Editorial: The end is not nigh
But the Cassandras should hold back on the wailing. If New Zealand holds its nerve, there will be a pause, not a collapse. It weathered the Asian Crisis that erupted in mid-1997 without foundering, and there is no reason to suppose it cannot do the same when it comes to the American credit crunch of 2008.
It has to be acknowledged that business is not brimming with confidence. The latest New Zealand Institute of Economic Research survey of business opinion showed a sharp deterioration, with a net 56 per cent of New Zealand businesses expecting the general business situation to worsen in the next six months.
That is understandable. The United States%26#39; economy is tipping into recession. The debate now is over how deep that recession will be. Some economists are predicting it will be one of the most severe in decades, pointing out that house price falls have wiped out US$2.2 trillion of wealth with little end in sight. The American consumer has been described as shopped-out, savings-less and debt-burdened. And that is flowing on, with European economies slowing. China will be hit, as the appetite for its exports wanes in the US, and emerging economies will also suffer as the US recession and global slowdown bite into the commodity markets. However, New Zealand is not going to fall into an economic abyss.
The spiralling world food prices that are putting pressure on at the supermarket are also putting money in Kiwi pockets. Fonterra has just lifted its payout to $7.30 a kilogram as prices have held up better than expected, largely due to drought. Chairman Henry van der Heyden believes there is still an upside in the prices. But Fonterra is taking a cautious approach because of the volatility of the international markets, and considering holding on to some of the season%26#39;s earnings.
That is sensible, and an example worth following. Many New Zealanders, especially those who own houses, have been enjoying the best of times. There is no reason to expect them now to enter the worst of times. Property values have soared, and despite the market cooling, there is no suggestion that it will follow the American market into collapse. Homeowners will need to be cautious when it comes to spending, but they are still much better off than they were before the boom.
There is also wiggle room, with tax cuts and the potential for the Reserve Bank to reduce interest rates to soften the impact. Governor Alan Bollard has advised banks and businesses not to overreact to the downturn, because the Kiwi economy %26quot;remains fundamentally sound and creditworthy%26quot;.
That is helpful as far as it goes, but Dr Bollard should remember actions speak louder than words. When external events push inflation above its 1-3 per cent target band, the policy targets agreement gives him some latitude to look to the medium term rather than the immediate figures.
If he needs to help New Zealand ride out the storm that started overseas with a rates cut earlier rather than later, he should use that latitude.
