New Zealand relies on world trade, and as world demand and consumer demand softens because those consumers are out of work, then demand abates.  New Zealand is affected by this because of our reliance on export earnings, both in product and service industries.  Though New Zealand has, because of its limited exposure to some financial products, not shared in the direct impact of the financial crisis, the downturn in global demand, commodity prices, high levels of household debt, and the rising New Zealand dollar, combined with New Zealand banking sector’s high exposure to property market risk continue to hold the New Zealand economy as one of the world’s vulnerable economies (Fitch Ratings Report March 2009).

What is important to realize, as far as the New Zealand economy is concerned, is the presence of an historical lag effect.  Historically, it has taken 12 months for the onslaught of an international market failure to impact New Zealand.  Wall Street 1929, for example, lost more money in a week than the United States spent on WWI.  New Zealand was not immediately affected.  The Dominion experienced a buoyant 1929, then, half way through 1930 it hit.  Imports and prices collapsed – export earnings fell 20 percent, and a further 20 percent the year after that. By 1931, prices had fallen so much that the New Zealand government forcibly dropped the country’s wages by 10 percent.  (Latvia has just done the same to its public servants by a factor of 20 percent in June 2009). 

 

In a similar period of synchronized world market failure in 1973 New Zealand experienced the same phenomenon.  In 1973, the US stock exchange spiralled down from January and didn’t stop until December 1974, by which time it had lost 45 percent of its value; in the UK, the London market had shed 73 percent.  In the US, unemployment climbed to 8.9 percent.  In New Zealand, retailers recorded another booming year in 1973.  Twelve months later, retailer George Courts’ profits had fallen 93 percent; John Courts was up for sale, and Milne and Choyce was smarting from a $1 million loss and soon, they would disappear altogether.  In the tail wind of the US and UK, New Zealand inflation hit 17 percent. 

 

This same 12-month lag effect is visible again.  Housing construction data and unemployment data while not immediately as severe as Europe or the US, are on trend with overseas indicators 12 months earlier as the New Zealand economy enters now its possible sixth quarter of consecutive shrinkage.  On this basis, Treasury predictions that New Zealand unemployment will reach 7.2 percent in 2010 should be taken as conservative and nor should they be read as a peak in unemployment.  It is more likely, that New Zealand’s unemployment will not peak until 2011. 

 

Moreover, as New Zealand lags behind the industrialized world, its economy appears better off in relative terms – of course, not because it is, merely because of the presence of a lag effect.  As a result, I expect that demand for the New Zealand dollar will remains high – and will likely continue until that time when the US and UK economies turn.  Then, in that period when our own recovery is delayed, the NZ dollar may fall in value.

 

Projected increases in government borrowings, reduction in tax take, exposure and risk of pension schemes, mean that while precautionary measures in fiscal and monetary policy are a prudent move, at an economic strategy level, previous economic growth strategies, such as Fast Forward programmes’ and other initiatives require fundamental reassessment in light of the new realities. 

To turn the New Zealand economy around in the grips of such a ‘perfect storm’ demands a prolonged focus on enterprise.  We need innovation applied to what we do and how we do it – old ideas delivered in new ways, new ideas delivered in better ways.  We must work harder doing the right things, not the wrong things.  Reassess if the products and services that we offer are still needed or wanted, and perhaps, be courageous enough to face that continuing to be a commodity-driven economy is no longer delivering the results that we value.