Andrew Little wants to eat John Key’s porridge

Brian Fallow observes

The economic cycle is in the Goldilocks zone – not too hot, not too cold, just right – to judge by the latest quarterly survey of business opinion by the New Zealand Institute of Economic Research.

Business confidence is strong and activity indicators point to output growth well north of 3 per cent, but there is scant sign of inflation and the way seems clear for a further cut or two in the official cash rate. The NZIER’s own forecast is for GDP growth of 3.5 per cent this year and around 3 per cent a year over the next five years.

In the fairytale, when the bears come home, Goldilocks, the larcenous blonde intruder, escapes into the forest with nothing worse than a nasty fright. Will we be so lucky?

As usual, the main threat to the cheerful domestic outlook is that we will be sideswiped by some shock from the other 99.8 per cent of the world economy.

That’s the fun part of being part of an economy that relies on other countries for it’s income. ?

in its global financial stability report, the IMF says the risks are building.

“The continued slowdown in global growth has prompted financial markets to expect an extended period of low inflation and low interest rates and an even longer delay in normalising monetary policy,” it says.

“The political climate is unsettled in many countries. A lack of income growth and a rise in inequality have opened the door for populist and inward-looking policies. These developments make it even harder to tackle legacy problems, further expose economies and markets to shocks, and raise the risk of a gradual slide into economic and financial stagnation.”

Not exactly a heartening message.

But it is clearly justified in the wake of the Brexit vote and polling which indicates millions and millions of Americans look at Donald Trump – a man clearly unfit by any standard of knowledge, experience, temperament or character for that high office – and see a potential President.

But even if next month’s election removes the shadow of Trump from the outlook, other risks remain.

One is that in the advanced economies a protracted period of sluggish growth and weak inflation (excluding asset prices bloated by extraordinarily loose monetary policy) will drive down inflation expectations “causing expected real interest rates to rise and spending to decline, eventually feeding back into even weaker overall growth and inflation”.

Meanwhile, in China it has become clear that Beijing gives a higher priority to its growth target than its reform agenda, even if the cost of the former is a potentially toxic build-up of debt in the financial system. This raises the risk of, in decorous IMF-speak, “a disruptive adjustment”.

We are left with a picture of a New Zealand economy that may be whistling a happy tune but sits inside a world economy which resembles a boat with an underpowered outboard motor, and is lying low in the water when the swells are rising.

The critical part will be the timing. ?As long as the effects don’t hit us until the middle of next year, or a little later, Andrew Little won’t be able to gain from it. ?Because heaven help us when Labour have a plan that sounds like a better idea.

 

– Brian Fallow, NZ Herald

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