When "good" news shows how bad things have got

When you’re in a tunnel, any glimmer of light is welcome. So it was with the economy last week.

Thursday we learnt that in the 12 months to March the deficit on the balance of payments current account — New Zealand’s account with the rest of the world — had “improved” to 8.5 per cent of total output. We were spending “only” one-twelfth more than we were earning. And now we have a debt to the world equal to 85 per cent of a year’s total output.

Friday we learnt that business sentiment had “rebounded solidly” to an excess of pessimists over optimists of 37 per cent. To get that sort of number two-thirds of businesses have to expect things to get worse and only one-third better. That tells us our business managers are depressive.

OK, a year ago the current account deficit was nudging 10 per cent. And, OK, in May business pessimists outnumbered optimists by 48 per cent (implying three-quarters pessimists and only one-quarter optimists).

But these “improvements” come after six years of good-going-on-great export prices, fat business profits, near full employment and rising wages. In a healthier society someone would be saying: “We’ve never had it so good.”

Glum business managers are not likely to generate the sparks that will make and keep us rich. No wonder we emigrate in droves.

OK, they are positive about their own individual businesses’ prospects: optimists outnumber pessimists by 15 per cent (implying three-fifths optimists and two-fifths pessimists). But when they look out the window, the corners of their mouths drop to their knees. Farmer grimness seems to have spread into the towns.

Year after year business tells us things are getting worse. Year after year business makes good, and at times bumper, profits.

Is this glowering dislocation between firms’ own sunny dispositions and their downer on the general operating environment just because there is a Labour government and a National ministry will lift spirits? Or is there more?

Remind yourself that this teetering current account deficit is despite a boom in prices for some export commodities which under the old rules should have made a solid trade surplus and greatly slimmed the current account deficit. The terms of trade have for a decade or so been running in our favour after a century of decline.

So what went wrong?

The United States triggered a world flood of money.

Computerisation and the entry of Chinese, then Indian, workers into the world labour force slashed prices for manufactured goods and some services. But instead of allowing prices overall to fall in line with this big productivity boost, the United States central bank congratulated itself on modest inflation, kept interest rates low (especially after the dot-com bust) and thus encouraged consumers and companies to take on debt, drive up asset (particularly house) prices and thereby enable themselves to take on more debt and spend like drunks.

Chinese and other Asian savers supplied the readies along with the cheap goods. The world money supply expanded greatly — directly contrary to once-fashionable monetarist theories. Inflation stayed apparently low despite that expansion simply because prices should logically have been even lower.

We got caught up in this wash — and in the inflationary thinking. Don Brash, then Alan Bollard, have consistently feared far more going below the bottom of their permitted inflation band than going above it. So money supply boomed here, too, and asset prices and debt.

So here we are with the rich world’s highest interest rates, huge waves of credit seducing spend-up-large local debtors, a dollar overpriced by between 20 and 50 per cent according to Morgan Stanley, a serious debt to the rest of the world and no sign all this is going to come back into balance without either a long or a savage adjustment.

The latter could come by way of a correction of the world’s imbalances. Last week the normally sober Bank for International Settlements warned that similar conditions exist now as in the leadup to the 1930s depression and the 1990s Asian slump. It highlighted China, debt, new-fangled financial instruments and an exuberant appetite for risk.

Small wonder business is glum about the economy. Small wonder Michael Cullen is manic about getting us to save. The gaping current account deficit is a measure of our dissaving and exposes us to an international shock. How much longer can our charade continue before a creditor forecloses or something goes messily pop in our economy or both?

Yet despite all that there is ground for long-term optimism.

Millions are joining the middle classes in Asia and, with that, the queue for high-quality food and tourist experiences. If foreign consumers and retailers don’t rule us offside for food and travel miles and carbon profiles and footprints, this economy’s longer-term prospects look good.

But to get there requires hard decisions, discipline and energy. So far this decade we haven’t shown much of that.