By Bernard Hickey
Watch out for the 5 'Black Swans' of 2011
2010 was supposed to be the year when New Zealand's economy accelerated strongly out of recession, powered by low interest rates and a global recovery. Instead, the European debt crisis blew up, New Zealand households clamped down on spending and the US economy failed to fire.
All this meant New Zealand's economy stuttered to a near halt in the middle of the year. So what should everyone look out for in 2011 as the potential 'Black Swan' events that could upset this year's forecasts for recovery?
Irish Politics
The potential for another meltdown on European debt markets remains high and Ireland could again be the trigger for an event that shakes global banking markets and makes it harder and more expensive for New Zealand's banks to roll over their short term foreign debts. Ireland's government is likely to be voted out in a general election on March 11.
The current government agreed last year to essentially impose a massive debt burden on Irish taxpayers to ensure the holders of Irish bank bonds, who are mostly British, German and French banks, don't have to suffer big losses. Most believe this deal isn't politically sustainable and that a new government after the election will try to renegotiate it, forcing losses onto those big banks and potentially triggering new bank bailouts in Britain and Germany.
Chinese inflation unrest
Global financial markets are watching China's economy and its inflation rate very closely. Chinese growth and price figures out this week showed the economy and inflation growing faster than expected. On the face of it, this is good news for the global economy and Australasia, which is benefiting from Chinese demand for commodities.
But many investors and the Chinese government are worried that overheating will increase prices and cause social unrest.
Food prices have surged in recent months, with the prices of some the staple vegetables such as ginger and garlic almost doubling.
The fear is that either social unrest could disrupt the economic growth or Chinese economic leaders slam on the brakes so hard that growth is slowed anyway. China is now New Zealand's second largest trading partner and crucial to the future of our largest trading partner, Australia.
Where the Chinese economy goes, we go.
Australian house prices
Australia's house prices, particularly in Sydney and Melbourne, are the most expensive in the world and have remained remarkably buoyant over the last three years despite collapses in over-valued house prices in Europe and the United States.
Now some economists are worried that a slump in Australian house prices, perhaps triggered by rising interest rates and a Chinese slowdown, could put a major dampener on growth in our largest trading partner. There have been some ominous signs in recent months in Queensland and Western Australia where prices have started falling, particularly in those areas where a lot of new houses have been built in recent years.
A significant drop in Australian house prices would depress consumer spending, as it did here, and therefore slow both the economy and demand for New Zealand manufacturing exports.
Middle Eastern conflict and oil prices
Murmurings about some form of conflict in the Middle East have bubbled away in recent months, centred around the prospect of an Israeli or US attack on Iran, or some form of meltdown in Pakistan. Either would disrupt trade in the region and potentially push up oil prices.
These murmurings may remain just that, given the fears about a wider nuclear conflagration, but it's worth watching.
Kiwi keep their wallets in their pockets
The way in which heavily indebted households and business investors kept their wallets in their pockets in 2010 surprised most official economists, including the Reserve Bank and the government.
Many expect that New Zealand households and businesses will rediscover their spending and investing appetites this year.
But with the debts remaining high, there is a risk that deleveraging and the spending freeze will restrict the consuming and investing parts of the economy, strangling retailers even more after a weak Christmas.
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