Fran O'Sullivan: Countdown to a worldwide meltdown

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Right from the start of this year it was apparent the "Goldilocks economy" had given way to the "sandwich economy" - at least as far as New Zealand was concerned - a trend which would ultimately see the savings, spending power and living standards of far too many Kiwis reduced by year's end.

This trend was readily identifiable in January as the so-called golden weather, which had sustained the "not too hot and not too cold" conditions commonly referred to as the Goldilocks economy, disappeared as finance companies continued to fold and high mortgage rates and falling share prices impacted on retirees, baby-boomers and prospective house-buyers.

This, combined with obviously lower growth rates, left them in a classic "sandwich" position.

But when I wrote that month that New Zealand was on track for the R-word - recession - the derisive sniff from the Beehive's ninth floor was audible.

It was not until March that former Labour finance supremo Michael Cullen warned that a "technical" recession couldn't be ruled out as the New Zealand economy continued to struggle against the weak housing market, the international credit crunch and the impact of last summer's drought - although he didn't think "it was probable".

In March, Helen Clark was still pinning her hopes on Treasury, saying there had been no advice that the country was heading into recession. A surefire indicator that the prime government department had become too inured to the prospect of a major downturn by years of record "surprise" surpluses to recognise an incipient fiscal disaster had already begun to camp on its own doorstep.

New Zealand, in fact, scored a 0.3 per cent decline in GDP for the March quarter and, as the latest GDP figures released yesterday showed, stayed in recession for the next two quarters.

We won't know the December result until next year, but as anyone doing a spot of Christmas shopping can tell, we ain't in for a boomer any year soon.

Given Treasury's surprising propensity to Pollyanna-type thinking this year, you might have expected Clark and her National opponent John Key to direct or challenge officials to take a cold bath and come up with some realistic forecasts so neither campaigned against an economic blue sky. The election date was, after all, November 8.

But it suited both leaders to maintain the delusion that despite a major deterioration in the October pre-election economic and fiscal update (Prefu), their respective tax-cutting policies were a) fiscally sustainable, and b) there would be no need to make screamingly hard policy choices if debt could be allowed to float up just that little bit by drawing down on Cullen's "rainy day fund".

Key's team redrew National's policies in response to the forecast "decade of deficits" and Clark shelved some of Labour's election policies.

But the circumstances surrounding the 2008 Prefu should be the subject of doctoral theses for years to come.

Despite September's financial crash (remember the Fannie Mae and Freddie Mac bailouts and failure of Lehman Brothers?) and the mayhem on Wall St and elsewhere, Treasury's pre-election forecast was based on figures that closed out in late August.

On October 6, the Prefu was unveiled. On October 11, the head of the IMF was warning that the world's financial system was teetering on the brink of systemic meltdown. Surely in such historic circumstances the rules should have been broken?

Along the way there have been some successes that the former Government can take pride in. Clark's skilled international diplomacy paid off when the Chinese free trade deal was signed in Beijing in April, and overtures to Japan and Korea were initiated.

By September the relationship was in a delicate state after Clark exposed publicly that she had blown the whistle on the toxic milk formula scandal at Fonterra's Chinese joint-venture San Lu, which Beijing says has now claimed the lives of at least six babies and left 290,000 with "urinary system abnormalities". Fonterra's San Lu investment is now a wipeout but the New Zealand dairy exporter is expected to also face a call to help meet the resultant compensation claims.

This is a body-blow to a firm that is being buffeted by the major drop in commodity prices worldwide which has made the previous mantra - that the Kiwi economy is shielded by the demand for New Zealand dairy products - a bit of a pipedream (at least in the short-term).

The long-running Auckland Airport takeover saga exposed a capricious side to Cullen that had not been seen before as he used regulatory powers to block the Canadian Pension Plan's bid for a 40 per cent stake even though it had enough shareholder approvals.

Surprisingly, his successor has since blocked an overseas takeover for BlueScope's ironsands business on similarly questionable grounds.

Cullen's thriftiness frankly deserted him when he unlocked the Government's purse to buy Tranz Rail's assets in a fit of nation-building.

But many of KiwiRail's operations look likely to be mothballed by a new Government facing more urgent priorities.

KiwiRail's chairman, the ubiquitous Jim Bolger, remains the great survivor. But Mike Williams, the former Labour Party president who had enjoyed a very nice living courtesy of the taxpayer, was forced to resign from his Government directorships after Key asked for his head.

The membership of National's own gravy train has yet to be unveiled. But Key is pledging to seek out qualified talent as directors' terms expire.

Along the way the itinerant expatriate billionaire Owen Glenn waged war on New Zealand First's Winston Peters - and won. Peters consumed far too much airtime during the period when New Zealand fortunes were becoming obviously hostage to the international financial crisis and economic fallout. He's finally gone.

And Key was able to forge a Government in record pace and impress international leaders and chief executives at the subsequent Apec meeting.

I don't want to dwell too much on the Rod Petricevics (Bridgecorp) and Mark Bryers (Blue Chip) of this world, or even the gutless Eric Watson, who left Mark Hotchin (Hanover) to face the music here while he lived it up overseas. Except to say the Securities Commission needs to take a hard look in the mirror and ask why it did not take a more aggressive stance during the finance company boom.

Then there was - and continues to be - climate change. The way the emissions trading scheme was pushed through Parliament made a travesty of the legislative process. It has now been sent back to the drawing boards.

These are the issues that have dominated my business columns this year. In my next column I will foreshadow some of the major issues for 2009.

It won't be Pollyanna stuff - that's one New Year promise that I will not have any difficulty meeting. Have a great one tomorrow.

- NZ Herald

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