Fresh from a night of turmoil on global stock markets, Prime Minister John Key remained firm in his belief the New Zealand economy would grow as forecast, allowing government to keep net debt below 30% of GDP and reach a budget surplus by 2014/15.
Key was also pessimistic on whether private sector debt would grow by as much as forecast in Budget 2011, saying New Zealanders would heed what was happening overseas by remaining more cautious in terms of spending, and as savings increased.
Finance Minister Bill English on Tuesday morning said he would expect to see these type of events crop up again over the next four to five years as debt problems in the US and Europe got worse (see video below).
Markets plunge
Stock markets tumbled overnight as international investors had their first day of trading following Standard & Poor's downgrade of the US government's credit rating from AAA to AA+ on Friday evening. Many are fearful of a new recession in America's largest economy and a meltdown on European Sovereign Debt markets.
S&P followed the US downgrade by issuing a statement yesterday that New Zealand was among a number of countries that would be negatively affected by a further slowdown in the US, saying the government may need to step in with its balance sheet to take some of the impact from a fresh global downturn. See more in Gareth Vaughan's article here.
'In OK shape to handle it'
Following that news, Key told TV3's Firstline on Tuesday morning that New Zealand was "definitely in OK shape".
"Of course there’s volatility in the international markets – that’s highly predictable, this is the first day, if you like, that US and international investors have had a chance to reflect their views about the credit downgrade in the United States, and actually the programme that the United States will have to follow to ensure that it doesn’t suffer another downgrade," Key said.
"It’s important to note that Standard & Poor’s didn’t just downgrade the United States, it actually put them on negative outlook, which means there’s a one-in-three chance it’ll be downgraded again in the next three years if they don’t actually take remedial actions," he said.
"But I think if you look at New Zealand, our debt position in terms of government [net] debt is around about 20-odd per cent of GDP, we’ve put it on a track to ensure it tops out at under 30% of GDP, despite the fact that when we came into office, if we hadn’t taken that action it likely would have topped out...at least 60% of GDP and carried on going," Key said.
"Secondly, if you think about the amount of cash that the government’s holding, it’s a lot of cash vis-a-vis 2008/09 when we didn’t have a lot of cash and we were struggling to actually fund ourselves. Again, when we came into office, everyone thought there would be a decade of deficits. The changes we’ve made mean that actually we’ll be back in surplus in two or three years’ time," he said.
'Not 100% on private sector debt track'
Meanwhile, speaking to media in Parliament this morning on his way to caucus, Key said he was "not 100% sure" that private sector debt would rise as high as expected, as consumers remained cautious.
“In the end these things are in the hands of New Zealanders. They will I think take their leave from what they see from around the world, and I think they will continue to be cautious. I don’t think any of us should be terribly surprised by what we’re seeing," Key said in Parliament Building.
"Back in the back-end of 2008, early 2009 we all said this was the worst recession since the Great Depression, that’s proven to be correct. But I think New Zealand has reacted to that. Our companies certainly have, our individuals have and the government has," he said.
Foreign borrowing decisions by New Zealand banks from global markets was up to the banks depending on their lending policies.
“But what I can say is New Zealand banks, which are really effectively subsidiaries of the Australian banks, had an awful lot of trouble raising capital on the international markets in the early part of 2009. Now, again, they took that on board, they’ve raised a lot of capital – my understanding is they’ve got a lot of cash on their balance sheet," Key said.
"Secondly, they’ve diversified the tenure of that debt – they’ve got a longer duration on their balance sheet, as has the New Zealand government," he said.
"These things will flush their way through. The volatility will continue because the wrangling will continue in Washington about ultimately whether they can reach the target that Standard & Poor’s has set the US government, which is a US$4 trillion debt reduction over the course of the next 10 years."
English: 'Short-term problems may get solved, but will pop up again'
The volatility seen overnight was concerning given, if there was a renewed crisis in the US and Europe, demand for New Zealand exports might come off, Finance Minister Bill English said this morning in Parliament.
“But otherwise we’re in reasonable shape to weather this kind of event," English said.
"I think we’re going to see these events episodically over the next four or five years – every now and again they’ll crop up because the debt problems in the US and Europe are getting worse, not better. Events in the last few days are just another crisis of confidence," he said.
"They’ll solve the problem in the shorter-term, and it’ll crop up again later.”
Here's Finance Minister Bill English's take on Tuesday morning on the market turmoil:
'It's OK'
Last night at his post-Cabinet press conference, Key said it would not be fair to assume Treasury's growth forecasts in the 2011 Budget were now too optimistic, following renewed fears of further recession in the US and Europe.
The Rugby World Cup and rebuilding in Christchurch would underpin growth in the short-term, Key said.
The government has said the economic recovery in New Zealand would be export-driven. When asked whether the latest fears could unhinge export growth, Key replied it was too early to make predictions on what the US rating action would mean for New Zealand, although there was still strong demand from the Asian region.
(Updates with videos of Key and Finance Minister Bill English this morning, removes Key videos from yesterday (see them here) with comments on private sector debt)
37 Comments
We need a culture change - PM
Prime Minister – agriculture exports are certainly a major, but also volatile earner for New Zealand. Especially dairy farming is in addition causing financial burdens to taxpayers in the billions, cleaning up the pressures environment. The government has to look into a more balanced economy, stimulating and supporting some new solid segments in our economy.
The current worldwide environment requires the setting of priority. Daily financial demands of the NZpopulation are increasingly stressed – life is increasingly more expensive. Therefore government’s policies must ensure that not only full, but skilful employment of the general public is guaranteed/ maintained.
Current national policies of allocating infrastructure needs in sectors such as energy, transport and telecommunication in the billions and skillful jobs to foreign countries/ companies needs to be reviewed.
Our nation – the younger generation deserves a better future Prime Minister
Saw John Key on the teev last night saying "DON'T PANIC"
Cripes, how often do ya hear that?
I'm starting to feel like Corporal Jones!
NZ does not control it's exchange rate, that's true. It rises along with commodity prices, if you look at the correlation between NZ commodity prices and the NZ exchange rate, it's very high. There are other factors too but commodity prices are a huge driver of NZ's economic performance.
If the world economy slows, commodity prices will fall (as they are doing now). Then so too, will the NZ dollar fall (is it is now doing). So in NZ dollar terms, the price fluctuation of our exports is reduced.
What Key is referring to - is the structural increase in commodity prices which is the result of the growing middle class in China, Brazil, India and other emerging economies.
So yes, the NZ dollar is coupled to world markets, but the NZ economy can still be somewhat decoupled from all the fallout in Europe and the USA.
"The Rugby World Cup and rebuilding in Christchurch would underpin growth in the short-term, Key said"
So take both of those out of the equation and what have we got?
Of course we could go back to buying and selling overvalued property like we did in the decade beforehand. Oh wait, we're still doing that.
Or do we cross our fingers and hope for the big one in Wellington or for one of Auckland's volcanoes to wake up - any one of those will underpin growth for a while won't it?
so right meh - our economic policy is based on a big piss up and a natural disaster!!!!! yee-ha we have the leader we deserve. if only that earthquake in wellington would arrive we would be like pigs in s@*$, it might just knock out the bee-hive and Don Key and a few of his idiot mates
Key told TV3's Firstline on Tuesday morning that New Zealand was "definitely in OK shape".
I wonder if that kind of brinksmanship permeates the offices of ACC and the two national superannuation funds.
Or did they have the sense to fade the negative US Treasury market proclamations of Bill Gross and take position?
Updated with comments on private sector debt track
Key is unsure whether the private sector will take on as much debt in coming years as Treasury thought.
Yet all other Budget tracks are right.
Don't worry, we've got two months of a rugby event that isn't even as the two biggest months in our regular summer tourist season, and rebuilding in Chch coming. That'll save us.
Dont forget about the insurance probelms as well Hugh...oh yeah and the actual costs of bailing out the red zone areas, the insurance companies are telling the government if the house was repairable, regardless of the land, then they will only pay the government the repairable value...wonder how much the government will end up borrowing for this, considering there is still a lot of red zone still to go.Oh sorry I forgot a natutral disaster is actually good for the economy because EQC and the insurance companies will pay out so fast it will add to the growth....ummm
Brownlee doing well? Please explain Hugh.
If you are referring to trying to rush through rezoning of unsuitable land, please be aware that there are literally thousands of vacant sites within existing areas ready to come onto the market at extremely competitive prices (due to existing homes needing to be demolished and owners taking the insurance and running).
Subdivisions at "Highfield" (Marshlands), "Prestons", Halswell etc where the land is suspect and proposed sections are priced in the high $200s is hardly going to do anything for affordability, unless the developers develop the properties and their financiers foreclose and sell them at huge losses!
Realistically we are likely to see a minimum of 5,000 existing green zone sites become vacant. If we consider a typical site, 750m2 L2 in St Albans, with insurance monies paid this sort of site may sell for as little as $150k, $75k plus costs per unit (if 2 built). The same sort of site in one of these outer subdivisions would be $200k if the developers have there way.
These proposed developments simply won't go ahead even if the land is rezoned because they are not viable.
Ngai Tahu at Prestons are starting on just one small stage, they know full well the demand is not high and will be looking at their developments as a long haul rather than a "flood the market" proposal.
Note that sections next to Prestons in the very upmarket Waitikiri, are priced from just $145k for unit sites, and around $200k for normal sites, yet they are far from sold out and in fact sales have only proceeded slowly since the June announcement.
Alex
this is getting more and more absurd by the day.
Let's face it, NZ's economy has long been a phony one based mainly on selling each other overvalued property and low value agricultural work
And now a piddly world sports event and a rebuild following a natural disaster is going to save us- even more phony!
Key is placing a lot of faith on economists who have been frequently wrong in recent years
MIA, no rebuild at all is likely.
Building will probably continue at rates similar to the recent past for residential as we've lost 26,000 voters according to the electoral roll (althoough this is an underestimate as east ChCh only lost 400 voters when perhaps 5,000 houses are vacant - I'd say many just didn't get round to sorting out their enrolment!)
So being conservative say it's actually 35,000 voters (which seems more likely), throw in 7,000 school age kids and we're at 42,000 down. That's 17,000 homes not needed.
Ok, say 10k end up in red zones. And there's another 15k which are uneconomic to repair, but of that 25k probably 7-10k are habitable for the time being. So that means we're actually even and no new building is required.
Not only no new building is required, but because 15,000 in green zones will need demolished (even though maybe 5-7k of those are perfectly liveable) there will still be an instant supply of 7-10,000 sections, many of which are larger sites suitable multiple units. So no subdivisions needed either.
Now looking at commercial space. Around half the CBD buildings are ok, just not accessible. Once they become accessible, those that have survived 6 months in limited accommodation will instantly have the extra space available. So there won't be any huge demand for new commercial space.
In fact travel down St Asaph St on the edge of the red zone. There are properties for sale and for lease all down the street - no one wants anything.
No demand. No rebuild. No boom.
All the insured are reading the fine print in their contracts and opting for "replacement" which means buying an existing building.
I spoke to a medium CBD commercial landlord recently who has over a dozen buildings lost. The first of his buildings to be settled was one which collapsed in September. He had planned a new build, but since Feb has now had the insurance company buy for him a replacement building in Auckland. This is typical of what will happen.
Recovery is a dream, we've got what we've got now and anything more will take years to accomplish.
Sure as hell won't worry Shipley...
The Prime Minister's standing by his minister over payments to members of the Canterbury Earthquake Recovery Panel. Members of the panel, including former National Prime Minister Jenny Shipley, are being paid twice the normal rates because Earthquake.
Well you can't expect her to turn up to meetings and be paid normal wages...can you!
And then there is the question of "pay back" later on.... isn't there.
Ironically John Boy (Crowned Emperor) yesterday came as close to telling the absolute truth as you will ever hear from those mealy lips when he utterd the phrase..
"We can't afford to be Exposed"
That about covers it all ... I will lie in the interests of those, who are in control.. of the percieved interests of all.
If I am talking ...you can be fairly certain I'm lying...but at least now you do know why.
We can not afford to be Exposed
I'm trade marking the Tee Shirt as we interface.
Hit refresh for video of English in there now too. His feet a little closer to the ground on this.
And my comment on not worrying because of RWC and chch was sarcastic. Should have put a yeah-right afer it. Apologies.
Also, FYI, hearing from some of the other media that they put in calls with English's office on the weekend for comment on the fallout, and they rung up by...(Mr positive) Key instead.
...
actually we've had a bit of that the last couple of weeks - sarcastic comments from regular punters being mistaken as gospel or statement of fact - few plonkers out there. Don't worry Alex we know you.
not surprising about Don Key getting on the phone - spruik it baby!!!! he is the super slick salesmen who will be gone in 3 and a quarter years to take up his role with his money mates for doing such a good job rogering NZ. BillyE is a long term politician so he probably wanting to be a bit more careful about what he says or he might have to work for a living in 3 and a bit years.
The markets clearly aren't as up beat as JK.
NZ down over 3% this morning, ASX and Japan down 4%, Korea down 5%.
Aussie banks cutting fixed rates too!
Where was all that pressure that was going to force up interest rates in September. Clearly all the bank economists have broken cystal balls!
For once Bernard was more accurate than the rest.
Must keep pessimistic!!
ASX200 down 5.5% now, with talks of emergency rate cuts!!
Where's our boom gone??
Perhaps it's all gone kaboom!
Why could no one see how fragile everything is/was? Interest rates should be low for the foreseeable future. Whether it's economists or seismologists it's all just guesswork when it comes to predicting the future!!
Chris-J. not so.
Some of us have consistently being saying it was coming, and why. Not so much the pricked bubbles, but the long-term underlying trend.
If folk were too arrogant, or too ignorant (I can't think of another option) to listen, well, tough.
I raced to be debt free by 2005 (I missed but not by much) because of the inevitability of it all. To note the spinmeisters here at the moment, somehow thinking that they can eliminate reality by hassling the messengers (or that they can 'win' by buying time) is a bit of a laugh, given what's unfolding.
PDK, if you've been reading any of my posts over the last year or so, you'll know that I think politicians and economists have been overstating a recovery that doesn't exist.
Being debt free isn't the entire answer, there is an opportunity for those who want to take on opportunities in real assets with genuine income to use some very cheap debt to move their fortunes forward.
There are always opportunities and with inflation (the only eventual outcome) real assets will prove their worth.
ChrisJ -
With provisos, agreed.
Reduced opportunities, and a lot of sidelined players, but yes, real assets will prove their worth. Energy, food, water, shelter. The rest are various degrees of discretionary.
go well (there's a beer waiting if you're ever going past).
Stock markets are not a boom they are a balloon.
Whether they go up or down most days doesn't matter very much.
People still got out of bed, build houses, plant and harvest forests, milk cows, feed sheep, assemble radio telephones, write software etc.
All that has happened down under is the foriegn cash upped and left, quite probably a good thing philosophically speaking. But it will be back because there is an enormous amount of cash in the world that needs a return.
Dunno, just pointing out the obvious really.
Fundamentals revolve around what people do and not what they say or the weather of the day.
It's worth remembering as the chickens all scream about the sky falling.
Geez. Nobody died because some Japanese people sold their Kiwi bonds.
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