The US and Europe will need to take their economic medicine, meaning the government is strongly focused on links with Asian economies to pick up any slack in demand from its traditional trading partners, Prime Minister John Key says.
And despite them taking that medicine, there would not be a repeat of the global market turmoil seen in 2008/2009 as the US in particular had a large amount of excess capacity in its economy for growth to pick up again at low rates of inflation.
Speaking at his post-cabinet press conference in the Beehive on Monday, Key said just because interest rates were about zero in the US, it didn't mean the economy there would not grow. Key made the point on Sunday that he thought US authorities were indicating the economy could grow for a considerable period of time with low inflation.
"My point was there is a lot of capacity in their economy," Key said to media in the Beehive on Monday afternoon.
"When we asked the chairman of the Federal Reserve about inflation outlooks, he was not concerned about inflation. That’s because, if you look at their labour market, there’s a huge amount of excess capacity. You look at their building and construction markets there’s lots of excess capacity," Key said.
"Personally, if you want my view, I think what’s going to happen in the United States and Europe is you are going to see a period where they are going to have to take on board the medicine, and that is, eventually get back into a more balanced budget position. But I don’t think it’s going to be instant, and I don’t think it’s going to be overnight. Personally, I don’t think this is going to be 2008/2009. It feels vastly different to me," he said.
Key fired a shot across the bows of those reporting the volatility seen on global markets last week indicated a renewed global recession was setting in.
"As I said to you last week, and I think that was actually vindicated by the fact that what you saw in the markets – three up days and two down days," Key said.
"Look, I’ve been in those markets and I tell you now, when you trade in August in New York, it’s like trading on the 28th of December in New Zealand. I had 2,000 people on the floor in New York when I was there, you’d be lucky if 150 to 200 of them were there in August. These are very volatile markets. You’ve got programmed traders pushing the markets around and your real money accounts basically sitting there on holiday in the Hamptons,” he said.
The fact the Euro zone and the US would be ‘taking their medicine’ would not necessarily mean stagnant growth in those economies for a number of years.
“We ourselves are sort of cutting our expenditure, but actually overall it doesn’t mean the private sector can’t pick things up,” Key said.
“Their interest rates are so low, the funding requirement of that is next to nil, isn’t it. The yield curve’s moderately upward sloping, but not very much,” he said.
The issue was whether investment could be encouraged in such an environment.
“All I’m saying to you [is], I think it’s different. We’ll see in due course," Key said.
“As I’ve said, we’re not immune to the rest of the world. But just from all the things that I see, we look in a lot better shape – I genuinely think we’re in a lot better shape than most other countries. Our unemployment rate is steady and coming down, our benefit numbers are coming down, Australia’s kicked up last week,” he said.
If the Euro zone and US economies were going to be stagnant, they had been just as stagnant in the first quarter this year, while the New Zealand economy grew at 0.8%.
“There’s no getting away from the fact, if the US and Europe are in better condition, and they’re consuming more and their consumers feel more confident, then that helps us because that helps global growth – I’m not arguing against that," Keys said.
Watch China instead
“But I tell you now, the one I worry about is China. If there’s a problem in China, then worry. Because that’s what affects Australia, and that’s what effects New Zealand. But all the numbers we see on China at the moment for the most part are still very, very robust,” Key said.
Australia was 100% correlated to China.
“Go and ask their macro forecasting team at the Reserve Bank. About half of them in the Australian Reserve Bank are focused on China. That’s because that’s their market," he said.
"In the end of the day, I’m not saying these other countries don’t matter, but a huge amount of growth coming out of Australia is fuelled by what’s happening in China. A big part of our market is China, and Asian demand in general. Overall we still see a very strong picture there. That’s why we’ve got this big focus on China, on India, on Indonesia, on Malaysia, and on Asia in general, to pick up some of the slack ... possibly hurting us in the US and Europe."
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