Financial markets and media organisations around the world, including here at home, were quick this week to seize on Fed chairman Ben Bernanke’s prognosis for a US-led recovery. At a Fed conference in Wyoming, Bernanke was bullish about the effect US Govt policy actions in recent months have had in helping stabilise a number of key financial markets, both in the US and abroad. He said short-term funding markets are functioning more normally, corporate bond issuance has been strong, and activity in some previously moribund securitisation markets has picked up. Stock prices have partially recovered, and US mortgage rates have declined markedly since the last American autumn.

Noteworthy Progress. Critically, fears of financial collapse have receded substantially, and after contracting sharply over the past year, economic activity appears to be levelling out, both in the US and abroad. Bernanke said the prospects for a return to growth in the near-term appear good. It was at this point many analysts and reporters appeared to stop reading the chairman’s speech, as if it would get in the way of a good story. Bernanke claimed this was noteworthy progress, although critical challenges remain. “Strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit. Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

NZ Still Under Threat. NZers tempted to see Bernanke’s remarks through rose-coloured spectacles should think again. While it is heartening to see powerhouse world economies like Germany and France recording positive growth, this is no excuse for complacency, especially in an isolated and vulnerable economy like NZ. As Bernanke has highlighted, there is cause for optimism. This needs to be tempered and leavened by realism about the pervasive and far-reaching effects of the recession of the past 18 months. There is an appropriate domestic focus here in both the public and private sectors about the need for smart innovation to complement the primary sector as a source of eventual growth. The importance of staying true to this strategy was underlined in an August 17 in Business Week magazine, which reported Brazil’s emergence alongside China and India as a major technological power. Given Brazil is also one of the world’s largest agricultural producers, NZ needs to monitor such developments and react accordingly.

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