One in three chance of another crash, says economist

Photo / Kenny Rodger

There is still a one-in-three chance of another crash, says Standard and Poor's global chief economist David Wyss.

"The recession is over but it is a half-speed recovery," he told a Breakfast With the Economists gathering in Auckland yesterday.

"We have now had four quarters of growth in all the major economies but we are crawling out of recession. And a slow recovery is a fragile recovery."

Among the risks was the perennial one of another oil shock emanating from the Middle East.

"Another is the financial markets. Europe seems to be settling down but there is still a lot of debt in what we are now supposed to call the 'olive belt."'

In the United States consumers, were still cautious and while house prices had risen for four months in a row, he expected a bit of a double dip as that market bumps along the bottom.

China understood it had to shift to domestic demand, rather than exports, as the engine of demand, Wyss said.

"And that means they have to get consumers spending. I think they will manage to do that. In China when the Government pushes, the economy does move. When it tells the banks to lend, they lend - though whether they get paid back is another issue."

But ANZ strategist David Croy said that while Chinese incomes were growing, the expanding middle class had different attitudes towards spending and saving from their Western counterparts. In the absence of a welfare system the need for precautionary savings was much higher.

Westpac economist Dominick Stephens said China's growth also meant it was competing with Western economies for resources, thus bidding up commodity prices.

He contrasted international oil prices of around US$70 ($99) a barrel with the $10 it fell to in the early 1990s recession, which aided that recovery.

On the outlook for New Zealand interest rates, BNZ economist Craig Ebert said, "If you believe in a recovery interest rates are too low."

Current market pricing implied the official cash rate would peak at just 3.5 per cent (from 3 per cent now) but that was well below neutral, where rates are neither stimulatory nor contractionary.

"Neutral is not 6 per cent any more. We think it is 4.5 or 5 per cent and we will get there by the end of next year."

ASB chief economist Nick Tuffley expects the OCR to end up around 4.5 per cent.

"The issue is how fast."

Stephens said Westpac still thought a neutral OCR was about 6 per cent.

"A 3 per cent OCR is what you deliver to an economy which has had a massive crisis, not to an economy with strong commodity prices and whose central bank thinks inflation is close to 3 per cent."

Croy said longer-term interest rates were a reflection not only of domestic factors but international market concerns about the prospect of another wave of quantitative easing by the US Federal Reserve.

But on the domestic front Croy noted that two increases in the OCR so far had not triggered a rush by borrowers to fixed mortgage rates.

"So the Reserve Bank can afford to sit on its hands for a bit."