Rod Oram: We don't yet get the gravity of this crisis

Sunday Star Times

CONGRATULATIONS, NEW Zealand! We have become the Road Runner cartoons' Wile E Coyote of nations. During the past year we have run full-tilt over the cliff. If we keep running and don't look down, our political and business leaders assure us, we'll be all right.

Let's just take a quick peek to see if that's true.

The OECD tells us the world is plunging into a deep, L-shaped recession. That means the steep fall in activity has a way to go yet. Then the recovery will be long and weak. It hopes a somewhat stronger pick-up might start two years from now.

But the OECD admits that depends on two very bold assumptions: that global credit markets are functioning properly again by early next year; and normal credit conditions return by late next year. There is scant evidence either will happen on so speedy a schedule.

And they won't because these are times of wrenching structural changes. They will take a decade or so to work through. This is absolutely not a short patch of cyclical weakness. We cannot spend our way through with a few tax cuts and a bit more infrastructure investment.

The world will be different. So any other sensible country had better figure out how to change with it. This is the crystal clear message from the OECD, IMF, central banks, treasuries and countless other experts around the world.

And the message is loud and clear here, if you choose to tune in. Try for starters the Reserve Bank's latest half-yearly financial stability report published in November. Treasury's advice to the incoming government and the New Zealand Institute's latest study is "The end of the golden weather: The financial crisis, global recession and what this means for New Zealand." All three are free on the relevant websites.

The institute says forecasts are pointing to a global recession at least as severe as the early 1980s. And it could become the worst since World War II. Four seismic shifts are driving this and the resulting structural change that will lower global growth over the coming decade:

* The unwinding of high household debt, resulting in a sharp reduction in consumption.

* The ongoing financial market disturbances, credit contraction and heightened risk aversion.

* The worsening fiscal positions in some developed countries, leading to higher tax burdens that depress growth.

* The US, hit hard by all three factors, will not be the growth engine it was. Meanwhile, the outlook for China and the rest of Asia is deteriorating fast.

These factors pose significant risks for New Zealand, including:

* The end of the commodity boom. World demand is so depressed a low NZ dollar won't help revive the primary sector.

* High overseas debt makes us vulnerable to being cold-shouldered by foreign investors. The dollar has already fallen 35% since its February peak and the NZX50 has fallen 37% since its May 2007 peak.

* As a tiny market on the edge of the world, we might find it hard to attract foreign investment as multinationals become more risk averse.

* Difficulty accessing capital, coupled with depressed demand overseas, may force companies to cut investment. This could lead to long-term damage such as a reduced presence in the global economy.

The Reserve Bank has been equally clear on the global crisis, its impact here and the stunning speed at which events are unfolding. When the bank began cutting the OCR in July, it had no idea it would end up reducing them so sharply by year-end, Governor Alan Bollard said.

While the bank's responsibility is to do what it can to help the economy, business and government have an equal obligation, he said very bluntly last week.

"We need to see inflationary pressures reducing significantly across the board, if we are to keep on easing monetary policy, thus helping the New Zealand economy to recover. That depends on all sectors of the economy responding to the reduced demand and not adding inflationary pressures to the system."

He singled out banks, the electricity and transport sectors, producers of fuels, food and building materials and local governments as businesses with scope to cut their charges. Only when they do, "will all these firms be playing their proper role in New Zealand's recovery".

The businesses responded with howls of self-righteous indignation. We're highly competitive, our costs have risen, we must maintain profits if we are to remain healthy and we've kept council rates within our sector's inflation, they protested.

Well, consumers might shrug off those excuses in normal times. But these aren't. Rightly, they are responding very negatively to companies that fail to share the pain with them. For example, ANZ National Bank, the country's largest bank, will suffer a severe backlash if its profits this year are more than, say, half the $990m it reported for the year ended September.

The right response from banks, though, needs to go far deeper than passing on interest cuts at the expense of some of their profits. They need to maintain confidence in the banking system by showing how they will adjust to the radical, permanent changes in global credit markets.

How will they, for example, reduce their dependence on overseas borrowing? Lengthen the absurdly short terms on which they borrow? Help heavily indebted households and businesses work down their borrowings so they can survive in these times of tight and costly credit? Help people save more?

Every sector of this economy has its own set of structural challenges forced on it by global conditions. Yet, we're hearing nothing from the likes of Federated Farmers and the Tourism Industry Association that suggests they are even aware of their issues, let along planning a response.

The same is true for the new government, judging by last week's throne speech. Yes, the speech had a few perfunctory paragraphs about the global crisis, but it offered no insight into how New Zealand might respond or the role government might play. "The driving goal of the new government will be to grow the New Zealand economy in order to deliver greater prosperity, security and opportunities to all New Zealanders."

Yes, but what is New Zealand's role in the world economy? How is it changing? How shall we respond to those threats and opportunities? All the speech offered was a bit of fiscal stimulus via tax cuts planned long before the crisis hit and some totally vague promises about the likes of transitional help for people made redundant, more infrastructure spending, better education standards and attempts to improve the bureaucracy.

It was a speech for a time and conditions that no longer exist. When reality does sink in, we'll plummet. Let's hope the pohutukawa we grab on the way down has roots strong and deep enough to hold us.

* This is Rod Oram's last column this year. He will return on February 8. David Hargreaves, regular columnist for The Independent, will fill in while Oram is away.