I’ve been pretty quiet here for the past few weeks, but have been accumulating some interesting articles that I’ve wanted to comment on. I’ll try to catch up in the next few days, but here’s one that got my attention today -
An article in the NZ Herald claims an increasing percentage of NZers think the economy is going to improve in the next year – 39.8% compared with 29.9% in August, and compared with 26% who current think the economy is going to get worse.
I think the optimists are deluded – I just don’t believe the economy can sustain the current madness of consumer spending funded by overseas debt. It’s all going to go pear-shaped eventually.
The NZ dollar has been rising strongly in the past week, defying (in my opinion) all logic related to its medium term prospects. The Herald yesterday noted some economists’ predictions that the NZ$ could turn down aggressively in the new year. That certainly makes sense to me. And while that will be good for exporters and contribute to a reduction in the current account deficit, it could be painful for a lot of people – increasing inflation from increased import prices, higher interest rates to curb inflation and from lack of demand for the NZ$ and falling property prices.
That could hit a lot of people pretty hard. Stuff.co.nz reported a few days ago that household debt in NZ has doubled in the past five years, compared with an increase in gross disposable household income of only 23%. And as a percentage of income, debt servicing has increased from 7.8% to 13.1%. The Bank of NZ. At the same time, house prices are high relative to incomes – about 8 times average income, compared with 5 times in the US – suggesting potential for a pretty strong downturn.
In fact a BNZ economist is quoted as saying -
“It’s all grossly unsustainable, but a tipping point doesn’t seem imminent.”
…
It is unclear where it will all turn, but he believes the soft landing which every one is hoping for may just become an “abrupt adjustment”.