SMELLIE SNIFFS THE BREEZE: No free fridge

SMELLIE SNIFFS THE BREEZE: No free fridge

By Pattrick Smellie

June 16 (BusinessWire) - So consumers are feeling more chipper, and might start spending again, says the latest Westpac McDermott-Miller survey of consumer confidence.

A net third of those interviewed for the June quarter survey are saying now is a good time to buy a major household item, the most positive score in that category since September 2005, while the numbers saying they're worse off than a year ago has fallen to a net 14%, compared with a net 22% in the March quarter.

Things have looked rosier off and on for those measures over the last decade, but the upturn is strong.

More striking is the fact that opinions are not only now evenly balanced on whether New Zealand has five good years ahead of it, but also that this outlook is stronger than at any time in the past decade.

This major improvement is driven in part by the unexpected discovery that there's demand for our food after all, as the developing world continues to grow while the importance of the sclerotic "old" western economies is on the wane, at least for now.

Adopting a traditional approach to economic soothsaying, this latest survey is good news not only because people feel more optimistic, but also because optimism is assumed to be code for "spending more."

That's why Westpac senior economist Donna Purdue says of the latest confidence survey, "this is great news for the New Zealand economy" because consumer spending has been the "weak spot" in the recent sluggish recovery.

But in the new age of austerity, is this really such a good thing?

If Reserve Bank Governor Alan Bollard is right, it's a problem if New Zealand households only tighten their belts for a year or two when the chips are down, but break out the plastic for a credit-fuelled splurge once the dust clears.

As Westpac says in its commentary on the latest confidence survey: "We expect the RBNZ to be somewhat surprised by the strength of today's result."

In its latest Monetary Policy Statement, issued earlier this month, the RBNZ anticipated households would undertake a "period of consolidation with growth in consumer spending slowing over their forecast horizon," based on the assumption of a major, long-lasting behavioural shift away from spending in favour of saving.

Static house prices are just one sign of this, but as Bollard himself asked this week: how deeply entrenched is the shock to the wallet of the last two years? Have we really turned over a new leaf, or are we all just waiting for the banks to start lending again to anyone who can fog a mirror?

If the global financial crisis taught anything, it's that everyone with access to credit overdid it in the decade through to about 2007, and that simply feeling better about life doesn't axiomatically mean everyone should or even will start spending again.

In fact, if they do, a sharp kicking from some sort of global fiscal karma is the most likely outcome.

In the debt-soaked economies of Europe, this threat rests most heavily with governments, which borrowed more than the human mind can comprehend to get the world through its last bout of credit-inspired indigestion, and should be knuckling down to a decades-long process of unwinding the fiscal stimulus unleashed. Trying to do the same bailout again any time soon may not prove possible.

However, government debt is not the issue in New Zealand, where Bollard says foreign lenders are giving credit where it's due for keeping a lid on spending and steering New Zealand through the global recession with less damage than elsewhere.

No, the danger here is the very high level of private, foreign, and especially household debt, and the extent to which that debt is being financed mainly by foreign-owned banks rather than other capital sources.

"Financial markets and credit rating agencies use a range of indicators to form their assessment of a country’s viability or fragility," Bollard said. "At the moment most of the focus is on sovereign debt and the fiscal accounts.

"However, as the recent credit downgrade of the government of Spain showed, overall external indebtedness can play a role in this. New Zealand is one of the very few developed counties with net external liabilities so high."

In other words, it's fine to feel better about life, but it's nowhere near time to come off the diet: the kind of advice which anyone who's ever tried to stick to a diet will tell you is more in the realms of wishful thinking than achievability.

And the trouble with that is that while Bollard's may be wishful thinking, he's also right.

Unless the diet continues, with a slower-growing, weaker domestic economy persisting for some years to come, New Zealand remains highly vulnerable to the next big and all too likely world economic shock.

(BusinessWire)

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