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Weekly Commentary

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Kaboom!

Mon, Oct 13 2008, 12:08 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

The outlook for the world economy has deteriorated at a frightening pace. The freeze in credit markets makes it clear that this is not a ‘financial’ issue, and some real damage to the economy seems unavoidable. Authorities around the world are scrambling to shore up balance sheets and confidence, but the situation remains extremely fluid and fragile.

The timing of these developments is particularly unfortunate for New Zealand, as there were signs that consumers and businesses were starting to feel chirpier after enduring a rough patch. The Q2 GDP figures confirmed a recession in the first half of the year, and timing issues around primary production suggest that GDP will probably contract again in the September quarter. But with the drought well and truly over, fuel prices down, interest rates falling, and personal tax cuts kicking in from October, the outlook for growth in 2009 and beyond looked encouraging. But that was then!

The most immediate and direct effects for New Zealand will be felt through reduced confidence and lower equity prices. But the more enduring impact of this crisis is likely to come through two channels:

Weaker export prices and volumes: World prices for New Zealand’s commodity exports have already fallen in response to concerns about weaker demand. The key question now is the extent to which the financial turmoil spills over into real economic activity in our major trading partners, especially in Asia. Export prices can certainly fall further from here, and recent anecdotes of export orders drying up are also a worrying sign.

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Published on  Mon, Oct 13 2008, 12:10 GMT