Liam Dann 's Opinion

Business editor of the NZ Herald

Liam Dann: Perfect world hides horror-movie nerves

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Economic fortunes are lining up so promisingly right now that it's hard not to shout, 'Look out, he's behind you'.

Cue the ominous music. These are the moments when I usually feel I'm in the first scene of a horror film.
Cue the ominous music. These are the moments when I usually feel I'm in the first scene of a horror film.

You have these occasional moments, fleeting points in time when everything aligns. When work is squared away, the kids are playing happily, the sun is shining and it briefly seems like life is perfect.

Cue the ominous music. These are the moments when I usually feel I'm in the first scene of a horror film - the set-up that establishes the happy suburban life, right before things get really dark.

Maybe that's just me.

Anyway that's how I've been feeling about the economy. Things are all just lining up so well right now that I can't help but want to shout: "Look out, he's behind you."

Even this patchy summer looks as if it will ensure we are drought free. In combination with the continued rise of dairy prices that is set to add billions of extra export earnings.

In fact we could be looking at $5 billion in additional export revenue this season, BNZ economist Doug Steel said last week.

No wonder there are now even odds that the Reserve Bank will kick off the gradual shift back to normal interest rate settings this week.

Now isn't the time for pessimism but if I had to pick a slasher hiding in the wardrobe (so to speak) it would be risk around Chinese economic growth.

That economy is slowing gradually and under the official sanction of the Chinese Government. If things go to plan it shouldn't be too bad for us. It is weighing more heavily on Australia because the slowdown is all about the Chinese shifting their economic growth away from hard manufacturing and towards the consumer sector. They are going to be using less coal and iron ore in the years ahead.

The Chinese Government will continue to stimulate consumer spending and so dairy prices should hold up well.

But one of these days China is going to have a banking crisis and a market panic. It might not be this year, it might not be this decade, but then again it might be next week.

We just don't really know.

The conditions do seem to be present for a market meltdown that would throw a serious spanner in the works of the global recovery.

That's despite a strong sense of self-belief among Chinese officials, who have the regulatory firepower to control rampant speculation.

Trouble in China is certainly the last thing the world economy needs, at least until the United States is back at fullspeed and Europe is clear of its debtcrisis.

That's something the Reserve Bank will have in the back of mind as it assess its rate-rise track this year.

The rest of us shouldn't let it dent our positive outlook.

But if there is another bogey out there to trip us up, it is surely the risk that we undo ourselves by playing this recovery like a game of 20/20 cricket instead of looking to build a test match innings.

For all the excitement about the prospects in the coming year it is worth remembering that being at the start of an economic boom doesn't actually make us much richer than we were during the downturn.

Right now it is equally true to say we are at the end of an economic downturn.

Most of the boom talk is about projections for economic growth.

We haven't yet had the bit where we generate all the extra wealth.

What has changed is sentiment, and that's great.

But most of the big indicators so far have been confidence surveys - which poll consumer and business expectations.

I'm excited about the prospects of an economic boom but it would be a worry if we all started acting as if we've won the lottery.

This year is going to feel good because we haven't experienced this kind of growth for so long.

But 3 or even 4 per cent growth isn't going to change everything overnight.

It will only be transformational if it is sustained over several years - typically five to seven years if history is anything to go by, but a decade would be nice.

It would be great to see this economic cycle used to address some structural inequalities and increase the wealth of all New Zealanders - not just those with equity and property investments.

But with a tight election race looming, both main parties will need to be wary of resorting to a lolly scramble for power.

If we play this economic cycle right then the opportunity for new government spending programmes will be there over the next few years.

But if we spend it all before we earn it, then there is a risk we will never actually earn it.

New wealth that isn't tied to increased productivity or increased export earnings isn't really wealth at all. We'll pay for it with inflation and the Reserve Bank will have to take interest rates higher than anyone with a mortgage will like.

Hopefully after such a long downturn the voting public will be open to a few notes of caution in electioneering.

It certainly wouldn't hurt Labour's image as the party battles to distance itself from the Greens and convince swinging voters that it is fiscally responsible.

And it shouldn't be too much of a problem for National as long as the debt-focused voice of Bill English is still being heard loud and clear.

The problem will come if the race gets ugly and the political obsession with holding or gaining power becomes stronger than the focus on long-term economic improvement.

This National Government has consistently bagged Helen Clark and Michael Cullen for the costly spend-up in which they indulged to ensure a third term.

It would be hypocritical of Key and English to forget that.

For these reasons we all need to manage a difficult balancing act this year.

We need to embrace the upturn and let positive sentiment take hold. We want business to relax enough to invest again in future growth instead of living from quarter to quarter.

But after the historic downturn we've just been through we'd be nuts if we returned to old patterns of borrowing and spending - both at a household level and government level.

In the end that's not about being paranoid or pessimistic. It is just about learning from our mistakes.

- NZ Herald

Liam Dann

Business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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