New Zealand economy at a crossroads:
European politicians are in the driving seat

- NZ’s economy remains on track for a gradual recovery, with interest rates remaining low.
- However, Europe’s debt crisis puts global recovery at risk.
- We expect NZ’s trading partner growth over 2012 will still track around average levels if crisis is averted.

The direction of New Zealand’s economic outlook will be determined by the actions of politicians seeking to avert further debt crises in Europe, according to the latest ASB Quarterly Economic Forecast.

“The New Zealand economic outlook is at a crossroads,” ASB Chief Economist Nick Tuffley says. “One path leads to a slightly weaker ongoing global recovery, while the other path leads to the looming spectre of European government default and a European banking crisis. The route taken will be determined by Europe’s politicians.”

Should there be an orderly resolution of the issues in Europe, New Zealand will continue on a slightly slower but steady recovery, he says. “If those issues are resolved, growth in New Zealand’s main trading partners is still expected to be around the long-term average, despite subdued outlooks for Europe and the US.” 

“Most of the global economy’s momentum has been coming from Asia, and – in the absence of another financial crisis – it is the economic fortunes of New Zealand’s backyard that will continue to have the biggest impact on our export fortunes. Our growth prospects would remain respectable at 2.1% in disaster-affected calendar 2011 and 3.4% in 2012,” he says.

The flare up of global risks has swung the RBNZ away from reversing last March’s post-earthquake OCR cut, as New Zealand remains a bystander to Europe’s crisis. “Inflation pressures are showing signs of creeping up, however, and in the absence of a global downturn the RBNZ would still want to increase interest rates over time,” Mr Tuffley says.

But what if the worst happened and European politicians take the wrong turn?  “We believe New Zealand fiscal and monetary policy will have less scope than in 2008 and 2009 to help offset any impacts,” Mr Tuffley says.  “But in other important ways New Zealand is more resilient.  The economy is in a less vulnerable position, the banking system is more resilient, and New Zealand’s exports are increasingly tied to Asia rather than Europe.” 

ENDS