Asia’s emerging economies hold the key to the future growth of the world economy and their development programmes would benefit other countries, particularly New Zealand, Reserve Bank of New Zealand Governor Dr Alan Bollard said.
He said the Chinese and Indian economies continued to offer strong export potential, augmented by public expenditure on infrastructure and evolving domestic demand.
“These economies have strong connections to regional growth that will benefit New Zealand indirectly over and above our direct trade exposure.,” he said, addressing the Deloitte Tax Conference in Wellington on November 19.
Not harmful
Dr Bollard described the Global Financial Crisis as “not as harmful as the 1930s Depression” but the world learnt that economic recovery could be slow, fragile and uncertain with temporary setbacks and aftershocks.
“The 2008 Global Financial Crisis has been different from the 1930s and was widespread and internationally synchronised.
It hit deep, but not long. It originated from the banking sector, spread virally across a number of other areas, hit the housing market particularly hard and was ultimately arrested by active government stimulus,” he said.
He said the world economy reached a trough in mid 2009, much to the relief of most countries, which focused efforts on recovery.
“The history of major financial crises shows the emergence of a consistent pattern, namely a long period of building up stresses (averaging a decade), a rapid unwinding and then an equally long period of gradual recovery,” Dr Bollard said.
The West suffers
However, unlike the previous economic crises, economies of the West have been showing signs of stress and trouble. While almost all countries of the West continue to struggle with sluggish investor behaviour and over-riding pessimism, Asian countries appeared to be doing better, he said.
“We have seen businesses very cautious about reinvestment, with scarcely any credit growth. In the US, households have been traumatised by the twin fear of losing their jobs and their houses,” Dr Bollard said.
According to him, the US economy remained weak, with housing and labour markets mired as both households and businesses sought to rebuild impaired balance sheets.
Dr Bollard called for “a policy prescription of very easy monetary policy.”
But the growing currency tensions risk unleashing trade conflicts, a development that proved very costly in the 1930s, he said.
“Many countries expected to have their recovery and external rebalancing aided by a softer currency, and when this did not happen, they became very concerned.
“However at the same time, strong growth in Australia and the emerging markets in East Asia has been very beneficial. These markets were less affected by the financial crisis, he said.
“They have themselves enjoyed strong export prices, and are now being buoyed by growing domestic demand. Russia, Brazil, energy exporters, South Africa and the Southern American countries are also in this group,” he said.
The NZ Scene
Dr Bollard said New Zealand is not a huge food producer (not being among the top half dozen producers of any of the world’s key food product groups).
However our food exports (as a percentage of GDP) top the world, and we are the best placed in competitive terms in Nomura’s food vulnerability index.
“Food trade is volatile in the short term, but these trends are very positive for New Zealand’s terms of trade which have picked up significantly over the last decade.
“The other important positive pressure is from Australian growth. The Australian mineral boom is now well documented, and expected to continue, if not intensify,” he said.
Dr Bollard said the mineral boom in Australia helped the country’s economic recovery and strengthened the Australian Dollar.
These are in turn driving Australia’s demand for food and manufacturing exports. New Zealand is a primary product supplier to Asia, but we need to see ourselves also as a post-primary supplier to Australia, he said.
“The Chinese and Indian stories exemplify this – not by any means a simple picture, but here are two economies with continued strong export demand, government building of infrastructure, and evolving domestic demand. These economies have strong connections to regional growth that will benefit New Zealand indirectly over and above our direct trade exposure,” Dr Bollard said.
