‘A nightmare’ scenario. That’s how ANZ chief economist Cameron Bagrie speaking on Morning Report described the outlook for the economy as the recession comes to an end.
Wait isn’t growth good? Well, not all growth is created equal. The problem is where our growth prospects are coming from.
It’s the housing market once again. Interest rates are low, prices have dropped. It’s a good time for a cashed up investor to get in, picking up houses relatively cheaply when other falter. Apart from the problem of more housing being concerntrated in fewer hands, this is a recipe for another bubble. As prices start to rise again it will draw in more money, pushing up prices further, and the cycle of great returns as long as more money keeps flowing into the system (not so different from a pyramid scheme) will start up again. In turn, this generates a ‘wealth effect’, the paper value of your home increases, you borrow against that increase to fund more consumption.
Real growth has to come out of exports but the opposite is happening.
The dollar is high and rising (up 30% since Key called it to drop below 50 cents and stay there six months ago), which is hurting export returns. Export groups bilthley say ‘well, the world still needs to eat and we export food’ but the reality is that prices for our major exports (dairy and tourism) are down and the dollar is just making it worse. Merchandise exports are still falling and show little sign of recovery. Tourism is in even deeper trouble due to the economic woes of major tourism sources like Japan, the UK, the US, and Germany. Even the cycleway won’t turn that around.
Domestic borrowing is set to grow, along with imports while exports limp along. All this leads to is higher debt, a higher current account deficit, and a higher dollar. The seeds of the next bust are already being sown. A nightmare scenario indeed.
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