Light at the end of the tunnel

OPINION: On average during the past decade, the 14 countries which take about 80 per cent of our merchandise exports have grown by just over 3 per cent per annum, writes Tony Alexander this week.

Back in the middle of last year, before the collapse of Lehman Brothers and worries about a new Depression, the consensus view was these countries would grow by 2.9 per cent this year.

Three months after the Lehman's collapse that expectation had plummeted to just 0.3 per cent, come March it was -2.1 per cent, and last month -2.6 per cent.

This month, however, we saw for the first time a rise in the expected 2009 foreign growth performance but only to -2.4 per cent.

This year is a write-off and history will show it to have been the greatest global recession since 1946.

Thankfully, 2010 is looking better. On average, forecasters overseas expect our main export destinations will grow by 2.2 per cent. That expectation was higher at 2.4 per cent back in January but lower at 2 per cent in May. So hopes for next year have improved and rightly so.

One thing many of us have been pointing out is that it is unreasonable to start taking an optimistic view as opposed to a simply less pessimistic one on the world economy until the US housing market improves. That is where the woe started and that is where it needs to end.

Thankfully, there are now signs the US housing market is improving following a near 34 per cent fall in average house prices.

One house price measure improved by 0.9 per cent in May, and in June the number of houses being built rose for the second month in a row to the best level since last November. The number of starts is still a horrible 46 per cent down from a year earlier but the trend is headed in the right direction.

The supply of new homes on the market is now 8.8 months, which is down from 10.2 months a month ago and the lowest such stock since October 2007.

It is because of these numbers along with some better than expected quarterly profit reports that the US sharemarket and other sharemarkets have been rising. The rises occur because investors anticipate better returns from growth as opposed to safe haven assets. This means funds shift away from things like government and corporate bonds.

That means medium to long-term funding costs facing banks creep up especially as the markets throughout the world start to tentatively think about when their central banks will start to raise official interest rates from extremely low levels.

The movement of money into growth assets is always accompanied by a shift into risky assets and that explains the rise in the New Zealand dollar to around the US66 cent level recently. It also means the chances of the kiwi heading back down again are now quite small. But this then is one of the reasons one should not expect to see unusually strong growth reappear in New Zealand for some time.

Although we think we are growing again, there will be restraint from the fact that on average the NZD is now above trend and this has happened unusually early in our economic recovery cycle. This development will help keep our two biggest export earners tourism and dairying suppressed until maybe late 2010.

But at least things globally now appear headed in the right direction. Tony Alexander is chief economist at the Bank of New Zealand.

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

- © Fairfax NZ News

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