English returns from "ugly" New York meetings with confidence US Fed can't devalue its currency with further QE and China will let Renminbi rise

By Alex Tarrant

Finance Minister Bill English says there is no reason to believe forecasts of New Zealand’s growth path will change “significantly” when Treasury releases its pre-election fiscal update, although forecast growth two to three years out might be weaker than expected in the 2011 Budget.

English has just returned from New York, where he described the mood among global economic policy makers as "ugly," as they struggled to deal with the sovereign debt crisis in Europe and political bickering in Congress over the American government’s spending plan. The US and Europe were talking themselves into recession, and New Zealand would not be immune from any fallout, English told interest.co.nz on Wednesday morning.

Asked later on Wednesday whether he thought Treasury would have to revise down its economic growth forecasts following his trip, English replied: “Not significantly”.

“Treasury will be going through that process right now for the pre-election update. The general picture has been in the short-term the economy has been better than we expected, [but] two or three years out it might be a bit weaker. But we’ve yet to see how it turns out,” English told media before Question Time in Parliament.

“I have to say with the kind of volatility you’ve got in financial markets, you have to be ready for anything,” English said.

“I wouldn’t want to prejudge it because there are different factors in play. But there’s no reason to believe that our moderate path of growth is going to change significantly,” he said.

English was confident the government could still return its books to surplus in the 2014/15 year with some "tough" budgets in which government spending would only be increased by NZ$800 million a year, following a ‘zero’ budget in 2011.

“Most countries around the developed world now are trying to get to surplus because debt’s fairly toxic and we would want to stick to that track. I’m pretty confident that we can,” English said.

A bit of confidence on the currency side

English returned from meeting global economic policy makers in New York more confident the US Federal Reserve would not be able to embark on a renewed track to devalue the US dollar, and that the Chinese would let their currency appreciate, welcome news to Kiwi exporters as they eye an "ugly" international outlook.

English said a meeting with US Federal Reserve chairman Ben Bernanke went well, with Bernanke being "reasonably forthcoming" about the difficulties the Federal Reserve faced in trying to stimulate US demand. Bernanke gave the sense the Fed was down to its last tricks in terms of stimulating the economy, and was frustrated the US political process was not as supportive as it could be, English told interest.co.nz on Wednesday morning.

“He thinks he could be more effective if US politicians were willing to try harder," English said.

English asked whether Bernanke was looking at embarking on another round of quantitative easing, or money printing, as the Fed's first two efforts at this had devalued the US dollar, sending New Zealand's currency soaring.

“There was an answer to why QE1 and QE2, and fiscal stimulus, hadn’t really worked. It was that it could have been worse," English said.

"They readjusted their measure of the US recession, looking backwards. Instead of saying, 'we want to crank up two or three per cent growth by using these tools', they’re essentially saying now, ‘we avoided catastrophe’. They’ve just re-measured the depth of the recession and it was 25% worse than they thought,” he said.

'Bernanke running out of tools'

The fact Bernanke had indicated he was running out of tools made English more confident that a third round of Quantitative Easing, even if it did occur, wouldn’t send the New Zealand dollar soaring, at the same time as commodity prices for New Zealand exports looked like they were beginning to soften.

“There’s always that danger there, but I think the market is going to be less reactive to what the Federal Reserve is doing, so I’m a bit less concerned about their impact on the currency because the Federal Reserve and the markets are giving a sense that there isn’t anything more the Fed can do that’s going to make much difference. Whatever they do just gets discounted," English said.

That meant the onus was now on US politicians and away from the Fed, which was what was “so depressing” about the "ugly" situation because markets and public institutions were seeing politicians operating to different logics – those of the 2012 election in the US, and of sovereignty in Europe.

'China may be ready to let Renminbi rise as they're more confident of managing an apparent property bubble'

Meanwhile, English said he got a sense the Chinese government was willing to start letting its currency appreciate, as it further liberalised its economy.

Meeting the Chinese Finance Minister and other China watchers, English said he felt the Chinese were more confident now than six months ago of their ability to manage an apparent property bubble, high inflation and problems with local government debt.

"They're pretty internally focused. What's driving them is the need to get on top of any social unrest, and the political tension between the coastal areas and everyone else, where the coast still wants this low exchange rate and don't want to rebalance," he said.

A number of people English spoke to in New York were expecting a 6-8% appreciation of the Chinese currency over the next 12 months, although it could be a bit further out.

"In the next 12 months they are unlikely to move much on anything because they've got this political succession happening. But discussions that we've had with their central bank and others indicate the central bank has a reasonably open mind about it," English said.

"If that happened, that would be helpful."

"They're trying to recruit people to their side of the argument with the US over the US currency, and I just pointed out, well actually we're caught between two currency policies we don't like much. Theirs where they won't let it appreciate, and the US where they've been depreciating it too much," English said.

China to keep growing 7-8%

The Chinese were reasonably confident on their growth outlook, with the official government position focused on 7-8% annual growth.

"So when people talk about a Chinese slowdown, they mean it’ll drop back from 12%. That is actually an official policy, so it’s not like it would be a surprise to the Chinese government," English said.

The Chinese government was worried about the property boom, inflation, food prices, and internal debt problems such as local government debt, he said.

“The uncertainty there is they’ve got an ongoing internal wrangle about the extent to which they continue to liberalise particularly their capital markets, on the one hand, or stick with a politically controlled system on the other hand."

Rating agencies in negative mood

Also in New York, English met with representatives at the major ratings agencies, not so much to promote New Zealand’s position, but to get a gauge on where they sat in terms of the problems in Europe.

“They were in a pretty negative mood. They’ve downgraded eight OECD countries by an average of three notches and are anxious to prove they are tough on sovereigns," English said.

The rating agencies continued to focus on external debt, although in this case they were discussing that in the context of Europe.

"There seems to be general agreement that the agencies had underestimated the effect of the large external debts of Italy and Portugal. People have been a bit inclined to think that was owed in the Euro, so that didn’t matter so much. But when you pull all the component apart it does matter. It’s owed to the private sector so it affects the banks. There’s only the ECB lending to Spain and Italy now," English said.

“The conclusions I’d draw from those discussions are that they’re in a pretty negative mood about all indebted countries and banking systems, and anyone who has got significant external debt is under the microscope,” he said.

“They’re caught up in the mood that they’re looking over a precipice. They’ve got quite a Europe/USA-centric view. They’re not that focused on Asia because they’re all surplus countries, it’s not where their risks are.”

New Zealand was certainly not immune from all of this, although connections to Asia, particularly China, and Australia would help.

“The IMF has downgraded most growth forecasts, but not China’s. Their official view is still reasonably positive," English said.

"There’s a plausible scenario where things don’t look quite as good two or three years out – a high exchange rate period – but don’t look too bad in the shorter-term," he said.

“Whatever the variations in the forecasts for other countries’ prospects, the answers here are pretty much the same. Get on with the strong focus on competitiveness, which is everything from infrastructure to the public sector reform, keep your macro-economic stability and political stability in place, and get as organised as we can to help our exporters offshore."

(Updates with video, English comments before Question Time, further comments on rating agencies, NZ's position)