Greek drama fails to play on confidence

OPINION: A recent survey of businesses shows that despite the bad news coming in from overseas about the likes of Greece, the United States housing market, the state of British government finances and efforts to slow Chinese growth, New Zealand businesses are confident, writes Tony Alexander this week.

In fact, the National Bank of New Zealand's business outlook survey showed their confidence about the economy over the coming year is the highest in a decade.

Why might sentiment be so positive when the likes of ourselves continue to warn that although we expect growth there remain some major challenges?

About half of New Zealand's manufactured exports go to Australia. Not only is Australia having yet another minerals boom, but also the exchange rate between our currencies places the New Zealand dollar at its lowest in almost 10 years.

In fact, near A78 cents the exchange rate is A7c below the average over the last decade. This helps explain why a net 40 per cent of manufacturers expect their exports to rise.

The average reading is a net 25 per cent. The businesses still trading now have experienced some tough times and managed to survive. They are likely to be quite cashflow positive and with far better balance sheets than in many years.

That gives some confidence with regard to investing and hiring. In fact, a net 8 per cent of businesses plan boosting plant and machinery expenditure and this is only just below the average reading of 10 per cent.

A net 9 per cent plan to hire more people, and this is pleasingly well above the 3 per cent average reading.

This suggests that although we learnt recently that the labour market over the December quarter was weaker than expected and produced an unemployment rate at a 10-year high of 7.3 per cent, the situation could turn around quite quickly later this year.There is a recovery in housing construction under way from a four-decade low of activity. This means improving orders going to manufacturers and distributors of building materials and home furnishings.

There is also a lot of infrastructure work under way with more to come and that means some greater confidence about order books going ahead for many suppliers.

But we would not advise anyone to blindly extrapolate the high confidence and intentions readings into a rosy picture for our economy. There remain some substantial obstacles ahead – mainly overseas.

From day to day, opinions keep changing regarding whether Greece will need bailing out by its European partners and whether such a bailout will be forthcoming. If they give in to the strikers and fail to get their finances in order after years of deliberately hiding the extent of their deficit, and if no bailout appears, we could see a mini-repeat of late 2008. That was when the Lehman Brothers investment bank was not bailed out and collapsed.

In the case of Greece, collapsing it would mean they could not repay their debt, the government would not be able to pay wages or other bills, and the economy would essentially collapse.

The problem with that is the contagion effect with investors fearing other countries in similar bad budgetary positions may also choose not to repay their debt.

In that case just as banks around the world experienced a drying up of funds late in 2008 so may governments – whether they need to fund deficits or just repay maturing bonds.

Given the disastrous effects failure to repay debt would have, we expect a bailout will occur if needed.

But that in itself is still likely to produce further crushing imposts on Greek citizens.

Basically, one way or another they are going to pay the price for years of fiscal incompetence and it is just a matter of whether their government does it by the deadline of March 13 – or it is forced on them by the European Commission and the markets.

Remember – it is someone else's money they have borrowed and pensioners in funds that hold Greek debt would be unhappy losing their wealth in the event of a debt default.

Undoubtedly some New Zealand funds have such debt.

» Tony Alexander is the chief economist for the Bank of New Zealand.

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