Local Economy Well Cushioned

By Edlin, Bob | New Zealand Management, October 2007 | Go to article overview

Local Economy Well Cushioned


Edlin, Bob, New Zealand Management


Economic forecasters' crystal balls were muddied more than usual early in September by turmoil in global financial markets. The turmoil had been triggered by losses in the American sub-prime mortgage market resulting from rising numbers of home foreclosures and a persistent housing slump. Global markets were unsettled as concerns were raised about prospects of an economic slowdown in the world's biggest economy.

Dark clouds of doubt make forecasting difficult, but don't deter economists.

The OECD lowered its growth forecasts for the US and eurozone economies and warned that world prospects were "clearly less buoyant" because of financial market instability. The Paris-based organisation announced its pessimistic outlook while updating previous half-yearly forecasts, but acknowledged the full impact of the American housing crisis and related problems in financial markets could not yet be measured. Chief OECD economist Jean-Philippe Cotis hinted that further revisions were probable.

The IMF similarly was scaling back its projections for economic growth in the United States and Europe. "There will be some downward revision to our growth projection, more so next year than this year," said Masood Ahmed, a spokesman for the International Monetary Fund. "We can already say that the downward revisions are likely to be the largest for the US but we will also see some impact in the euro area."

He did not reveal how much the IMF expected to trim its growth estimates, but said fresh assumptions would likely be released in mid-October ahead of the IMF and World Bank annual meetings. Even so, he said IMF economists "envisage a relatively strong global growth performance continuing".

In this country, Treasury noted early in September that the pace of real economic growth seemed to have slowed since the start of the year, "and downside risks have risen because of recent volatility in global financial markets".

The reduced appetite for financial risk had already resulted in a sharp drop in the exchange rate. A lower dollar (and continued high interest rates) could reorientate growth towards exports and away from domestic demand.

But investor sentiment was "fragile" and volatility high--the New Zealand dollar traded daily in $0.01 to $0.02 ranges in the first week of September, and the Treasury was not ruling out renewed turmoil.

While the main economic impact from such turmoil was likely to be felt in the US, the Treasury portended, some "small" impacts were likely in other markets. Among the possible impacts in this country was downward pressure on prices for commodities and in overall demand for New Zealand exports. …

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