World Recession: How is New Zealand Faring?

Hon Heather Roy MP
Saturday, August 28 2010

In late 2008, the huge American bank Lehman Brothers went bankrupt, and many other major financial institutions suddenly looked shaky. The US financial system froze as banks refused to lend to each other and the panic quickly spread. In Britain the Royal Bank of Scotland, a major bank, became insolvent, and Gordon Brown was in the unlucky position of being the first Prime Minister since Benjamin Disraeli - in the nineteenth century - to face a run on the banks. People queued for hours to make withdrawals in case their bank went under.

To anyone who has studied the origins of the Great Depression of 1930, the sequence of events then and now had a horrifying similarity and the spectre of a global economic meltdown loomed.

At the time New Zealand looked vulnerable on a number of fronts. Then we had a large balance of payments deficit and had been consistently importing more than we exported. The deficit was typically around nine percent, which was high by international standards. Only Iceland was in a worse position.

New Zealand also had a low level of savings that made us dependent on overseas investment and that looked likely to evaporate at short notice. Much of New Zealanders’ money was tied up in housing and that sector looked particularly weak. Readers may recall commentary around interest rates being decided on what the Auckland housing market was doing.

As the world banking crisis evolved we were already having a home grown problem with a number of insolvent Finance Companies. Many Mum and Dad investors lost their life savings.

Our overall position looked weak but the truth is that New Zealand has, so far, done much better than most. Whilst Greece teetered on default and riots in the streets of Athens cost three lives, the reporting in New Zealand concentrated of Ministerial credit card spending.

So how did we manage so well? The banking crisis never affected New Zealand directly. Most of our major banks are Australian owned and no Australian banks became insolvent. Presumably their lending policies were more prudent. Furthermore, Australia is our largest trading partner so their prosperity is to our benefit. Australia was the only large Western nation to not have experienced recession during the global financial crisis.

The New Zealand economy also had some strengths. Government debt was relatively low at around 20 percent of one year’s production (GDP). By comparison Britain’s debt figure was 50 percent, which would not normally be considered excessive, but with tax revenues falling it rose rapidly.

Furthermore, New Zealand had been labouring under relatively high interest rates in comparison with other OECD countries. These were progressively cut with the impact of making it easier for borrowers to service their loans. In countries where interest rates were already low there was less room to manoeuvre. The Japanese, for example, have interest rate close to zero making it difficult to create a monetary stimulus.

During this time and when finance companies were beginning to topple the New Zealand government felt it prudent to guarantee deposits. To date, payouts have not been excessive. By contrast the US government, for example, has spent a fortune on propping up ailing banks and industries.

New Zealand has also benefitted from being an exporter of commodities. Food products have attracted and maintained relatively good prices during the global recession and it is our manufacturing exports that have struggled. Our trade imbalance is down to three percent.

Though New Zealand is now technically out of recession the overall picture is one of mild recession. The fear is that the USA continues to struggle. Its unemployment rate hovers stubbornly around 10 percent and its budget deficit is huge. Europe, meanwhile, struggles with the prospect of several nations defaulting on debt. As a small economy, if our trading partners suffer then so will we.

So far, so good, but we need to remain vigilant and the right monetary policy decisions are crucial. That’s why the ACT party constantly calls for stimulation of our economy in the form of lower taxation coupled with less government spending.

Lest We Forget
28 August 1963: Martin Luther King’s “I have a Dream” Speech
Martin Luther King delivered his historic “I have a Dream” speech advocating racial harmony at the Lincoln Memorial during “The Great March on Washington”, also known as the “March on Washington for Jobs and Freedom”. A shortened version of the speech can be found at
http://www.youtube.com/watch?v=Y4AItMg70kg&feature=related
The march was a large political rally in support of civil and economic rights for African-Americans. Somewhere between 200,000 - 300,000 people marched. Of those who marched, 75-80 percent were black with the rest being made of white people and other minorities. The march was organised by a group comprising civil rights, religious and labour organisations. Most now credit the march with assisting the passage of the Civil Rights Act (1964).

ENDS

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