Jul 3, 2008

Brian Fallow On The Coming Recession

Brian Fallow write a rather worrying column today. He looks at various assessments/studies with a focus on our economic prospects. This study from the Reserve Bank is particularly troublesome:

A couple of Reserve Bank economists, Michael Riddell and Cath Sleeman, have been looking at six previous recessions in New Zealand - the imbalances which preceded them, what triggered them and what made them worse.
They draw no conclusions about the situation now, beyond saying that "there is nothing in the material in this article to suggest any greater reason for optimism" than the downbeat view expressed in the bank's June monetary policy statement.
They note the mitigating factors - fiscal stimulus and commodity boom - but say these factors "have much to mitigate".
By my count 12, maybe 13, of the 17 recessionary factors they list are at work now, two of them - a global credit squeeze and a large rise in oil prices - in spades.
Riddell and Sleeman conclude that material global slowdowns almost always lead to marked slowdowns in New Zealand. Little comfort can be drawn for the recent exception of 2001 because we went into it with an undervalued exchange rate and relatively low interest rates, most emphatically not the case now.

Some of the deeper recessions were "associated with financial excess, reflected in overvalued asset prices".
Sounds like a fair description of the recent housing boom.
Two of the longest recessions, in the mid-1990s and early 1980s, followed oil shocks. Those were the dismal years of stagflation, of little or no growth but runaway inflation.
"Overall, policy struggled to juggle objectives - maintaining living standards, limiting the rise in unemployment, limiting the rise in interest rates, while also trying not to let inflation get out of hand."

Here is a link to Fallow's full article in the NZ Herald: