A ‘goldilocks’ economy for 2018

Winston Peters is worried about a global economic slump next year, but NZ Super Fund CEO Adrian Orr thinks that's "bollocks". And he has $36 billion in our money riding on that view. Bernard Hickey reports.

Some observers of the global economy and financial markets, including Winston Peters, are very worried about a looming economic slowdown and some sort of financial crisis next year. After all, New Zealand has had a recession in every year ending with eight since 1968. (See chart below)

But Adrian Orr, the former Reserve Bank Deputy Governor and now CEO of the $36b New Zealand Superannuation Fund is far from convinced. He rubbished the idea of a slowdown in a speech to business leaders in Wellington last night, pointing to firming economic growth in both the developed and developing economies.

"Bollocks," he said when asked of his view of Peters' prediction of a looming global slowdown.

He described the global economy as in a "Goldilocks zone" of strengthening economic growth with low inflation and low interest rates.

"We are in a very, very positive situation," he said, pointing to real per capita GDP growth of 2.5 percent in Japan, for example.

He said global stock markets were neither wildly over-valued or under-valued, with Europe and Japan about 10-15 percent under-valued relative to long term valuations, while the United States was around 5-10 percent over-valued.

"Should there be a large downturn in 2018 that would be fantastic," Orr said of the likely effects on asset prices, given the NZ Super Fund was a long term investor keen to buy assets during downturns in the knowledge they would bounce back over the long run.

Ageing populations, urbanisation and climate change

In his speech, Orr talked extensively about the long term effects of demographic change (with ageing populations in the developed world and the urbanisation of younger emerging markets) and the effects of climate change. The one caveat was China, which "got old before they got rich."

He said the NZ Super Fund had reduced its carbon emissions exposure by 20 percent and aimed to further reduce its exposure to carbon reserves from the 20 percent reduction already achieved to 40 percent.

He said politicians and voters in some countries were in denial about climate change.

"It's the tragedy of the horizons."

But regulators and consumers were already reacting, and climate change itself was already having dramatic effects on economies. Orr said investors and companies should move to get ahead of the likely impacts.

"It's on its way. You don't have to buy into the science. You just need to understand that the regulatory response and the consumer response is here already."

Matching a wall of capital with infrastructure shortages

Elsewhere, Orr said one of the biggest challenge for investors and Governments was connecting up a wall of capital with the huge need for infrastructure investment as the emerging world urbanised and the developed world dealt with ageing and climate change.

Orr called on New Zealanders to retain their outwardly focused nature, but to be more disciplined

He said the world's most powerful governments and politicians were mayors and councils who were able to green light or block infrastructure developments in cities, which was proving the biggest obstacle to matching the wall of capital waiting to be invested with the infrastructure projects.

"The two just can't seem to plug and play," he said.

'Thank God for all the cash'

Orr also downplayed the risks around central banks having to withdraw stimulus from the global economy as the recovery took hold.

"The world is awash with liquidity and thank God for that. That's what central banks are supposed to do and it has worked," he said.

He expected central banks would be able to carefully and slowly withdraw.

Orr's final parting shot for the Peters view of the world came in answer to a question about whether he was concerned about the risks of a nuclear conflagration in North Asia caused by Donald Trump.

"We might be able to solve two of those things because Winston is going to North Korea..." he said, referring to speculation Peters might be called on to act as independent intermediary in talks between America and North Korea.

Here's the prepared remarks for the speech, but Orr went well (and entertainingly) off piste in the speech itself.

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