Gareth Morgan, Director of Gareth Morgan Investments
In NZ we dread a sustained oil price crisis because it will exacerbate an already weak economic performance, Australian financial markets are almost greeting that same news with delirium. Now it’s always been the case that they have been far richer in mineral wealth than we have, and are net exporters of oil, but the impact of a rise in the oil price is multi-dimensional. Not only is there the direct impact of the price rise to consider, but there are the implications it has for overall world growth and the demand for our exports, as well as the impact that’s felt through global capital markets via rises in real interest rates.
For NZ, a net importer of oil, a seller of agricultural commodities, and an economy weathering a large external debt burden, the price rise would be bad news on all three fronts. For Australia, the price rise is bad news on two of those fronts. There seems little reason to rejoice about ii. in either country.
In NZ we have seen the central bank has made noises about how the appropriate way to face this type of shock is to stiffen monetary policy, and take the fall in our terms of trade on the face. This prognosis has been common in central bank circles overseas since August 2, and stems from the belief that the Japanese reaction to the oil shocks in the 1970s where they did just this, while it led to recession, turned out to be markedly more successful than our reaction.
In Australia however, the general perception has been that the country will be a net benefactor from the oil price rise, even though such a conclusion is far from obvious, with the result. that there is building again intense political pressure for yet another easing of monetary policy. This would mean that short term cash rates have fallen from 38% to around 13% since January. The policy priority in Australia all year has been to use monetary policy to reverse the economy out of its recession. The fact, that inflation is above 7%, and the balance of payments current account. is still at 5% of ODP, s seen as being of less importance than the economic slowdown that has befallen the place.
Should Australia pursue this easy money line in the face of an oil price-fuelled global economic slowdown, a pretty safe bet given the politician’s policy priorities, then the country will have inflation near 10% and the balance of payments deficit out over 6% of GDP, within 32 months. Economic growth though could he around 3%.
This provides a curious contrast with NZ if it were to pursue the option of tougher monetary policy in reaction to the oil problem. While we could be pleased with inflation receding back from an oil-fuelled spike of around 8% to about 4%, a balance of payments deficit of 6%’of GDP, and growth of around -1% would detract from that achievement.
Australia and NZ neighbouring economies maybe, but travelling markedly ‘different paths into the 1990s.