By Bernard Hickey
Prime Minister John Key and Finance Minister Bill English have downplayed the potential for last night’s global stock market rout and growing signs of a hard landing in China to force New Zealand into recession.
Talking to reporters after Wall St fell another 4% on Monday night and Chinese stocks fell 9%, Key and English said the New Zealand economy was in much better shape than others, including Australia.
They said the Government had no plans yet to accelerate infrastructure spending or engineer a fiscal stimulus in response, although English said it was possible any global downturn could mean a Budget Deficit in 2015/16 was possible. They both said the Reserve Bank had room to cut interest rates if necessary and the Government could speed up spending if the economy worsened.
Key said the stock slump was a wake up call for those who thought markets only went in one direction.
“The good news about New Zealand is we are in a hell of a lot better shape than most other places,” Key said.
“Our balance sheet is back in order, we’ve got ourselves back pretty much not spending more than we earn, households have been saving for the past five years. And the big drop in the exchange rate does have quite a bit impact,” Key said, adding that a falling oil price was also good for consumers in New Zealand.
He did say falling stock markets may affect confidence.
‘Plan A is the right strategy’
Key said the current’s current strategy, or Plan A as he called it, was a good plan, although he would not rule out bringing forward some spending.
“In the end you can always bring forward some initiatives if you need to, spend a little bit more money. Certainly we are in a much better position to prime the pump if we had to do that now,” he said, adding that interest rates could also be lowered if the situation worsened.
“We are one of the few countries in the world that have still interest rates at a reasonably high level. The government could drop those further or the government could spend more,” he said.
Key said he had seen nothing to support claims of a recession in New Zealand.
“The general consensus view from economists is that the probability of recession might have gone up a little bit, but from very low levels, but overall the likelihood is that we will grow, but it will grow at slower rates than we would have anticipated,” he said.
Key said New Zealand’s food and tourism exports to China were less vulnerable to a downturn in China than Australia’s exports of iron ore and coal, which were used more in construction than by Chinese consumers.
“On the consumer side we are still seeing some pretty strong of numbers. These things have a bit of a lead time about them, but the consensus that Bill had when he was in China was that the impacts of what’s happening in the financial markets in China are much more likely to impact on the both the investing side and ultimately on the construction side,” Key said.
“But consumer demand side for foods is very strong still,” he said.
“Plan A is the right plan, and that is: have flexibility in the economy, live within your means, make sure New Zealand is externally focused. But, like anything in life, we have responded if we need to do that. If we needed to stimulate the economy more, we could theoretically do that. The Reserve Bank could do that. We do have options.”
KiwiRail costing NZ$200 million a year
Elsewhere, English said the Government had pumped over NZ$1 billion of investment into KiwiRail, which had failed to make it profitable.
He said the Government was now regularly putting NZ$200 million a year into KiwiRail. He said the Government remained committed to KiwiRail because the public wanted to maintain that infrastructure.