Age of prosperity could begin this year - AXA

AXA chief economist Bevan Graham. Photo / ACP Media

If the risks to the global recovery can be as successfully managed as the financial crisis was, we could look back on this year as the dawning of a new age of prosperity, says AXA chief economist Bevan Graham.

There is, however, a long way to go and the risks are formidable, he says.

Concerns about sovereign debt are to the fore, and not only for some of the weaker members of the eurozone.

For developed countries as a whole, public debt is on track to hit 100 per cent of GDP, way above the levels we have been accustomed to think of as prudent in light of challenges like an ageing population.

The implications for New Zealand are expected to flow from higher global bond yields, as the market prices more of a risk premium.

Benchmark US bond yields are close to all-time lows at around 3.5 per cent, even though it is running a fiscal deficit around 10 per cent of GDP or US$1.5 trillion ($2.1 trillion).

Another likely effect is downward pressure on the kiwi dollar, which tends to fall when risk aversion rises, even if the seat of the concern is nothing to do with this country.

"We are seen as a risky trade to the marginal investor, and especially those in the carry trade," AXA's head of investment strategy Keith Poore said.

Even though the global investment and insurance giant judges a major country debt default to be a very low probability event, it has in effect added some insurance to its portfolio by reducing its level of currency hedging, at least against the US dollar and the pound.

Graham said the deficits governments were struggling with were structural.

The cyclical recovery under way would not fix them; it would require politically tough measures like raising the age of pension entitlement.

"Decades of living beyond our means is not easily fixed," he said.

"The fact that we are not in the same situation as Greece is the consequence of tough fiscal action taken mostly in the 1990s. The Government should not shy away from making hard decisions now."

A long and arduous road back to fiscal sustainability is not the only big global trend AXA sees.

It also discerns some encouraging early signs of the necessary rebalancing that would require the surplus economies - China, Germany and Japan - to consume and import more while the deficit economies, including the English-speaking West, save and export more.

This will be a long process, Graham believes, taking 10 to 15 years and one which imparts greater importance to the free-trade agreement New Zealand has secured with China and is negotiating with India.