So. The economy. How is it going?

New Zealand stands in an awkward position. One foot on lush, green, solid and productive pasture: the other one up to the thigh in the offal pit.

So not so good?

We were told for years our businesses had to be more flexible: now you know why.

But I notice we’re still talking agriculture then?

Yep. This week Moodys said we’re not diversified enough, which is something economists have been saying about the New Zealand economy since about 1955.

Isn’t it true?

It’s partly a statement of the bleeding obvious, partly just not all that helpful. We might be the geographic size of Japan or the UK but there’s only four million of us. There’s a limit to how much diversification four million people can pull off.

So we’re still a very narrow farming economy then?

Not as narrow as we were. Yes, we still rely on the primary sector’s three Fs – farming, fishing and forestry – but tourism now contributes nearly 10%.

But, ahh, the offal pit….

Global uncertainty, global turmoil, global bad stuff. Dr Bollard said so this morning.

So, not good?

We’re in the largest financial meltdown since … oh when Adam and Eve over-leveraged themselves into Eden and then some snake talked them into a bunch of collateralised debt obligations. Dr Bollard’s latest outlook is relatively optimistic but he then says there is a greater degree of uncertainty around the forecasts than there ever has been.

How big is that uncertainty?

Well, if anyone could measure uncertainty, a central bank should be able to. Unfortunately they can’t. Perhaps the best way of describing it is the forecasts are written not only in sand. They’re in particularly treacherous quicksand. To put it another way, it’s the least uncertain outlook the Reserve Bank could come up with.

What is their outlook?

The economy hitting bottom in the mid-winter; flat growth for another six to nine months, and then a surge in growth. They are talking annual growth of above 4% from then, which by historical standards is pretty good.

It sounds a bit too good, given all the bad news at the moment.

Maybe not. We’ve got a couple of things going for us. Our business sector has done two very smart things the past few years. One is they have used the high exchange rate, cheap credit, and tight labour market to boost their capital investment. The rise in plant and machinery – which is mostly imported – over recent years, has been running at record highs – 12-14 % above trend output. And that figure excludes computer and intangible assets.

You said two things.

The other smart thing was they didn’t, by and large, borrow heavily to do so. The Reserve Bank noted a few years ago the business sector, as a group, are net savers. In fact it was even suggested (though not by the Reserve Bank) that businesses should be encouraged to borrow more because they were not using their balance-sheets “aggressively” or “creatively” enough.

That sounds rather silly now.

It does. There are always exceptions, of course, but as a group New Zealand managers seem to have been smart. Remember that next time you hear someone pontificating about how poorly New Zealand firms are managed.

So if they’re so smart, why are we having a recession?

The first part of our recession is over: that happened because we had a bloated property market and a drought. The second part is the global shemozzles you read about every day. We’ve only just started feeling that.

But there hasn’t been much unemployment. I know it's up a bit but ….

Unemployment is always the last factor to move. Most businesses will cut other costs before they lay people off. The other side of that is unemployment is the last thing to improve when the recession ends: businesses want to be sure the worst is over.

So we’re in for a bad year on that front?

Almost definitely. It’s going to be a hard winter.

We hear a lot about ‘stimulus packages’ and whether our government is doing enough. Are they?

That’s unclear, but we have, firstly, less room to move than other countries and secondly, less need to move.

Why?

Less room because of the current account deficit.

Haven’t we had that for a long time?

Since 1973. It has got worse since 2005 – for a lot of reasons, but mostly because we have borrowed so much to put into the property market. But it has been above 5% of GDP since the mid-1990s which is supposed to be a no-no. It’s now above 8%. It’s one of those things that only matters when investors think it matters. We’ve just gone through an era where investors were remarkably relaxed about risk: we are now in an era where they are quite the opposite.

But how does that affect the government’s stimulus package?

Because if the government runs up too much debt, when we already have a large current account deficit, we’re a bigger credit risk: the credit ratings agencies will downgrade us, which will only push our interest rates higher.

Haven’t the credit ratings agencies got it quite badly wrong about a number of companies lately?

They have. But it won’t help us.

So the current account will have to come down?

Yes. A big part of it is how much our banks borrow offshore – about 35-40% of mortgage lending is sourced that way. It has to lessen because international investors will simply be less willing to lend that much. So we’ll have to provide more locally. Which means we’ll need to save more.

So is the government doing enough? Haven’t they just brought forward things the last government was doing?

The key thing is ‘just’. The timing of investments – or any other spending – has a big impact on the economy. And the last government was good at announcing stuff several times before it happened. The roading programme was first announced in 2007. What matters is how much overall stimulus we have, not which particular government announced it. The other part of the stimulus is monetary policy. We’ve had a huge monetary policy stimulus, firstly from interest rate cuts and secondly from the fall in the exchange rate.

Couldn’t they have cut interest rates further, and quicker?

Not really. Firstly the bank already cut rates faster than it ever has – even going back to the pre-1989 days when they were not independent and the government held the policy levers. Secondly, those people with money to save still want a decent return – and we need them to keep investing.

So, after about the end of next year things will be hunky dory?

Not necessarily. Don’t forget, these forecasts are highly provisional. Secondly, New Zealand still has the same long-term issues we have had since we stopped being Britain’s farm. We are a small population, spread over a relatively large geographic area, which makes us an expensive place to run. Our per-head spending on things like roads and electricity networks is unavoidably high. We also have high expectations of our education, health and welfare system. And we are unavoidably a narrowly based economy. Whatever prosperity we do have, we can’t afford to take for granted. We made that mistake in the 1950s and we made it again over the past few years. We can’t make that mistake again.