I found this article written by Sandra and the team at Mortgage Link interesting reading…..
The recent decision to downgrade the US credit rating has brought up many questions, as people around the world analyse the possible implications of the cut. While New Zealand may be a long way from Wall Street, the US plays a vital role in the stability of the New Zealand economy, and people are not sure what to expect over the coming months.
Standard and Poor’s, the company responsible for cutting the US credit rating from AAA back to AA+, has warned a number of countries about the possible implications of the new rating. New Zealand is among the nations warned about the potential for slower growth and heightened risk aversion, with worldwide economic uncertainty also raising questions about Italian and Spanish debt.
While the worst case scenario for New Zealand would be for the US to go back into recession, it is important to realise that other markets are more important to local stability than the United States. Australia is the biggest market for New Zealand and China is the second, so even a full blown US recession would be mitigated by conditions in other countries.
The decision by Standard and Poor’s to downgrade the US credit rating has had no immediate impact on the sovereign ratings of Asia-Pacific nations, although the main stock index in South Korea, Japan, and other centres has been greatly affected since the credit rating cut. The intricate connections between global markets is leading to a lot of uncertainty both in the region and all around the world.
“However, given the interconnectivity of the global markets, an unexpectedly sharp disruption in developed world financial markets could change the picture. It could lead the US and European economies into deep contractions again, or further delay their recoveries.” said Standard and Poor’s in a general warning to smaller economies.
New Zealand is among the countries warned of potential export-driven slowdowns. Both weaker demand and lower export prices could greatly affect New Zealand, as could the ability to roll over debt due to a heavy reliance on overseas markets for funding. If a slowdown does take place, it has the potential to be both deeper and more prolonged than the downturn of 2008.
With the US current account deficit deteriorating, a higher New Zealand dollar is also likely over the next few months. While this does have some positive effects, there is real danger to the manufacturing and tourism sectors as a result. Exactly how the dollar reacts will be one of the key indicators over the coming weeks.
While the US credit downgrade is already affecting the New Zealand economy, the extent of these effects will depend a lot on the reaction from other nations. Along with how US markets are dealing with this situation, New Zealand economists will also be looking closely at the outlook for Europe, Asia, and Australia during this critical period.
