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Be worried (but about the right things)

Published in Insights, The New Zealand Initiative’s newsletter, 12 October 2018

Oil prices rising, the Kiwi dollar falling: these are the economic issues dominating our domestic headlines.

It is understandable that New Zealanders follow such developments with eagerness. They directly feel the effects at the petrol pump and on their next international holiday.

However, as the International Monetary Fund (IMF) reminded us this week, the world economy is undergoing fundamental shifts – and these transformations could dwarf the things we fret about.

In its new World Economic Outlook, the IMF paints the picture of a global economy on edge. A downward correction of world economic growth from 3.9 to 3.7 percent in the organisation’s April forecast may not sound dramatic. But the underlying factors are.

As the IMF explains, the world economy is facing two main risks: Donald Trump’s tax and trade policy and, linked to it, the vulnerability of emerging markets.

President Trump’s decisions on fiscal spending, tax cuts and protectionism have stimulated the US economy. But these policies are not sustainable, not even for the US. Second, the retreat from globalisation and free trade is a threat to the world.

Emerging markets especially risk facing the brunt of Trump’s policies. If the Federal Reserve responds to the artificial US boom with interest rate hikes, countries like Argentina, Turkey or Pakistan will be exposed as large parts of their debt are denominated in US dollars.

The IMF points out that since the beginning of the last financial crisis in 2007, global public and private debt has increased by 60 percent to a staggering US$182 trillion.

If you wonder how all this could affect New Zealand, compare our NZD’s exchange rate to the greenback and the MSCI Emerging Markets index. Over this year, both our dollar and the index have moved in sync. It shows how much New Zealand is tied to the world economy, especially to emerging markets.

Should you worry about filling your car or planning your next holiday, that is understandable.

But if you were the Governor of the Reserve Bank, the Finance Minister or the Prime Minister, these irritations should be the least of your worries. The global economic outlook is mightily disturbing, and New Zealand must prepare for the next financial crisis.

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