By Alex Tarrant
The next five to ten years will be make or break for New Zealand, ANZ chief economist Cameron Bagrie says.
He urged the government to leverage off New Zealand’s strategic advantages, which included natural resources and renewable energy prospects, and the New Zealand Inc brand. However this shouldn’t be done at all costs, and the environment needed to be kept in mind.
New Zealand ranked eigth in the world in terms of its natural resources. The top seven were oil-producing nations and Australia, the so-called 'lucky country', was thirteenth, according to the World Bank. On top of that, New Zealand ranked number one in terms of renewable energy prospects, Bagrie told a post-Budget breakfast in Wellington on Friday.
“I think the next five to ten years are generally going to be enlightening in terms of where New Zealand heads. The next five to ten years is truly going to make or break us," Bagrie said.
“Four years after the global financial crisis what has really changed? Not much, to be perfectly honest.”
Bagrie said he was upbeat about New Zealand’s prospects because he was a big believer in New Zealand’s natural endowments. New Zealand also had a solid political framework and was on the doorstep to the growing part of the world.
Renewables, natural resources
“In a world where you’re getting depleted from non-renewables, if you want to be world class at one thing, it’s the renewables," Bagrie said.
Singapore was outdoing New Zealand in terms of economic performance, but had no capabilities in terms of renewables. It was important for New Zealand to “get it together” and get the arrangements in place to leverage off its capabilities.
However New Zealand needed to respect the economic challenges to getting ahead like contagion from the European Sovereign debt crisis. There were no magic bullets, Bagrie said. New Zealand needed to get back to basics and pull multiple levers.
“We do need to see austerity, but the more we can pull a growth lever, the less intense that austerity lever is going to be," Bagrie said.
This did not mean growth levers should be pulled at all costs.
“If New Zealand decided to mine the Mackenzie country, that great drive down through Twiziel, Tekapo, those sort of places, I’d be there with a placard,"Bagrie said.
“But let’s be honest, a lot of New Zealand’s coal reserves are down around Ohai/Nightcaps, those sort of places. And they’re not exactly a tourism mecca.”
Finance Minister Bill English, the MP for Clutha Southland, later told the audience he was the MP for Ohai/Nightcaps.
Bagrie also noted how highly New Zealand ranked in terms of ‘feel-good’ measures like work-life balance, safety, health, environment, education, and housing.
Grumpy growth, Euromess
Meanwhile, Bagrie said he was still talking about his ‘bathtub with waves’ approach to economic growth, which was "grumpy" in New Zealand.
Three to four years after the global financial crisis, there was now more debt in the world economy than before the crisis. The difference was it had been shifted from the private sector to the public sector.
“And what global markets are now directing their attention towards, is the entire solvencies of governments. What we need to see today is true global leadership to sort the problems out. Until we see that global leadership, and we are talking about European politicians here so there’s reasons to be nervous about that one, markets are going to remain on edge," Bagrie said.
There were massive swings from euphoria to where the bears had "the upper paw.” The latter was when markets saw a lack of political leadership, or when people focused on the fundamentals like debt levels. Euphoria set in as people looked for the sugar pill – “the central bank solution, the so-called put, more liquidity injections.”
Tensions between the fundamentals and euphoria led to the waves in the bath – the ups and downs.
“We’re going to be here for a while yet," Bagrie said.
Bagrie said he thought the UK and Europe were headed for a ‘hail-mary’ moment like New Zealand’s 1984 experience which demanded fundamental reform.
“We’re not there yet in Europe. I think they’re heading that way. And they will see that same eight years of extremely difficult times that follow," he said.
How to get out of it
There were five options for getting out of a debt fuelled consumption jam.
“Option one, default. Greece at the moment is still broke. They’ve gone from being bankrupt to being insolvent. And accountants will tell you when you’re insolvent, you normally become bankrupt again," Bagrie said.
If there were defaults in the eurozone, the European banks would take a haircut, which would be a 2008-style moment.
“So we don’t want to see that.”
Deleveraging was number two. That meant cleaning up the act at the government level - higher taxes and less spending
“Well the Greek and French elections just gave the big middle finger salute to that, so that one’s not around the corner," Bagrie said.
The third solution was to inflate debt away.
“Print money. Well, printing money’s not inflationary if people don’t want to borrow it. Japan’s tried this one for twenty years. Hasn’t worked."
Repression – caps on interest rates and capital controls - was number four. However when this had been practiced it “pretty well stuffed capital markets for twenty years.”
The final option was, seeing as debt-GDP ratios were too high, getting that ratio down by raising GDP.
“If you’ve got some difficulties, if you can get the revenue line firing, that’s the way to fix your problems. If you start moving down the cost-line in an overly aggressive manner, the risk is you can tip the revenue line as well," Bagrie said.
The six C's
In terms of New Zealand's ability to emerge from its grumpy growth track, Bagrie said he was watching the six C’s: Contagion risks, Confidence, Commodity prices, Cost of Funds, China, and the Currency.
‘Contagion risks, or in particular the credibility or the competency of the government. At the moment because global investors are flexing their muscle, your government needs to be whiter than white. We need to be doing the right things," he said.
“What we saw in yesterday’s budget was precisely that. It was fiscal austerity, which presents challenges. It was responsibility. But there were also some tweaks there in terms of adjusting the Fiscal Responsibility Act, which I think is going to cement the current government as one of the most pro-active fiscal managers out of any country around the globe."
Confidence was holding up despite depressing news every night which had the potential to lead people to wrap themselves in cotton wool. However, New Zealanders were getting on with business.
Commodity prices were under a fair bit of pressure, while the cost of offshore funds was another to watch.
“Credit markets at the moment are becoming somewhat dislocated. That’s making it more difficult to borrow money internationally. That said, the New Zealand banking system I think is tremendously strong," Bagrie said.
"You’re seeing deposit rates come down as opposed to go up, which tells you banks are pretty flush with liquidity. You’re seeing pretty aggressive competition in the mortgage market, which tells you, once again, that banks are in a pretty good space," he said.
Wholesale interest rates had also come down “massively.”
“A precondition to Alan Bollard moving rates up will be the European scene stabilising. And to be honest I can’t see that for a very long time," Bagrie said.
In China, New Zealand’s second biggest trading partner, and Australia’s largest, there was a property bubble unfolding.
“We need to be careful here. I do not think New Zealand is going to suffer directly from a China slowdown, which is occurring, it’s the indirect channel via Australia that worries me," Bagrie said.
The currency was up and down like a yo-yo.
"At the moment it’s down, until we see central banks give us the put. Then it’ll be risk on, it will be equities up, currency up. But it’s a safety valve, and it’s a safety valve a lot of other countries would love to see," Bagrie said.