and it looks unlikely based on what’s happening. It’s similar story in the meat industry. There’s debate going on at the moment on the impact of foot and mouth disease here – at least in underpinning earnings for the time being. But that’s unrelated to the global growth climate and more particular factor going on in that market.
“Interestingly when you look at some of our smaller exporters like aluminium – traditionally an industry correlated closely to the global economic cycle – we see aluminium prices benefiting from low world inventory level and at the moment generating significant revenues.
“So while there are predictions for the export sector to slow down, and I think it will taper off over the year, I don’t think we’ll see an abrupt slowdown.
“Of course it was always destined to taper off anyway. We’ve been seeing 30 percent growth rate in export earnings over the last 12 months and there’s no way those co

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