World Growth Prospects Dimming
In a few days time we will get updated forecasts for growth in our top 14 trading partners from the Consensus Economics regular survey of a few hundred economists around the world. Given some of the data released overseas in the past few weeks we are likely to see growth prospects revised downward. That means we will need to remain cautious about prospects for NZ export prices, demand for manufactured goods, and tourist numbers. But it will tend to underpin strong net inward migration flows with Kiwis discouraged from going overseas for now and a few people overseas inclined to try their luck down here.
Recent poor data include job numbers in the United States falling by 308,000 in February. These numbers can be highly volatile so one needs to take the result with a grain of salt. But the labour market result appears in line with a recent sharp weakening in consumer confidence to the worst levels in ten years. Given that consumer spending has underpinned the US economy for the past 2-3 years and business investment shows no sign of lifting and taking the strain any data suggesting an end to the strong household spending gives cause for concern. Tomorrow we will in fact get the retail trade number for the United States for February and it has the capacity to shade views on US growth quite strongly in one direction or the other.
More accurately, if the number is weak then the chances will be high that US interest rates will need to be cut another time to ward off worsening economic conditions. If the number is strong however no-one is going to believe an upturn is actually at hand. Instead there will be a sigh of relief that the consumer spending downturn has not started yet.
In Europe we have learned recently that Eurozone growth was a paltry 0.2% during the December quarter and 0.8% for the year, with German unemployment hitting a five year high in January amid talk of a recession there in the first half of this year. Things are so bad the European Central Bank has cut interest rates 0.25% and further reductions are possible given the downbeat assessment of Eurozone growth prospects by such groups as the ECB.
In Japan the sharemarket has fallen to its lowest level in 20 years, the Government is stepping in to help shore up the balance sheets of banks, and there is talk of more fiddling at the edges to continue hiding the true extent of the financial devastation. The latest ploy is to let companies artificially inflate their share prices through relaxed restrictions on buying their own shares.
In Australia consumer confidence has fallen sharply and sits in net pessimistic territory, the housing market is coming off the boil (in a tidy fashion so far thankfully), business confidence has just plunged, and rural areas are suffering badly from the drought which has devastated farm incomes. It is looking increasingly likely that the Reserve Bank of Australia will need to cut interest rates from 4.75% though this is not a foregone conclusion.
Now throw in
the risk that the uncertainty about war in Iraq goes on a lot longer, talk of a breakdown in multilateral cooperation in all sorts of matters if the US wages war without a UN resolution, the whining and dummy spitting by the North Koreans, and doubts over the ability of oil producers to make up for any shortfall caused by an Iraq war
and you have a very worrying international climate.
With any luck
in the coming month we will get some sort of resolution on
the Iraq issue, allowing business and consumer confidence
levels around the world to recover, leading to improved
hiring and capital expenditure. If we do not get some
resolution then one can expect the current climate of
caution-driven pessimism to remain, retarding hiring and
expenditure, and leading to steadily worsening prospects for
growth in our trading partners. In this scenario an export
dependent economy such as New Zealand can expect only so
much insulation from below average interest rates, strong
growth in some sectors like foreigner education and wine,
and migration gains. A world downturn would eventually hit
us hard. And so we wait to see if that is what we are going
to get, or whether the common scenario of improving world
growth later this year plays out and saves us when the
domestic upturn runs out of