Key on the economy

Stuff reports:

“We’re at the end of what I’d say is the economic cycle at the moment. There’s no question that when I look around the world and the things I’m now involved in internationally, you can start to see the pressure in the system,” Key said. 

“I was in China a week ago, it’s clear their economy is really starting to splutter a little bit. While the United States economy is doing well, they’re running massive, massive deficits – 7 per cent of GDP. Europe’s obviously much weaker than it was.

“So I think you are starting to see a slowdown in the economy and I think that, in part, reflects the business confidence numbers in New Zealand, and I think in part New Zealand businesses are looking at what the Government’s doing and they’re uncertain about that.” 

Low business confidence numbers could not be ignored, but Key said he hoped the economy remained strong “because every day, New Zealanders rely on it”.

Key and John Howard spoke at the dinner of the conference. It was interesting but rather scary to hear what he had to say on the economy. Especially considering he is now the Chair of ANZ Bank and is very very focused on the global economy.

Basically it was that the world recovered okay from the GFC as China kept the global economy going, and also many OECD countries were able to borrow against fairly strong balance sheets.

Today we don’t have the same capacity. With the welcome exception of NZ, many countries still have very high debt and are not even back into surplus. So another global shock woule be more punishing.

China is in a very different place also. It still has economic growth above most OECD countries, but weaker than in the past. But their real problem is their household debt. That constrains their ability to respond as they have in the past.

In 2008 household debt in China was under 20% of GDP. It is now almost 50%.That is a huge increase in just a decade. It is a sign of an expanding middle class but it has risks.

The household debt in China is now at 110% of disposable income. In nominal terms it is nine times higher than a decade ago.

So when the next global shock comes (now overdue – 1973, 1987, 1998, 2008) it could be really nasty. A good reminder why we need to pay off debt in good times, so we can cope with the bad times.