THE SKY IS FALLING

Economic sentiment has changed. The share market's bull run seems to have halted. The rise in house prices appears to have stopped. Interest rates are up. The trade deficit is huge. Economic growth over the last quarter was just 0.4%. Economic confidence has fallen 10%. Oil prices continue to rise and Labour is going ahead with the 5 cents a litre fuel tax.

INFLATION

Economist Gareth Morgan points out that if the CPI index still included house prices inflation would now be 7%! He is predicting a hard landing. He believes an inflationary election budget means further interest rate rises and Asian Reserve Banks abandoning their US dollar holdings means the US dollar will fall pushing the Kiwi up to 90 cents. Interestingly the opposite scenario produces the same result. The Kiwi falls, import prices rise, interest rates increase and the economy has a hard landing.

A HARD LANDING

More interest rate rises and a fall in rental income so heavily mortgaged rental and homeowners are unable to meet payments. Forced sales means property prices will fall and owners will have no equity. More sales, further price falls. NZ households are among the most indebted as a percentage of assets in the world. It is possible.

IMMIGRATION

Immigration is just as big an impact on the Auckland economy as interest rates. 580 NZ'ers are now leaving for Australia weekly. The number of new migrants arriving has fallen. The demand for housing is not just driven by interest rates. Fewer people mean fewer houses. Even Peters has given up talking about immigration.

GOVERNMENT SPENDING

Government tax revenues continue to rise and Cullen continues to spend. Real government spending has increased enormously hidden by the fall in spending on unemployment. Family support package spending is yet to kick in. As the money is directed to low-income families, most on benefits, it will all be spent. Consumers think it's a good time to buy and employers are still hiring. Result inflationary pressure.

BOOM CONTINUING

The Letter believes the economy will continue to grow at least until the election. Our 'independent' Reserve Bank is very reluctant to increase interest rates again before the election and is concerned the level of domestic debt is so high that interest rate hikes will devastate households. The infrastructure spending that the government is committed to takes the building boom into next year and beyond, motorways, prisons, schools, hospitals it's a long list.

INTERNATIONAL OUT LOOK

NZ has benefited from the worldwide commodity boom. Even though every boom has busted you can put forward some favourable scenarios. Bush tax cuts stimulate growth and tax revenues - we think it's likely. The Republican Congress gets serious about controlling spending - less likely. China's boom continues joined by India - likely. The expanded EC results in new growth in Europe - less likely. Oil starts flowing from Iraq's huge oil deposits - could take a while. A favourable outcome from the Doha round – likely.

BETTER FUNDAMENTALS

The Uruguay Round has favourably altered NZ's terms of trade. This is significant because NZ provides 50% of the world's internationally traded milk. Progress in the Doha round would add real wealth to NZ.

THE BUSINESS CYCLE

Every time commentators claim this business cycle is different and there will not be a correction or this time it will be soft, it is our experience that the next recession is going to be hard. If we knew how and when, we would be out in the market trading. NZ is a small open economy, which is very vulnerable to external shocks. Our openness means the shock travels through the economy with remarkable speed. The correction will probably come from some factor we cannot predict like the Asian bird flu becoming a worldwide pandemic.

GOOD GOVERNANCE

What makes good government difficult is timing. The Clark government is enjoying the benefits of reforms implemented up to 20 years ago. Changes to the employment laws, extra red tape, increased taxation and greatly increased poor quality government spending are having only a marginal impact today, lowering growth about 1-2%. Cumulatively over time the decisions will have a great effect. If the US had grown at 1% less from 1870s to 1990 the average American today would be as wealthy as the average Mexican.

LABOUR'S LIST

The Letter was 100% accurate in our predictions. Labour's new MP, pro-life Leslie Soper, replaces Jonathan Hunt but has no chance of being re-elected. Because electoral boundaries favour Labour they only have seven list MPs. MMP is strictly proportional so the list redeems the balance. On present polling Labour will only get seven list MPs and lose all the Maori seats. As the Maori MPs with the exception of Tamihere have been given high list places the following Labour list MPs would be elected, Cullen, Wilson, Horomia, Samuels, Ririnui, Okeroa and Choudhary, who misses out if Hobbs loses Wellington Central. Shane Jones, Georgina Beyer, Maryan Street, David Parker, (who will lose Otago), Hereora, Steven Ching, Moroney, Fenton and Chauvel, (all ahead of Leslie Soper) miss out.

OUR POLL

Last week we asked should political parties be able to advertise as they wish in campaigns. 88% of readers said yes. ACT appeared before the Electoral Commission and argued that political parties not taxpayers should fund elections and funding should be equal seehttp://www.act.org.nz/funding. This week "Is the economy going to have a hard landing this year?" Letter readers will be an interesting barometer. Vote athttp://www.act.org.nz/poll.

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