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From this article, it is clear that New Zealand is in economic recovery process from the recent financial crisis that almost affected every economy in the world. The article gives information about the investors (business) confidence. Although, business confidence has been high in February and April, it slightly decreased in May. Decrease in investor’s confidence may be due to inflation which is also cited to have increased. Additionally, this article report that intention of pushing up prices had also increased among business people.

Employing the income model as asserted by Keynes, reduction in business confidence adversely affects economic growth. It will be correct to conclude that the country is unlikely to achieve her economic growth forecast.

Given that

Y=C+I+G+(X-M) where Y is the national income/output/expenditure, C is consumption by households, I is investment by investors, X is income from exports, M is imports while X-M is the net income from abroad, any negative change in business confidence will affect the I since it is the business people who are involved in investment. Decrease in investment will lead to a decrease in level of Y. In the long run if reduction in business confidence is not checked, it may have adverse effect on level of employment to the households; reduce income to the household and consequently their purchasing power. This will reduce demand in the economy, worsen the investor’s confidence, reduce level of investment and consequently reduce level of production. (Kundra 2005; Chamberlin & Yueh 2006).

Section one (Evaluation of the Market- Government objective in Economic Growth)

1). Key concept includes government spending-which is one of the fiscal policy by the government in regulating economic indicators.

Investors’ confidence and investments – investors are key players in the economic growth since they affect the GDP which is calculated by adding Government expenditure, investments, consumption and net foreign income.

Negative net foreign income-owing to repatriation of profit by multinational companies which are making good profits in New Zealand

2).

Circular Flow of Income in an Open economy.

The case study is discussing about the concept of national income and other macroeconomic issues associated to this concept. The economic model relevant to this is:

Y=C+G+I+(X-M) where:

Y represents total output (GDP), C represent consumption by households, I represent the investments, X represents exports, M represents imports while X-M represents net income from abroad. (Kundra 2005; Chamberlin & Yueh 2006)

3). According to the article chosen, it is clear that that there is as slight decrease in business confidence. In May, it was reported to be 48.2% as compared to 49.5% reported in April. This might be the reason as to why investment figures are mildly encouraging and overall business investment weak as reported in the case study article.

It has been a plan of many business to embark on new outlays since early springs last year, but loss of business confidence has caused disconnect between these plans and real activity. To this end, government should intervene through monetary and fiscal policies to curb this. Some of the fiscal policies to be employed include increase in spending to create more employment to the households, and reduction income tax. This will increase demand in the economy and consequently increase business confidence. The government may also lower the discount rate and requirement reserves to reduce cost of investment.

4). According to the article chosen, I support the case study through the following examples:

In the case study it is concluded that by the end of this year, the economy will have shrunk- estimated to be -0.4% growth in GDP. In the article chosen, it is asserted that business confidence is slightly reducing. In February it was around 50.1%, in April it was 49.5% while in May it was 48.2%. In the income model, Y=C+G+I+(X-M), investment will adversely be affected by decrease in business confidence which will consequently have a negative impact on Y. Thus, forecast of a negative growth rate is not wrong.

The second claim in the case study is that there has been disconnection between business intentions to investment and real investments in the economy. The article chosen support towards this claim can be associated to reported inflation which adversely affects investments. Under inflationary conditions, lenders will not lend their money, business confidence will go down and consequently planned investment will not be implemented. (Kundra 2005; Chamberlin & Yueh 2006).

Section two (The Macroeconomic Environment- the Business Cycle)

1). Business cycle includes the economic phases which an economy in one period may be experiencing. The key concepts include:

Business confidence: changes according to the phase the economy is in.

Investments: high during good economic conditions and low during undesirable economic conditions

Currency value: low value when economic conditions are bad and high value when economic conditions are desirable

2) New Zealand is in the Recovery phase

A             B              C       D

Time in Years

Part A represent recession phase, B represent the depression phase (trough), C represent recovery phase while D represent the Boom. New Zealand Economy is at C, recovering from financial crisis effects, although at a very low rate. (Chamberlin & Yueh 2006).

3). According to case study, New Zealand faces a number of challenges. First, there is a decreasing level of business confidence. Investments are not happening as planned by various businesses. Her currency has also been stumbling and losing value. Investors have become risk averse and the economy is expected to shrink. According to article chosen, the economy is recovering from the crisis. Domestic sector is also seeing more fragile recovery. Business has been bruised although not permanently. Business people are behaving cautiously. Not looking forward to invest more. Lending institutions are reluctant to lend out. Thus the predicted shrinking of economy by -0.4% is possible or it may be worse than this.

4). The predicted future is shrinking in the economy by -0.4%. This can be supported by economic theory of national income. According to the case study, it is apparent that investors’ confidence is not good. The lending for investments is also likely to decrease since many lenders have become risk averse. This will adversely affect level of investment in the income model. Low investment will reduce employment opportunities to the households. Low employment to the household means low income and less purchasing power. This will culminate to low demand in the economy which is a disincentive to investors. Consequently, there will be low investments and a decrease in economic growth. This is why a negative GPD growth is predicted. (Kundra 2005; Chamberlin, G., & Yueh 2006)

Section 3. (Government Policy and the Economy: Fiscal Policy)

1). Theory of fiscal policy can be traced back to Keynes theory. Fiscal policies are part of government interventions to ensure smooth flow of the economy. They include government spending and taxation policies. To stimulate the economy, the government usually increases it spending and reduces taxes. On the hand when economic indicators such as inflation are not pleasing the government will reduce its spending and increase taxation as an ant inflationary measure. (Hansen2003)

2). The current role of New Zealand economy is to stimulate the recovery of the economy through increase in spending. This will work through demand side effects. It will increase employment to the households, increase their purchasing power and demand. This will consequently be an incentive to investors who will respond by increasing level of investments. Thus the economy recovery phase will peak at a desired pace. (Kundra 2005).

3). Two fiscal priorities as stated in the New Zealand Budget Policy Statement 2010 are,   Investment in productive infrastructures as well as strengthening the tax system. These policies can be summarised in terms of taxation and government spending. The government is planning to reduce tax burden on the small businesses and the household. Infrastructural development will also increase efficiency in the economy.  All this will increase economic growth and facilitate recovery process.

4). These two policies have some advantages and disadvantages. Increase in government spending on infrastructures is likely to stimulate growth of other sectors in the economy. Good transportation network means quick and easy transportation of products to the market. However this is likely to increase level of government expenditures and increase budget deficit. Reduction in taxation will increase demand in the economy and encourage investments. However, this will reduce government revenue which is needed to finance its expenditures.

Section four (Balance of Payment: Current Account)

1). Current account includes exports and imports of a country and the transfer payments.

2). Balance of payment is affected by the current account balance, balance in capital account and the federal reserves balance. As per the case study, current account figures depicted a deficit of 2.9%. Repatriation of profits amounted to $ 2.6 billion. This will be transfers to foreign countries and adversely affect current account. (-2.6 billion). (Kundra 2005; Chamberlin & Yueh 2006).

3). Deficit in the current account as per the case study is due to success of foreign investors in New Zealand economy. They are making large profits which they eventually repatriate to their home countries. Additionally, low business confidence has reduced the investments and thus output which will comprise of some exports to other countries and consequently reduce the current account deficit.

4). Pros and cons of the current account deficits

A negative current account deficits means that there are more outflows than inflows to the economy. This means that the economy is losing to her trading partners. On the other hand, this deficit is caused by success of foreign investors in the economy. These investors will increase their operations in the economy. Consequently they will increase employment opportunities to the labour force, increase foreign direct investment, and eventually stimulate growth of the economy. Capital and technological knowledge will also be imported by foreign firms which are an advantage to this economy. (Kundra 2005; Chamberlin & Yueh 2006)

5). Actions to curb current account deficit

The government should investment in productive activities such as agriculture, manufacturing sectors so as to increase the economy production and diversify her exports. It should also enter into agreements with the foreign investors that will encourage reinvestment of their profits back to the economy. Third, the government should encourage exports through export promotion policies e.g. export processing zones that will advertise the products from New Zealand in other countries, encourage import customs duty compensation to those who imports raw materials meant to produce goods for exports. The government should also seek bilateral and multilateral relations to increase market for her exports.

References

Kundra, S. (2005). Modern Macro Economic. Anmol Publications PVT. LTD.Chamberlin, G., & Yueh, L (2006). Macroeconomics. Cengage Learning EMEA

Hansen, B. (2003). The Economic of Fiscal Policy. Routledge.

Budget Policy Statement 2010.(2009). New Zealand. Retrieved 1 June, 2010. From,

< http://www.treasury.govt.nz/budget/2010/bps>

Case Study: Hosking, R (2010).  Economy Grows At Last But Not On The Back Of A Boom Or Public Spending. The National Business Review, April 1, 2010, P3:

Section 1

Appendix 1: The Article Chosen.

Source: The National Business Review Retrieved 2 June 2010, from. <http://www.nbr.co.nz/article/business-confidence-dips-high-level-123898>

Business confidence dips from high level

NZPA and NBR Staff | Monday May 31, 2010 – 03:52pm

Business confidence dipped in May but remains at very high levels historically, according to the National Bank business outlook report.

Overall, a net 48.2 percent of respondents expect an improvement in business conditions in the year ahead in the May survey compared with 49.5 percent in the April survey. The February figure of 50.1 percent was the highest reading for business confidence since 1999.

A net 45.3 percent expected better times ahead for their own business, compared to 43 percent in the April survey.

The past month has seen the New Zealand dollar tumble, increasing unease towards the sovereign debt crisis in Europe, a sell off in global equities, mixed economic messages and an economy friendly budget.

“Nothing seems to be denting the air of optimism towards prospects for the New Zealand economy,” said senior National Bank of New Zealand economist Khoon Goh.

All sectors except manufacturing recorded a confidence fall. The construction sector remained the most optimistic even though it showed the biggest drop in the month. The agriculture sector continued to have the lowest level of confidence.

Employment intentions rose three points with a net 16 percent now expecting to hire additional staff. This is the highest reading since April 2002 and consistent with around 4 percent employment growth.

Investment intentions rose four points.

“Our composite growth indicator from the survey continues to point towards a strong recovery ahead. The composite indicator is at a level which is consistent with over 5 percent year-on-year growth by the end of this year,” Mr Goh said.

There was, however, an unwelcome inflationary undertone. Pricing intentions rose, with a net 28 percent now expecting to push prices higher, a level consistent with around 3 percent annual headline inflation, before accounting for GST changes.

A further increase in capacity utilisation also suggested the recovery was starting to use up spare resources in the economy at perhaps a quicker rate than expected.

Section 2 Article: appendix 2

Appendix 2 Retrieved 3 June, from <http://www.rbnz.govt.nz/news/2010/3977089.html>

Handling Our Economic Recovery

Date 6 May 2010

New Zealand’s recovery from the Global Financial Crisis is entering a new, less fragile stage, which will allow monetary policy stimulus to be removed, Reserve Bank Governor Alan Bollard said today.

“New Zealand has been fortunate in some respects, allowing most of our crisis liquidity and guarantee measures to be terminated. Conventional monetary policy will now guide the stages of recovery,” Dr Bollard said in a speech to the Otago and Southland Zones of Local Government New Zealand in Dunedin.

“Overall, we are emerging from the crisis with some reconstruction of our external deficit, as a result of strong exports, weaker import growth, suppressed domestic profits, and some consolidation of balance sheets.”

On the other hand, the domestic sector is seeing a more fragile recovery, with business bruised but not permanently scarred. It is behaving very cautiously, still not looking to invest in plant and equipment or re-employ staff.

“Banking sector credit data continues to be extraordinarily restrained. Whatever the explanation, we certainly wish to see credit available for all sound business ventures.”

In the household sector, there has been only a soft pick-up in house prices, new building and sales. Householders are building up savings and reducing debt.

Dr Bollard said the stage is set for the Bank to influence the pace of recovery through more conventional discretionary monetary policy.

“In our Official Cash Rate Review last week we noted: ‘…we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.’

“We used the words ‘begin removing stimulus’ deliberately. With an official cash rate at an historically low level of 2.5 percent we are clearly in a very stimulative position.

“Using a truck driver analogy, our foot is strongly on the accelerator. Over coming months we expect to reduce the pressure on this pedal, but in effect to keep some throttle going. Truck drivers know they must reduce acceleration long before the corner. We are not talking about tightening policy yet. We do not expect to have to touch the brake pedal for some time.

“Financial markets currently expect the Reserve Bank to begin raising the official cash rate around the middle of the year and continue to do this in small steps for some time. This is broadly in line with our current views as outlined at last week’s OCR Review.

“However, the timing and pace of returning the OCR to more normal levels will ultimately depend on economic developments. Both markets and ourselves foresee that the official cash rate will not need to rise as far in this cycle as it did in the last one.

“But a final caution: recovery so far has been full of surprises. There will be more to come.”

Media contact:
Mike Hannah
Head of Communications
Ph 04 4713671, 021 497418,
mike.hannah@rbnz.govt.nzThis e-mail address is being protected from spambots. You need JavaScript enabled to view it

Section 3 Article Appendix 3

Fiscal Strategy of the Government <http://www.treasury.govt.nz/government/fiscalstrategy>

The current Government’s fiscal strategy – set out in the Fiscal Strategy Report 2010 – aims to deliver a fiscal position that is sustainable in the long term, contributes to economic stability and advances key priority policies.

The Government has sought to strengthen its fiscal position so that it is well placed to respond to future challenges such as those associated with population ageing.

The strategy aims to provide certainty to households, businesses and investors by keeping taxes and core Crown expenses around current levels. By keeping finance costs low, it will ensure flexibility in meeting future fiscal pressures by maintaining a low level of debt. It also aims to build up assets in the New Zealand Superannuation Fund to assist with future superannuation payments as the New Zealand population ages.

Section 4. Article: appendix 4

(Balance of payment. < http://www.nbr.co.nz/article/current-account-shows-new-zealand-seriously-out-whack-111488>

The National Business Review, Thursday 3 June 2010.

Current account shows New Zealand seriously out of whack

Rob Hosking | Tuesday September 22, 2009 – 03:25pm

It is a sure sign things are seriously out of balance when a good result gets you further into trouble.

Thus it was with today’s current account deficit figures. The drop in the size of the deficit was huge – at 5.9% of GDP, well below the consensus market expectation of a drop to 7.4% of GDP.

The goods part of the external balance is actually in surplus – as it was in the March quarter – and in actual dollar terms, before seasonal adjustments, the current account balance is in surplus by $124 million.

Seasonally adjusted, the figure is $612 million for the quarter, down from March’s $2.1 billion.

The drop though is because less money is being taken out in profits by offshore owners of New Zealand businesses – because those businesses, mostly banks, are less profitable.

The other reason is a one-off company tax payment from Bank of New Zealand to the taxman following the recent dispute which the taxman won.

Well, when we say “one off,” there are five other large foreign banks being eyed up by Inland Revenue …

The New Zealand dollar, in response to the current account figure, bounded higher than a gymnast on ecstasy, rising 1.5% in response, early this afternoon, to $US0.7171, the highest point for over a year.

An announcement from Fonterra of an improved dairy payout also appears to have had an impact.

But, once again, the dollar is heading the wrong way. What New Zealand needs is an export-led recovery and the high dollar is impeding that.

The pity of it is that export volumes are actually up by a considerable margin. Prices paid, though, are down.

But it adds to the angst of the policy makers, both at the Reserve Bank and across the road in the Beehive.

Add to that the signs the New Zealand housing market is getting a little prematurely active again. The policymakers are not always right about these things, but on this one they are bang on the money: any sustainable recovery has to be built on exports picking up and not household spending (and debt).

That means a period of quiescence in the housing market is needed.

“Bottom line: New Zealand remains heavily dependent on offshore capital, [and] today’s outcome does not alter that,” is how TD Securities New Zealand economist Annette Beacher summed up today’s current account figure.

And the currency response is only pushing things further out of balance