By Rob Hosking
Friday 17th October 2003
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The country could be headed for a more low-key version of the late 1990s, chief strategist Paul Dyer warned.
Then, a large current account deficit by the end of 1996 also a time of a booming property market "led to two years of zero growth and an extremely large fall in the New Zealand dollar."
The latest current account figures, out last week, showed a rise and Mr Dyer said the deficit could reach 6% of GDP next year.
"That means spending growth is going to have to slow down at some point, to meet domestic income," he said.
The New Zealand economy's average capacity for growth is about 2.5-3% a year, he said, but to adjust for the current account deficit growth would have to slow to below that level for some time.
He was not predicting as dramatic a slowdown as New Zealand saw in 1997-99 back then, inflation was running much higher than now, which meant the Reserve Bank had to keep interest rates at much higher levels than they are at present.
The National-New Zealand First coalition government was also running a comparatively loose fiscal policy, with stimulatory tax cuts and a pre- and post-election spend up. The Asian financial crisis in 1997/98 was even more significant.
Those factors were not of concern now, he said.
But the deficit figure pointed to a looming reining in of spending.
"And it will be, in part, a currency story." A drop in the value of the New Zealand dollar was highly likely, he said.
It would also have major implications for the government as it gears up for an election scheduled for 2005.
Prime Minister Helen Clark went to the country earlier than necessary last year, partly because economic forecasters foresaw a downturn.
That economic downturn did not eventuate on that occasion. Yet if Mr Dyer is correct, there will have to be some major revisions of the government's economic forecasts.
The most recent public forecasts, released with this year's Budget, show the government is assuming a slight drop in growth over the current financial year, to 2.1% of GDP, rising to 3.5% the following year and then sitting at 2.8% for the next couple of years.
Almost simultaneously with the warning from Mr Dyer came further notes of caution from Reserve Bank governor Alan Bollard.
The central bank is concerned that some New Zealanders have borrowed too much money to get into the property market and are operating on the assumptions that the risks and rewards are similar to what they were when New Zealand had high inflation.
That has wider economic implications, Dr Bollard warned.
"Partly as a result of strong household borrowing over many years, New Zealand has a very high ratio of net external financing relative to our GDP indeed, one of the highest ratios of any advanced economy.
"Currently, New Zealand's net financing from offshore stands at about 90% of GDP, compared with just 60% for Australia, 25% for the US and 15% for Canada."
His predecessor, now National Party finance spokesman Don Brash, has made similar noises about the level of New Zealand's offshore indebtedness.
"I think we have become too dependent on the savings of foreigners over a long period," Dr Brash said. "An increasing proportion of GDP going towards paying the interest on that capital we have collectively borrowed."
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