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The International Economy: Risks and Opportunities

International agencies and many commentators including the Minister of Finance in his “state of the economy” speech last week, have been writing about the growing dangers in the international economy. This commentary looks at those dangers, the potential effect on New Zealand, and what policies are needed to put us in a good condition to weather the turmoil should it occur.

A number of factors make the international economic situation particularly worrying. Firstly most of the world’s major economies are in trouble: particularly the European Union (EU), China, and the US. Secondly there are major tensions such as the refugee crisis in Europe, in turn driven by the increasingly complex situation in the Middle East, and toxic political deadlock in the US. Finally, the major financial centres of the world – mainly in the U.K., Europe and the US – have not fixed the problems that led to the 2008 crash and the Global Financial Crisis (GFC), in the face of resistance from the powerful financial sector. That, along with political barriers in the US and the EU makes their debt situations difficult to resolve.

A more immediate worry is that many of the cushions that reduced the effects of the GFC have gone. We cannot count on China or the US keeping the international economy working. Many developed economies (though not New Zealand) have high public debt which reduces government capacity – at least in the eyes of the financial markets – to respond by stimulating and stabilising the economy. Interest rates are already very low so cannot be reduced. So we must rely more on government spending, and ‘unorthodox’ measures such as central bank credit – but in more effective ways than the ‘quantitative easing’ bailouts of the finance sector.

Another crisis is far from a certainty – don’t panic – but it is difficult to judge just how likely a downturn or crisis may be. The possibilities are enough of a worry that we should be thinking about whether we are properly prepared, and I make some suggestions how. It is important to learn from the disastrous mistakes that are still being made around the developed world, and from new thinking that has not yet permeated through to government circles in Wellington. Out of crisis comes opportunity: many of these preparations are policies needed for a better New Zealand.

Download the full bulletin: CTU Economic Bulletin 175 February 2016