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Metaphors and markets

-Donal Curtin

Thursday 24th April 2008

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Will 2008 really be trouble free?

We're used to rather excited metaphors for our little economy at the bottom of the world - a cork bobbing on tempestuous oceans, we catch the flu when others sneeze, that kind of thing. It's the sort of imagery that emphasises our vulnerability to sudden squalls in the rest of the world.

So it's a pleasant surprise to keep coming across a new line of argument that says, for once, we're less affected by the current global economic and financial turmoil than lots of other places.

The rationale? Three things. One, we've got a very strong fiscal position, so the government has ample room to pump funds into the economy if we were to weaken. Two, there's the dairy boom (with a subtext, it's less dependent on what happens in China than many of the 'hard' commodities like copper and iron ore are). And three, we're not an economy of investment banks, hedge funds, or heavily leveraged corporates, so the impact of all the 'sub prime' stuff should be less here.

At the risk of upsetting readers' post-holiday serenity, I wonder if this isn't an overly complacent view. Let me put three different cards on the table.

The first one is housing. Currently the whole world is pointing the finger at the unwinding of a house-price boom in the US, with all its collateral damage on financial markets worldwide. The unwinding might even have tipped the US into recession already, for all we know. It's not unknown for economists and statisticians to notice recessions only when they've already fallen into them.

Yet the highest estimate I can find of the rise in American house prices over the past five years comes from the US Office of Federal Housing Enterprise Oversight. It shows that US single-family house prices rose by 47% in the five years to the September quarter of last year. On the other hand, our Real Estate Institute numbers show the median house price in New Zealand over the five years to December last year rose from $192,000 to $345,000 - a rise just shy of 80%. Which economy, I wonder, might have the housing problem?

The second one is household finances. Again, everyone moralistically points a finger at the feckless US consumer (while quietly giving thanks for their free-spending ways). Depending on where and when you look, the American personal savings rate is either very close to zero, zero, or slightly in the red. In the December quarter of last year, the US personal savings rate, as a percentage of disposable income, was 0.2%, according to the American Bureau of Economic Analysis.

Here at home, on the Reserve Bank's estimates for the year to this March, the household savings rate, again as a percentage of disposable income, will show a deficit amounting to 13% of income. If this is even remotely near cooee, which country might have the family budget problem?

The third one is the tightness of monetary policy. There's a calculation available, which I've mentioned before, which takes a stab at putting a number on the combined effect of a high exchange rate (on exporters) and high interest rates (for all of us, businesses and con-sumers): it's a gubbins called the Monetary Conditions Index. Currently the index is near its all-time high in terms of biting hard on exporters and borrowers.

And the trouble with that is index levels this high have, in the past, been quite enough to stop the economy in its tracks. It's possible this time is different, and that all the positive stuff will keep the monetary squeeze at arm's length.

Maybe. All I'd note is that the index is already high, and may not be finished with us, either. Indeed, if the Kiwi goes over 80 US cents in the next wee while, the index of monetary bite may even go to a new record high.

I'd like to think we'll sail through the coming year in fine fettle while the Aussies, Japanese and Yanks clean up their own messes. More realistically, I reckon we have our own issues to deal with. And I think that's what the sharemarket has been telling us, too. Our NZX 50 index peaked on May 24 of last year, even before the 'debt crisis' or a US recession loomed into view: smarter money than yours or mine wasn't sharing this new view of a relatively trouble-free 2008.

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