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One-in-four chance of a new global financial crisis: NZIER

Thursday 1st December 2011

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The chances of a break-up of the European common currency, the euro, are rated at 25 percent and New Zealand firms should prepare for “another global financial crisis” if it happens, says the New Zealand Institute of Economic Research.

The institute’s latest Quarterly Predictions, published today, say the weakening global economy will depress exports and tourism arrivals anyway, restricting growth to just 1.5 percent in 2012, with a slow recovery to 2.5 percent growth in 2013.

However, if the Eurozone crisis plays out badly with a break-up of the Euro, “New Zealand would likely experience another recession and the Reserve Bank would need to cut interest rates.”

Even assuming the Eurozone crisis is resolved in an orderly way, NZIER sees no prospect of interest rates rising before mid-2013 and warns that the government’s plans to return its books to surplus by 2014/15 will be “challenging”, given the weak outlook for exports and world growth.

“New Zealand’s recovery will be severely hampered by the rapidly worsening global economy,” said principal economist Shamubeel Eaqub.

“The fallout from the European debt mess will depress export growth” and international tourism arrivals, and dampen investment. Banks will have greater difficulty accessing capital from the international financial markets.

On the home front, households are continuing to save, businesses are investing only cautiously and the Christchurch rebuilding programme is the only bright spot on the horizon, although the timing of the reconstruction effort getting into full swing remains unclear.


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