In Europe's shadow

By Anne Boniface

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More than two years into the European debt crisis, developments in the debt-laden economies of Greece, Spain and Italy still hog international headlines.

European policymakers and politicians have stumbled from one quick fix to another, so far managing to avert a full-blown crisis, but at the same time failing to provide a credible, comprehensive and achievable path toward redemption for the Eurozone economies.

As key players have stumbled from one all-night crisis meeting into the next, the rest of the world has been reduced to watching and waiting from the sidelines - preparing from the worst, but hoping for the best.

Nobody really knows whether Europe's travails will end in a full-blown catastrophe or not. But for farmers and economists alike, the presence of this pervasive uncertainty is not enough to stop us going about the day job.

In the case of economists, we publish our forecasts based on what we think is the most likely outcome in Europe, bearing in mind the risk that things could turn out worse, or better, than we expect. Our central expectation is European policy-makers will continue to muddle their way through - averting full-blown catastrophe, but stumbling from one problem to the next.

In this environment ongoing volatility and uncertainty, as well as extensive fiscal belt tightening, will weigh on European growth prospects and push Europe back into recession this year, with growth struggling to improve much the year after.

So what impact is this uncertainty having on New Zealand's agricultural sector? The prices of products heading into European markets have fallen hard. Lamb prices, for example, have fallen 28 per cent from their peaks.

However, it is not just Europe's deteriorating growth prospects weighing on commodity prices. Growth in other big commodity consumers, most notably China and other parts of Asia, have also slowed noticeably and in some markets increased supply has put downward pressure on prices.

The European debt crisis has also impacted on the New Zealand dollar. We have seen bouts of increased volatility as market sentiment on the outlook for Europe has waxed and waned.

When things look better, the New Zealand dollar (NZD) tends to appreciate. When the outlook is getting worse markets tend to be more risk averse and the NZD tends to depreciate.

All this has often happened independently of what has been going on with commodity prices, which are usually an important driver of NZD movements.

While Europe's problems certainly put a dampener on global growth prospects, it is not the only game in town worth keeping an eye on. For commodity producers like New Zealand, developments in economies such as China are also very important.

The period following the Global Financial Crisis showed Asian economies, led by regional juggernaut China, had the ability to, if not completely decouple from western economies, post strong growth while growth while Europe and the United States were anything but spectacular.

Indeed, lower commodity prices actually make growth easier for these developing economies as they compete for scarce resources.

Chinese policymakers have been taking active steps to stimulate domestic growth.

Lower interest rates, easier access to credit and other stimulus are likely to start gaining traction by the end of the year.

This is likely to flow through to improved demand growth and recovering commodity prices by late 2012 and into 2013.

New Zealand exporters' increased exposure to trade with China and other emerging economies means, although 2012 may be a challenging year for agricultural exporters, we think fortunes will improve in 2013, even as European policymakers continue to trundle from one crisis summit to the next.

- Hamilton News

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