From September the global oil price has halved. The milk solids price halved from February to December.
Those are two indicators that the international economy is unsettled. Our supposedly “rock star” economy faces an “interesting” 2015.
One marker: Bill English’s evaporating fiscal surplus. The Treasury in its half-yearly economic and fiscal update (HYEFU), which converted the upbeat May number to a downbeat December one, circumscribed its forecasts with a welter of “risks”, economists’ terminology for uncertainties.
A “fan chart” on page 34 of the HYEFU depicted a wide range of possible fiscal paths ahead to 2020. That fan chart, together with another on revenue projections on page 58, did not match English’s bland assertion at the HYEFU media lockup that he will get his surplus back in the next six months.
English’s problem is not only local. It is global.
In the 1990s and into the 2000s the Federal Reserve Board (the Fed) “contained” inflation to low levels but ramped up money supply.
Low-wage China’s takeover of large chunks of global goods processing was lowering manufacturing costs. Computerisation was lowering back-office, communication and other services costs. Yet overall consumer prices were going up.
It can be argued that the Fed and, here, the Reserve Bank should have lowered their late-1990s/early-2000s inflation targets.
Their money-supply boost inflated bubbles in house, bond and equities prices and encouraged brilliant, dangerous financial inventions which eventually burst the bubbles.
The subsequent “recovery” has been long, slow and uneven, requiring taxpayer-funded interventions to rescue banks and, in Europe, whole governments. Central banks, led by the Fed, printed money on a massive scale.
The Fed has stopped that and is talking of raising its benchmark interest rate, now near-zero, from mid-2015 because United States GDP growth has picked up (though wages have not lifted much and job growth is not commensurate). The European and Japanese central banks are still full-on, trying to counter economic stagnation. China’s has been loosening credit to counter a persistent slowdown.
That is not a picture of stability. Instead, ultra low interest rates have made a time bomb of underfunded pension schemes and have driven rent seekers into riskier assets, possibly stoking another financial meltdown.
The good news is that the “developed” economies no longer equate more or less to the global economy.
The rise of China (spectacular) and of some other “emerging” economies (mixed) has been expanding the range of influential contributors to global growth. But even there the story isn’t as bright as a year ago. For example, Brazil is wobbly.
For New Zealand, there is some good news. The terms of trade turned up from the late-1990s as export markets broadened and prices lifted.
And, while there are risks in overdependence on China — witness dairy’s 2013-14 roller-coaster — New Zealand’s longer-term export prospects look not bad. One near-term factor: there is talk the Republican-controlled United States Congress will back the Trans-Pacific Partnership, which might get it over the line (but might also bring intellectual property and some other worries).
More good news for us is the United States shale oil boom. It boosts global warming but cuts petrol prices and eases household budgets.
But a low oil price is bad for Middle East oil states, whose autocratic regimes squat on repressed populations, and for a maverick Russia, which experienced some wild December swings in the rouble and faces sharp recession this year. Economic (and political) instability in these regions could unsettle the global economy and so us.
This instability is at a time when digital technology is reinventing human connectivity, finance, production, value chains, work, education, health care and much else and profoundly reordering societies and economies, making paid work insecure and boring holes in tax systems. (More about this next week.)
One result of geo-economic uncertainty and technological disruption is a wider-ranging and more energetic debate on economic and social policy principles than for decades.
Thomas Piketty in 2013 reignited and updated old arguments about the lopsided division of spoils between the wealthy and the non-wealthy.
Leading Financial Times economic columnist Martin Wolf, former cheerleader for the financial wizards, last April explored a reignited debate questioning private banks’ ability to create credit.
There is increasing questioning of GDP as the dominant measure of economies when the use of resources is outstripping their replenishment. Our Treasury has joined in. Secretary Gabs Makhlouf talked in November of economists’ models limitations and said economists must work with experts in other disciplines.
Geo-economic instability, technological turmoil and root-and-branch political-economy debate. This year promises to be packed with interest — and challenge.