An expert’s forecast for the global economy and what it might mean for NZ

“We have just had a week where a decade happened,” Dr David Skilling said to me just after Russia launched its attack on Ukraine.

Dr Dave is a fascinating, clever man. We went to school together before he went on to Harvard University with a Masters and PhD in Economics. Today, he lives in the Netherlands where he works as an economist and policy advisor to governments, firms and financial institutions in Australia, NZ, Europe, The Middle East and Asia. In the same way that I look at P&Ls and can read a culture to then give advice to a business on how they might perform better, Dave analyses global events, trends and a country’s “portfolio” and then shares advice on how they might perform better.

Last week we were lucky enough to have an hour of Dave’s time for a Zoom call with Business Changing clients and it was crazy insightful. Of course, there’s only so much we can share publicly from this call but below is a brief overview of some interesting insights and what it might mean for the global economy and your business. (Sign up to David’s newsletter here to receive his weekly commentary: https://davidskilling.substack.com/)…

ON RUSSIA AND UKRAINE

This is a mess and it will be for a long time. It’s almost certain that the world has completely changed and we’ll start to refer to “Before Ukraine” and “After Ukraine”. This war and how it’s being fought will profoundly shape the global economy.

This is the first world economic war. There is a military dimension, of course, but how we’re really seeing the fight is through the western world coming together and standing up against a very real threat through asset freezes, country sanctions, sanctions on individual oligarchs, and major companies like McDonalds, Goldman Sachs, Starbucks, Visa and Mastercard withdrawing business from Russia. Economic measures are the new tool of fighting war. Of course, this means there will be global implications.

WHAT IT MEANS FOR THE WORLD

Countries are having to pick sides: Russia or the Western alliance on behalf of Ukraine. This will lead to a more fragmented global economy. This is a structural break in the global system and I see a degree of permanence with this. We will be operating in a very different environment going forward.

By standing up to Russia and taking them (the 11th largest economy in the world) out of global circulation will have a major effect on economic costs around the world. Everything from wheat, fertiliser, energy prices and fuel prices will go super-high. The world will see commodity flows and supply chains disrupted.

There will be no overnight resolution — having countries draw a line in the sand on who they support is something we’ll see this continue past the end of the Russia/Ukraine takeover. Many companies will be reluctant to return rapidly to the Russian market due to stakeholder pressure.

What we’re experiencing right now is most similar to the 1970s – oil price shock, geo-political shock, high inflation, low growth… We will look back at the pre-Ukraine period as being the golden years.

The sanctions will possibly broaden in scope and could possibly include China in the future, which is close to home for NZ because our growth model has been selling to China: milk, meat, forestry, tourism. This is what helped us through the GFC and Covid – exports to China actually went up during Covid.

WEATHERING THE STORM

A country’s ability to perform is down to much the same as a business: demonstrating the ability to be world class (creating exceptional goods other countries/people want to buy from us), working to their strengths, and having a good management and leadership team who can make quality decisions and change course when they need to.

For NZ, we’re world class in terms of tourism, agriculture and our knowledge-based sector like tech. Red meat, dairy, and international tourism keep the foreign exchange rolling in – however, at the moment, all are deeply challenged – by new development of “meat alternatives”, by Covid and closed borders (China will have closed borders for at least a year), and customer demand for lower emissions.

BUSINESS SHIFTS FROM COVID

Internationally, we’re seeing a much better use of technology – during lockdown there was a rapid rotation to digital and ecommerce. And from that, innovating business models to adapt to this new way including AI and automation. There has been a huge and fast investment in this for businesses post Covid. If you’re not there yet, you need to be.

We’re also seeing substitution of labour for capital – businesses investing in tech and physical capital to combat rising wage costs and to substitute for workers who are away sick, working from home, talent shortages and people leaving NZ to chase higher salaries.

WHAT ALL THIS MEANS FOR NZ BUSINESSES

For NZ businesses, the future will include:

• Higher prices. Inflation will be higher and we’ll have higher interest rates as a consequence of that (but not as high as you might imagine due to our debt and ability to pay it back). We’ll experience higher input costs and higher wage growth as we try to keep workers here rather than them heading overseas to more tempting salaries.
• Supply chain disruptions and the implications of these. It’s important to figure out where your supply chain exposures are.
• To have any chance of competing on the global market, NZ businesses need focus on how they use technology in terms of going digital, doing ecommerce well, and including AI and automation.
• NZ businesses really need to figure out how to attract and retain staff – it’s hugely competitive in a very tight market right now and this will only deepen as borders open. We will possibly experience negative flow as more Kiwis leave NZ for delayed OEs and better pay packets than we gain in terms of skilled labour coming to NZ. This will have a drag on our economy.
• Now’s the time to find new growth markets, such as the UK and US. It’s a good reminder to not have all our eggs in one basket when it comes to the countries we trade with.