Green shoots or yellow weeds

- Reprinted from Marac’s Outlook magazine


Economic data around the globe is now more mixed rather than the one-way traffic downwards: outright improvement, stabilisation, or slower rates of decline are increasingly commonplace.  “Green shoots” has become the latest catch phrase as the positives get focused on.  There is a growing sense of a glimmer of light at the end of a long, dark tunnel.  Investors have taken the positive signs to heart and rising risk appetites have seen global equity markets recover from the January – February plunge.

A positive worth highlighting is the health of Australasian banks. The top Australian banks are well capitalised, and have fared well under the various measures of financial stability. The same can be said for the New Zealand subsidiaries. High credit ratings have been maintained by the big four Australian banks and their New Zealand subsidiaries during the crisis.

Speaking of Australia, the lucky country is faring better than most when it comes to economic growth.  The economy expanded modestly in the first quarter of 2009. Although the growth rate in Australia has slowed significantly, the economy has skirted a recession at this stage, after registering only one quarter of contraction at the end of 2008. This is important, as Australia is our biggest trading partner and number one source of tourists.

Although the bottom of the recession seems in sight, the more sober message is that the economic recovery, in our judgment, is likely to be modest compared to what New Zealand normally experiences.  Global credit markets remain impaired and the banking systems of the US and the UK still face a long journey back to full health. De-leveraging in indebted countries, including New Zealand, still has some way to go and will constrain the extent to which global consumer demand can recover. 

The US, so long the consumer of last resort during times of economic slowdown, will not be filling that role and there are no other obvious contenders. Numerous governments, spending desperately in the short term, will then face years of fiscal austerity to pay down debt. And the bottom has yet to be reached, even if it does appear to be in sight.

This year is going to remain a tough one for many businesses, despite the early signs of stabilisation. Considerable uncertainty remains, but the road to recovery is likely to be long and bumpy, with a few stumbles along the way. We expect more bleak data over the coming months, tempering further signs of an eventual recovery.  It is only six months since the credit crisis hit a crescendo and New Zealand has yet to feel much of the economic impact of the slump in global demand. 

Monetary conditions have actually tightened in recent months via the higher NZ dollar and rising long-term interest rates, despite Official Cash Rate (OCR) cuts. The risks to the inflation outlook remain to the downside, and we still expect the RBNZ will have to deliver further small OCR cuts in the future.  We envisage an OCR of 2.0% later in 2009 and we are looking seriously at the RBNZ’s other options to influence interest rates.



Contingency planning for businesses will remain important, as will being adept in dealing with change and taking advantage of opportunities that arise.  We should be aiming for not just survival but for improvement in our collective lot: personal finances, business performance and national economic potential.  That means focusing not just on the here and now but keeping an eye on where we envisage we should be moving to and acting accordingly. 



New Zealand is fortunate in not being directly caught up in the global crisis and also for a significant portion of its exports being food rather than industrial products (eating still isn’t out of fashion). And as confidence returns around the world, we are sure tourism will enjoy a revival. The process of recovery will be slow, but for now we need to keep hoping those green shoots keep flourishing and don’t turn into yellow weeds!

Chris Tennant-Brown, Chief Economist New Zealand, CBA