National's attempt to downplay economic concerns is like telling the All Blacks not to worry about playing without their front row

"Get it in perspective". That's been the well-worked line from the Beehive this week, as a quiet political news cycle has coincided with a burst of bad economic numbers from here and around the Pacific.

We've had Steven Joyce saying we need a bit of perspective. John Key thinks we just need to "take a deep breath". And we've had Bill English saying"I think we've got to keep the dairy industry in perspective. Dairy is part of the economy. It's probably a smaller part of it than most people think."

Well, the problem with that line is that the perspective isn't that good, no matter how you cut it. And when English was asked about the banks willingness to support farmers as prices fell, he referred to the GFC and suggested banks "conducted themselves pretty responsibly last time and I'd expect they would this time."

Drawing comparisons to the worst economic downturn in generations creates rather a different perspective, don't you think?

Of course it's nothing like the GFC at the moment, but there are reasons for concern. The bank economists are certainly lining up to give their perspective. Westpac's Dominick Stephens points out that farm debt is up eight percent in the year to date and support for farmers will be conditional on land prices staying high. He's picking a few years of low dairy prices, while Goldman Sachs in the US says it could be as many as five, given the global glut.

ANZ has business confidence slipping into the negatives, while NZIER has it at a three-year low.

Topping the list is BNZ's Stephen Topliss, who used the R-word. Recession. He said it was possible to imagine that given the forecasts around dairy prices, the predicted El Nino, and the fact the Christchurch rebuild has peaked. If immigration slows, well, that could tip the balance. And he says that's even before we consider the financial crisis in China.

It's that final concern that could be the greatest factor of all. While the "domino theory" never really played out when it came to communism, it could have more impact when it comes to China's economic influence over the Asia-Pacific region. We were lucky to be sheltered through the GFC by China, and in turn by Australia and other Asian markets. But if China slows more rapidly than expected, or the stockmarket can't steady itself after its 30% fall in three weeks, we have reason to take a different perspective from the government's.

With little fanfare, China has already slipped from being our number one export market, back to number two behind Australia. The goal of reaching $30 billion in two-way trade between New Zealand and China by 2020, once so easily assumed, now looks a tougher climb. Already National's target of having exports reach 40% of GDP, up from 30%, is going the wrong way. They're currently 28%.

So telling New Zealanders to "keep it in perspective", is a bit like telling the All Blacks the same thing on the eve of the 1995 Rugby World Cup final, when most of the team were throwing up. Or playing Samoa this week without the front row. Sure, we play on and many of our reserve players (wine, IT, and tourism) are in good form. And no-one wants to undermine national confidence by panicking. But dairy, immigration and China are our star players and pretending otherwise just looks like denial. And we all know that you can't truly tackle an issue if you're in denial; you need to admit that you have a problem to be able to truly face it.

Sure, it's fair to say that while those prospects are troubling, it'd be wrong to say at this stage that the short-term outlook is dire. We're still at the "concerned" phase.

But perhaps the more worrying point is that we're still so dependent on those star players. As has been discussed for a couple of generations now, an economy built on commodities, selling houses to each other, fickle immigration and a single market (be it Britain or China) is not going to be terribly resilient.

So putting the rhetoric and soothing noises to one side, the true nature of National's concern about these "headwinds" will show in their actions over the next three to six months.

Comments (2)

by Ian MacKay on July 09, 2015
Ian MacKay

"..like telling the All Blacks not to worry about playing without their front row."

OK then. Just borrow a front row from Samoa.

by Rich on July 09, 2015
Rich

One should consider the following factors:

Low impact:

- impact on dairy of 90mln middle class Chinese stock market gamblers suddenly finding themselves poor

- impact on Auckland house / apartment prices of overseas owners facing stock losses and margin calls

- impact on NZ dollar of falling export prices

- impact on banks overseas funding of falling dollar increasing currency risk on those lending to them in NZD, and credit risk of those lending in foreign currencies

High impact:

- bank failures in China as a result of exposure to stock market (not just recognised margin lending, but mortgages and business loans)

- failures of commodities businesses (Fonterra, Australian mining companies)

- social unrest in China, from stock market losers and as a result of unemployment from business failure

- negative equity and mortgage arrears in NZ

Some of those might not have an noticeable impact idividually, but together they could/will be a big issue for NZs banks (which are also Australia's banks, but zero chance of Australia bailing the NZ arms out if they get in trouble)

 

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