Editorial: Good ship NZ can cope with rough waters

It is not yet clear how serious slowing growth in China may be. Stock markets have reacted as stock markets do to any sign of uncertainty. Photo / AFP

Editorial

New Zealand is a small boat in a storm, but a fairly sturdy one. We have ridden out the past few tempests in the world economy without being swamped and that offers confidence we can survive this one. It is not yet clear how serious slowing growth in China may be. Stock markets have reacted as stock markets do to any sign of uncertainty. But they are their ships' casinos, banging and clattering about whenever the sea turns rough.

Down on the decks where people work and shop, eat and are entertained, we are keeping an eye on the bridge and can see no sign of panic. Business leaders and the Government are holding their nerve. There is ballast in the balance sheets, though not nearly as much as there was in the public accounts eight years ago when a property slump brought recession then the global financial crisis.

Property prices in New Zealand rebounded by 2010, and for the past five years they have been rising at a rate that now presents the main risk to our ability to ride out this turbulence.

Rapid house price inflation makes it difficult for the Reserve Bank to bring interest rates down in line with those of most other currencies. Back in May, the bank announced an unusually selective loan-to-value ratio for residential investment property in Auckland. At the same time the Government announced a "bright-line" test for taxing capital gains on investment homes sold within two years of purchase. Both restraints were to begin in October, but last Friday the bank postponed the loan-to-value change to November.

The delay is unfortunate because it may be difficult for the bank to make further interest rate reductions in the meantime. Since its May announcement the bank has lowered its official cash rate several times as world conditions deteriorated. But Auckland property prices have surged more than ever. It may be that the winter boom is a result of speculators getting in while the going is still good. Does that suggest the market will slump from October-November? Or will any lowering of interest rates further fuel the housing market? If so, monetary loosening cannot be used to stabilise the good ship New Zealand in the months ahead. We would rely instead on the fiscal stabiliser, giving up hope of a Budget surplus this year.

Of course, it may not come to that. China is an unusual place. Its autocratic Government tolerates markets so long as they make China prosperous and the people content. A few weeks ago it took unorthodox steps to shore up its sharemarket. Its growth needed to slow at some point as production gives way to consumption and its economy finds a new balance. China's scale makes this a seismic shift felt internationally, but it is not unexpected.

It is not like the global financial crisis. It has caused aftershocks in stockmarkets around the world because they were due for a correction, too. Hopefully it will remain just that - a correction. After all, equity markets have boomed in the recovery from the 2008 crisis. Productive investment has been slower. If we are now in a sea change, we can cope with it.