Finance Minister English says EU sovereign debt crisis, possible US downgrade, still dangers for NZ borrowing, exports

New Zealand's ability to borrow on international financial markets, and the stability of our export markets are still worries for the government as the European sovereign debt crisis intensifies, and as the US government faces a credit rating downgrade, Finance Minister Bill English says.

Meanwhile English said exporters may have to get used to the New Zealand dollar staying in the 80 US cent range, as New Zealand's economy stayed relatively more attractive than those overseas, where it could take a decade to sort out underlying economic problems.

Troubles in Europe intensified again overnight with fresh fears of Italy's ability to ward off public debt problems that have plagued Greece, Ireland, Span and Portugal.

In the US there is futher talk a third round of quantitative easing might be on the cards due to weaker than expected growth. There is also talk the US government's AAA credit rating may still be downgraded despite Congress and the Senate passing laws to allow the government to increase its debt ceiling and undertake budget cuts.

Speaking on Morning Report this morning, English said it was concerning that the United States government was still facing a credit rating downgrade. Listen to the interview here.

“It’s positive that they’ve made some decision, but I think this is a symptom of a long-running underlying problem," English said.

“We’re going to see periodic crises of various sorts for the fair bit of the next decade in my view, because both in Europe and the US there is large amounts of debt, it is still growing and the political pressures that go with trying to get on top of that, the market pressures that go with that, are going to keep causing uncertainty,” he said.

There were two ways this could have an impact on New Zealand’s economy.

“One is that because we are participants in the international financial markets, borrowing a lot of money both through the government and through the banks, we’re vulnerable to changes in sentiment in those markets. So we’ve taken a number of measures and so has the Reserve Bank over the last couple of years to reduce our vulnerability to those markets, so that we are less dependent particularly on shorter-term borrowing," English said.

"The other way it can affect us is when decisions taken by the politicians affect the economies directly, so that if the US economy slows down, or Europe slows down, that can have an impact on us when we’re selling directly to them," he said.

A US or European slowdown could also affect other markets such as China, to where New Zealand was selling an increasing proportion of exports.

“I think most people can see day-to-day the impact where our exchange rate is around its highest levels it’s ever been [post float], and that can be tied to the fact that other countries’ economic outlooks are looking pretty negative, and ours is looking fairly positive,” English said.

High NZ$ bad long-term, but good short-term

The high dollar was a real concern for getting the structure of the New Zealand economy right. Yet it was good news for households because it meant the prices of goods and services imported were getting cheaper, which was going to take some of the steam out of inflation.

“But in the long-run we would prefer a dollar that makes it easier to rebalance the economy. But the world’s not giving us that choice, so we’re going to have to focus very much on how to be a competitive economy, with a dollar maybe in the 80 cents US [range] for some time,” English said.

Kiwis being careful

There appeared to be an amount of conservatism among New Zealanders at the moment in terms of savings and investment choices as world markets remained volatile.

“When they read this stuff in the news it doesn’t lift their confidence in the world economy," English said.

“On the other hand we’ve actually done pretty well through the last two or three years. If you’re an ordinary person in the US, or in Europe, the likelihood you’re unemployed is much higher, your job security is much less, your concern about whether the politicians and the government system are handling the pressures I think would be much higher than it is here," he said.

Confidence was gradually building amongst New Zealanders, while there was very little consumer confidence in other countries. Growing confidence should flow into higher wage growth in New Zealand.

“We’re certainly relying on growth in exports, and that’s not just around high commodity prices. High commodity prices aren’t a bad thing when you’re selling commodities. We know what it’s like when they’re low, it’s not very good," English said.

"In recent months a better performer has actually been the manufacturing sector because our dollar has been weaker against the Australian dollar, it’s our main manufacturing market, and so manufacturing activity has been picking up surprisingly better than we might have expected," he said.

"I think the other driver of wage growth is going to be the Canterbury recovery. That’s got its own problems and frustrations for the people of Christchurch, but the rebuild of NZ$20 billion has to be done, and the economists tell us that is going to put some broader growth pressure into the economy, particularly around wages and incomes.

"So getting incomes up has to be our main objective, and there’s a few challenges in the world to achieve that,” English said.