Pessimist turns into a conditional optimist

For more than two years I have held a very pessimistic outlook for the New Zealand economy. Now that we have achieved a recession thanks to the global credit crunch, the housing market bubble bursting and (up until June 2008) an overly tight-monetary policy, do I still hold to a pessimistic outlook? The answer is a conditional no. The worst of the economic downturn may already be over for the NZ, but the path back to positive economic growth is not going to be smooth or even.

In 2009 I expect to see a new œtwo-speed economy developing, the rural/export sectors confidently expanding and making money, but the city-concentrated retail and housing sectors of the economy still struggling as highly-leveraged household balance sheets take some time to correct. For the overall economy it will not be a sharp rebound to positive growth, more of a grind back up to 1% and 2% annual GDP growth rates. However, the following positive trends for the economy should lift confidence and investment next year and eventually lead to increased consumer spending:- -Lower interest rates and exchange rates for the agricultural and export sectors will help business profitability and household incomes. - International lamb and beef prices are on the improve and the lower NZD exchange rate helps (my sheep-farming brother was moaning about $45 per lamb prices not so many months ago, however his last sales, admittedly for larger last-season's lambs, were $90 a head) - Income tax cuts, particularly if National can govern outright. -Lower petrol prices at the pump certainly lifted consumer confidence and spending in late 2006 when they last fell back. Could we see the same happening over coming months? -I suspect the business community will get a boost and a lift if there is a change of Government in October or November. The current Government has not been particularly anti-business, but they do have a narrow and ideologically-biased attitude that business can easily afford extra costs like four weeks holiday and Kiwisaver contributions. Many businesses cannot, profits are lower and investment/hiring is down. It is not rocket-science to work out why the economy is in recession. Government policies are as responsible as the credit crunch and housing market. I am cautious enough to tag the new-found optimism for the economy with a big condition, as the risk is that the global economy goes totally into recession and our agricultural commodity prices fall away. Under this scenario the road back to economic recovery will be harder and slower. Also under this scenario 90-day interest rates could well reduce to below 6.00%. I give this scenario a low probability, the more likely outcome in 2009 is that 90-day interest rates get to 6.50% and not much lower. ------------------ *Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com.