Business confidence has become overly sensitive to global developments. There is the potential the escalation of global threats this year could be a positive for local economic growth.
The fall in the ANZ survey of business confidence from 23% net positive in December to 7% net positive in February is a predictable response to the escalation of global threats. The survey was on holiday in January.
Interestingly though the survey of exporters’ expectations improved from 19% net positive in December to 23% net positive in February. This brings into question whether perceived threats from China, European banks, oil producers etc. necessarily mean NZ economic growth will slow as implied by the fall in business confidence.
Setting aside the period when the financial crisis had an overwhelming impact on almost everything, including NZ economic growth, the historical link between world and NZ economic growth is weak, as shown in the chart.
For some exporters, what happens to global economic growth can have a major impact. But for many NZ exporters, provided there isn’t a crisis-style global recession, industry-specific factors should have a larger impact (e.g. what European producers do will probably be more important for dairy product prices than world economic growth).
For the majority of NZ businesses, what is happening with thelocal drivers of economic growth and especially interest rates and population growth is more important that world economic growth. This is why world economic growth generally has little bearing on local growth.
In that context, the escalation of global threats implies a lower profile for NZ interest rates than would have been the case otherwise, while it may make NZ more attractive to migrants, including Kiwis looking to return from OE.
I can’t completely rule out the possibility of a global recession,but I believe there is a good case for expecting overseas central banks to paper over the latest escalation of the crisis. If I am right, likely OCR cuts in response to concern about global threats will only add to the strong stimulus in the pipeline from low interest rates and 2%+ population growth.
Written by Rodney Dickens.
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