5 January 2015
Ten points to consider here and globally while keeping watch on recoveries from the lingering GFC.
In dramatic terms 2014 ended with several big business and economic stories on cliff- hangers. That’s going to make for interesting times in 2015 as trends play out and a new economic narrative starts to take hold. Here are 10 big topics I’ll be following closely.
First up, because it comes to the crunch this month, is the stand-off between Greece and the EU.
Greek voters, fed up after five years of austerity, appear set to elect a socialist Government led by Alexis Tsipras on January 25. Tsipras promised to renegotiate the terms of the bailout deals done with the EU after the financial crisis and is seeking a writedown of national debt.
EU leaders, particularly the Germans, don’t like it and expect the Greek people to meet the conditions agreed as part of the bailout.
The clash between national democracy and commitment to the EU could see the Greeks exit the union.
There’s plenty of commentary suggesting the EU can handle an exit with Greece’s diminished economic status making it less likely to destabilise. But others warn it can’t be fire-walled and will bring more serious divisions between major Euro players to a head. If Europe is really rattled that may create economic shockwaves for the rest of the world.
The oil price crash
How low can it go? Many commentators say oil still has further to fall. The increase in US supply coupled with Opec and Saudi determination not to cut production has created an oversupply which demand has yet to match. The 50 per cent fall in prices in just six months is putting big pressure on oil exporting nations like Russia and Iran as well as hurting the energy sector in the US. That briefly spooked markets in December. But despite this disrupting effect around the world it is hard to see how low oil prices won’t give a big boost to many economies – especially the Americans.
The US recovery
America thrives on cheap oil. It is putting money in the pockets of consumers and cuts costs for business. This may be the year the US economy finally takes off. All the rest of the conditions are in place, low interest rates, low inflation and a booming stock market. If it is America’s year then it will be a well timed comeback as concerns about China’s slowdown continue.
China’s economy is supposed to be slowing. That’s the official government policy which aims to shift the economy from export-led growth to a steadier more domestic focus. But whether this kind of transition can be managed without turmoil, even by a government with as much power as China’s, remains a great unknown. There are also concerns about a stock market bubble and property bubbles in the major cities. If there was a serious market crash it could provide the biggest economic test the Chinese have seen in a generation. Given New Zealand’s reliance on China as an export destination the shockwaves might hit us even harder than the GFC.
Inflation in hiding
Where did inflation go? Is it lurking, waiting to surprise us just as we relax our attitude to it? Or has something structurally changed that makes deflation a bigger threat to the global economy? The question has divided economists but no one really knows the answer yet. The New Zealand Reserve Bank is in the privileged position of being able to take a watching brief. Our economy is still growing but the lack of inflation has enabled interest rates to be left low. It is actually something of a sweet spot, albeit a precarious one.
Reserve Bank vs the Property Market
The Reserve Bank will be also keeping a very close watch on the housing market this year. Housing is one area where inflation doesn’t seem to let up. With high debt levels New Zealand can’t afford a bubble and crash scenario. But now with rates on hold retail banks will have deals on offer and lending may rise. The introduction of Loan to Value Ratio (LVR) restrictions was a bold and controversial move which showed the Reserve Bank is prepared to innovate. Later this year further lending restrictions targeting property investors may be introduced.
The slump in dairy prices is the biggest cloud hanging over the New Zealand economy. It is remarkable just how well growth has held up as the dairy price has fallen. Economists seem to be confident that, after a bumper run of record prices, one bad season is manageable. But if the price doesn’t start to show signs of recovery in the next few months the concerns will mount.
The kiwi finished about 5 per cent down on the greenback last year but was at a record high against the aussie. Exporters will be looking for further falls as the US economy pulls its own currency up. Meanwhile the low aussie is good news for local investors but worrying for exporters and the tourism sector.
The Bull run
Wall St and the local NZX have been running fairly well in tandem with big returns for investors over the past few years. That’s got some commentators concerned that stocks are becoming overvalued. While few are picking a market crash as the economy continues to grow, there is a feeling that there could be more volatility and more patchy returns this year. No doubt there are a few more record highs to come in the weeks ahead. The first big test of the valuations comes with reporting season next month.
Shares in New Zealand’s most ambitious tech company went on such a roller coaster ride last year that it is tempting to think of the Xero story as having played out. That’s far from the case, of course.
Xero’s progress in 2015 will be fascinating to watch. The key to its success is customer numbers and maintaining the kind of strong growth it has seen to date. Investors will be watching closely for signs that it has its US strategy back on track after some stumbles last year. If it can get fresh momentum in the US then the possibility of a Nasdaq listing will loom.