New Zealand’s Bubble About to go Bang? Summary

Written by Ben Ross - Talking Auckland

Bernard Hickey sums it up in a nutshell

debt

 

Yesterday I wrote part one on why New Zealand’s economy won’t end up as a disaster as a critique to a piece from Forbes last week saying that it will. You can see part one here: New Zealand’s Bubble About to go Bang? Part One

I was planning to run a series covering all 12 points over this week. However, Bernard Hickey (an economic commentator) summed up what I was going to write in the series in a three-minute audio piece on Radio Live yesterday.

Again you can listen to that particular interview here: http://www.radiolive.co.nz/Bernard-Hickey-on-bubbles-interest-rates-and-Genesis-shares/tabid/506/articleID/43727/Default.aspx

I highly recommend listening to it as Hickey does sum up why we are not heading towards an economic disaster , a sum up I agree with AND was going to write on over this week.

 

In summary though these are the reasons why we are not heading for the Bubble Bang disaster that was pointed out and whipped up unnecessarily:

  1. Our fiscal and monetary policies are reacting in such a way currently to avoid overheating the economy that would subsequently cause a harsh correction. Both fiscal and monetary policies (so Government spending, and interest rates) are tightening up gradually to allow the economy to continue to truck along but not cause it to overheat (which will kick off inflation)
  2. We do not have a housing over-supply like the USA but a housing shortage. Okay the shortage is bad in itself and has caused house prices to be higher than they should be but in a cruel sense of irony the shortage has not caused the same negative equity situation the Americans had when their Sub-Prime Mortgage situation blew up last decade. Furthermore and hopefully the Unitary Plan will ease the housing situation over the next decade as Dr Nick Smith has alluded to
  3. Household debt has shrunk (and levelled off) from 150% to 100% meaning we are no longer over-leveraged thus exposed to sharp corrections from the World Economy. Of course getting that debt down (as well as consumer debt which is our soft spot) would still be advantageous
  4. Government debt is low and very low compared to the OECD. This again lowers our risk if the World Economy does go pear-shaped
  5. Corporate balance sheets have de leveraged their debt since the Global Financial Crisis hit in 2008. With low debt exposure it means that our corporate sector again is less exposed to the disturbances from the World Economy
  6. We have a floating dollar that moves accordingly to both our domestic but more often the international situation. If we have over-exposed ourselves the dollar will usually drop making importing harder and exporting easier. We wind back our consumer spending while our exporters earn us foreign receipts which hopefully is used to pay back our debts (thus lowering our debt exposure)

 

All that said though we can still head towards economic disaster if one of these three occurrences do occur:

  1. World War Three
  2. China AND the USA both fall over
  3. Total mismanagement of the Economy similar to Muldoon’s dying regime in 1984

 

Lets hope they do not happen….