'NZ/Aus prospects good if Germany acts'

Former RBA board member McKibbin on NZ's positive long-term economic prospects, why the US has an inflation shock coming, and how to wind back fiscal stimulus

30th Aug 12, 2:39pm by Alex Tarrant

By Alex Tarrant

Former Reserve Bank of Australia board member Warwick McKibbin talks in the video above to interest.co.nz's Alex Tarrant on why he thinks Australia and New Zealand have positive economic outlooks over the medium-to-long term.

He says if the capital invested by the likes of China and India in Southern European and US housing can be unlocked and reinvested back into emerging economies - particularly in East Asia - it's a good news story for Aus/NZ.

Rising returns in those emerging economies also need to be reinvested to propel further growth for the expansion of the middle classes

However, waiting for a favourable European solution, which would require a transfer of German taxpayer wealth to shore up the Spanish and Italian economies - McKibbin thinks Greece should be out of the Euro - was like waiting for Godot.

Meanwhile, while the European crisis was the biggest challenge currently facing the world economy, McKibbin believes the biggest challenge facing the world economy in 5-10 years will be inflation in the US, once the business cycle there got going again.

This article will be updated with McKibbin's comments in the video above.

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2 Comments

by Stephen Hulme | 30th Aug 12, 5:01pm 1346302866

Why do you take this bloke seriously? - every utterance is prefaced with a conditional "if" - real world players deal with it as it is - no room for wishful thinking.

by Andrewj | 31st Aug 12, 4:30am 1346344203

No , he's part of the problem.

From today’s Guardian

Marc Faber, the Swiss investor and ultra bear, says there have been four mega bubbles in the past 40 years. In the 1970s it was gold; in the 1980s it was the Nikkei, and in the 1990s it was the Nasdaq. Bigger than all of them, though, has been the iron ore bubble, a tenfold increase in prices in less than a decade.

Iron ore is the raw material for steel, production of which has rocketed as a result of China's economic boom. Consider the following facts. In the past 15 years, China has built 90 million new homes – enough to house the populations of the UK, France and Germany combined. A quarter of global steel demand is for Chinese property and Chinese infrastructure.

Commodity-rich countries, like Australia, have never had it so good. China takes 25% of Australia's exports and iron ore accounts for 60% of all the goods Australia sells to China. One reason Australia avoided recession during the global downturn of 2008-09 was that it had a well-run banking system. A much bigger reason was that the country had become a giant pit from which China could extract the minerals it needed for its industrial expansion. Money flooded into the country from sovereign wealth funds and hedge funds looking for AAA investments. The Australian dollar has soared, as have property prices.

China's economy is now slowing, and although the economic data is not particularly reliable, it seems to be slowing fast. The country has two million unsold homes, with another 30 million under construction. There is a glut of iron ore and the price is falling. Where does that leave Australia? Horribly exposed, quite obviously. It has an over-valued currency, an over-valued property market, and its major customer is now desperately pulling every available policy lever in the hope of avoiding a hard landing. Whatever happens, the Australian dollar is a sell. Just how big a sell will depend on how successful Beijing is in reflating the Chinese economy.