“The end of the golden weather: The financial crisis, global recession and what this means for New Zealand,” has been released today by Benedikte Jensen of the NZ Institute.

This is the first in a series of in-depth papers from the NZ Institute that will look at the current global economic environment, what risks & opportunities it presents to New Zealand and measures and actions required to ensure that New Zealand emerges strongly. A key conclusion is that this is more than just a business cycle, and the crisis may have a long term effect on global economic growth.

Some background and context:

• The global financial crisis began over a year ago with the emergence of the US sub-prime mortgage crisis and has continued to intensify with the collapse of major financial institutions, ongoing sharemarket volatility and drying up of access to credit worldwide. 

• The International Monetary Fund (IMF) has shaved two percentage points off its forecasts for the global economy in 2009 since July 2008. The IMF is also now predicting output in all advanced economies to contract on a full year basis in 2009 – the first time this has happened in the post-war period.

• The OECD has concluded that this will be the most severe global recession since 1981. An ‘L’ shaped recovery is predicted (i.e. A slow recovery where the US and Eurozone experience four quarters of negative growth, followed by several quarters of anaemic growth in late 2009 and early 2010. Stronger growth does not return till September 2010).

• Economic growth is slowing in Asia and other developing countries.

• Government interventions have begun to restore confidence but key markets are still significantly dysfunctional. 

This paper identifies four factors that could lead to a downward structural shift in global growth over the next decade which are household indebtedness, credit contraction and risk aversion, higher tax burdens due to worsening fiscal positions of advanced economies and a lack of a global growth engine for the economy due to the US looking like Japan in the 1990s.

It also looks in depth at implications of a global recession for New Zealand, which would likely impact through the following three main channels:

1) A reversal of the commodity boom and subsequent impacts on rural incomes and the rest of the economy

2) Credit contraction hitting investment by New Zealand companies and New Zealand’s ability to attract foreign investment

3) Difficulties for New Zealand in continuing to finance our large overseas debt as foreign investors become more risk averse

In the coming months the NZ Institute will also release focus papers on Growth Channel and Credit Channel Exposures, The Fiscal Position and Stimulus, Savings & Capital Markets, Government Balance Sheet and New Zealand’s place in the world. All papers will provide recommendations for concrete actions and solutions to ensure that the New Zealand economy emerges strongly. 

NZ Institute highlights, on both introduction and conclusion of this paper, that it is the end of the golden weather and we urgently need to prepare New Zealand for what may be an unprecedented global environment over the next decade.

Download ”The end of the golden weather: The financial crisis, global recession and what this means for New Zealand” (PDF)

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On this site, we are in agreement that we urgently need a clear, coherent economic strategy that resonates with the country, and leads to great outcomes.  To achieve great results will require:
 
(i) a single, clear “organising idea”
(ii) a new form of national dialogue
(iii) improved public-private sector trust-based relationships

However, almost as important as ‘what’ the strategy is, is ‘how’ the strategy is created and then executed.  In my view, policy making in New Zealand has recently come to be characterised by its secrecy, its closed nature, and its insularity.  The public sector sees the private sector as ‘vested interests’ and thus, despite their training, naturally discount ideas as being driven by purely pecuniary interests. The private sector see public sector as out of touch, irrelevant and politicised.  Neither of these views are true.  Both need addressing, and the past approach will not do that.

There have been a lot of comments on this on the blog.  Some comments on this so far on the NZX Blog:

Jane said, “The government should be “of the people”, not a fortress.”

Baruch said, “… build a wider constituency of support”; and

Peter said, “[put] these concepts in a simpler format”.

When the private sector is engaged, it typically manifests as large committees, ‘talkfests’, and other inauthentic engagement, with most of our contributions inevitably disappearing down a black hole.  We need to avoid jamboree type talkfests with large numbers of people (a la Knowledge Wave, Ruddfest).  Equally small, ‘closed’ groups hatching plans in closed rooms, will not get it done. 

We think that there is a very large and diverse group who should be part of this debate, and this group is all Kiwi’s – whether living here or expat.  The question right now is, how to best engage all their talent and ideas? 

I have some thoughts as to how this could occur, but would prefer to hear from everyone else first, especially the online community, as to the “how”.

Today we have released round two of Swan Dive or Belly Flop?  This version is very different, and, we believe much improved on, the previous version.  

We’re two weeks out from the release of our original draft strategy, and the economic face of the world is wearing a decidedly unhappy expression.  This piece from a BBC blog is particularly telling. 

“Swan Dive or Belly Flop?” is doing its job.  There are some exciting and pragmatic ideas being generated on this blog, and real galvanisation behind the idea of a “vision” for New Zealand’s economic future.  By “vision”, our bloggers don’t mean “slogan”.  We all know the downsides of sliding into sloganism.  They mean a strategy with a set of clear organising ideas, with clear outcomes, so we all know what we’re working towards and, importantly, can measure along the way how far we have to go before we’ve achieved it.  

Feedback has been outstanding, and will be incorporated in the next version, to be released next Friday. Feedback has refined some ideas, added others, and forced us to look very hard at some of the original ideas.  Some people have certainly disagreed with us.  Great!  Fantastic!  Did we say we had all the answers?  Don’t think so.  What we did say was that the discussion and debate had to be had – and now – if we were to take advantage of the opportunities the current crisis has opened up for this country.  

One idea in particular has received a lot of attention. While we’ll address it in detail in the next version, it is worth briefly noting. It is the home focus proposal for the NZSF and taxpayer savings pools. It has been criticised as impure. We’ll address the positive reasons for this approach in the document, but it’s worth debunking the theoretical criticism. Under the perfect asset allocation theory (i.e. the “best practice asset allocation” of the NZSF mandate), each country, and individual, allocates capital efficiently according to portfolio theory. If this is the case, then local capital and foreign capital are perfect substitutes. Hence, all local investment opportunities are taken up, because the perfect amount of capital is allocated to each country. 

But how does this work in the real world for a small country like New Zealand, that chooses to export its major pools of savings for investment? Well, it only works if, and only if, the rest of the world has no home bias, and allocates their savings globally perfectly in accordance with that. As we know, home bias is real, it is strong (e.g. over 70% of US savings are invested in the US yet is is 25% of the world economy), and – to the extent that New Zealand bases its savings direction policies on a theory that breaks down in practice – we’re consciously creating an underfunding situation at home. Working through this market failure, systemic home bias in countries with savings pools bigger than ours must result in plentiful underfunded investment opportunities in New Zealand. Accordingly, the efficient (i.e. lowest cost, highest return) portfolio decision for an asset allocator in a small country with a global home weight bias, is to significantly overweight home investments, as that’s the main place returns will be not competed to the lowest level for the investor.

Another key point that has come through is the lack of cohesion between the public and private sectors, and a lack of trust in the public sector’s ability to execute a strategy, and engage the public in it successfully. A number of ideas came through on how to address this major execution issue, and they will be in the next version. 

While there are real differences in views on some issues, regarding the idea that real, urgent and strategic action is what will define the success of this country into the future, there is consensus. We agree.

Today NZX and NZ Institute today released a further announcement on the Swan Dive or Belly Flop? draft strategy that was released this time last week, outlining next steps and an update on feedback that we have received so far.

You can download the full release here and we encourage you to continue to provide input to the strategy here on the NZX Blog.