By Neville Bennett "We have not yet seen the bottom", remarked John Wally last week. The CEO of NZ Manufacturers and Exporters (NZMEA) also said the situation is "bleak". He focused my thoughts on the local and global world economy. It is good to see green shoots, evident in some commodities, but we are, nevertheless, tracking the Great Depression as the graph confirms. I'll touch later on the implications of our crash in manufacturing. Two great indicators conflict: The Baltic Dry Index (BDI) is the benchmark for freight costs of iron ore, coal and grains. It has been gaining daily for three weeks and has regained September 2008's position, the time when the world economy fell off a cliff. The BDI has risen 230% since April and particularly reflects the crowd of ships waiting at Australian and Chinese ports. Unfortunately, New Zealand is not part of this bustle. Yet according to IATA, freight fell a massive 30% at the end of last year. Is it recovering? Passenger traffic fell 11% in March. Air freight, which is around a third of global freight, is still down 20% on a year ago. Giovanni Bisignani, CEO, remarks "we have not seen any signs that recovery is imminent". Rising fuel and interest costs are adding to an escalating US$9bn industry loss. Our Asia-Pacific region is the most depressed, alas.
Global Recovery It is perhaps unrealistic to expect rapidly growing green shoots. My columns on world debt and rising bond prices have indicated the millstone around taxpayer's necks. Paul Krugman, the most pro-Keynesian economist, predicts that any recovery will be "so slow it would feel like a recession', and there is "5 or 10 years of substandard performance ahead". Accordingly, he is urging the US government to introduce yet another stimulus package: "it is worth spending a lot now to avoid being in an entrenched slump". Krugman is perhaps being worsted by Niall Fergusson on the Financial Times Economists blog. Fergusson is a historian and challenging an economist feels to him like a cat versus a king. But Krugman started it by saying Fergusson belonged to the "Dark Age" of pre-Keynsian economics. Niall insists that interest rates are going to increase. Krugman inexplicably maintains there is a savings glut, "which is why there is no upward pressure on interest rates". Fergusson wins Round One. Somewhat intoxicated, Fergusson assays Krugman needs a history refresher course because the 1930's has a deeper recession with a large output collapse. Maybe Niall won't win this Round Two as my graphs show close output tracking between the 1930's and now. Moreover, the IMF maintains that the world is in "severe recession", will remain so in 2009, and recover slightly in 2010 but only if efforts are "stepped up" to heal the financial sector, while supporting demand with monetary and fiscal easing". (The IMF is also in the Krugman camp). Risks are on the downside. New Zealand New Zealand lacks the luxury of contemplating more fiscal or monetary stimulus. It accepts that any looseness will bring a credit down"“grade. Wellington is more responsible than London, Tokyo, Washington and Canberra: our government has never contemplated the presents that Australians and Japanese got at taxpayer expense. We are hunkering down. The economy went into negative growth at the end of 2007 (earlier than others) and its dive has a deepening profile. In the December quarter activity was down about 1%. This figure can disguise big falls, such as in housing consents which have halved since June 2007. We are spending less overseas, with imports down 11% since September. This is quite a good trend as the current account deficit makes even case-hardened Standard & Poor's blanche. Manufacturing Manufacturing and Exporting sales decreased by 59% in April compared to April 2008. This is worse than the world's automobiles and rather bewildering. Some of the slowdown can be ascribed to our maverick currency. That should affect exports more than domestic consumption goods. The reverse happened. Exports fell "only" 53% while domestic sales fell 62%. Staff numbers were down 17%, so employers are holding on to staff for better times. What to make of this catastrophic result? Changes are needed. This is only one result, of course, but matters are hard for people who make things. We have stood aside as task-after-task is transferred to China. These entrepreneurs, who have taken an enormous hit, are not novices; they have been fighting for years a volatile exchange rate, expensive credit, high taxation, and little support for R&D, and escalating compliance. Their fate is crucial to the economy. They are major employers and contribute enormously to GDP and the Balance of Payments. The cards are stacked against them, while services increase their share of GDP (services increased by 1% in the December quarter). I am not saying they should be subsidized, partly because we cannot add to debt, but we have left them unprotected by tariffs. Again, it would be difficult to reverse our commitment to free trade, but we ought to be aware that exporters are facing vicious price cutting by competitors and unfair dumping of subsidized products by overseas counties. My worry is that the recession is hastening structural change. The world is daily becoming more brutal. There is creeping protectionism. In addition to dairy the US is not playing fair (ask Canada about the "BUY American" campaign). We could become a service economy, with a diminished primary and secondary sector, and an attendant shortage of jobs for many people without tertiary education. Perhaps too, this is part of the decline of the West. Western economies will account for less than 50% of world GDP this year. New Zealand is not regarded as part of the West, but the US, Canada, and Europe contributed to 60% of global GDP in 2004, so its decline is dramatic. A period of one-and-a-half centuries of Western superior production has passed. Moreover, the trend seems irreversible. China will overtake Japan this year, boosting commodities. "”"”"”"”"” * Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared.