NZ Economists Ignore U.S. Y2K Warnings

Economists in New Zealand are ignoring the year 2000 crisis in their predictions for the economy, despite dire warnings about a possible recession from the U.S.

A leading U.S. economist believes there is a 70 percent chance of a U.S.-led recession in the year 2000 caused by the Y2K problem.

"I can no longer say with any confidence that there is enough time to avoid a severe global Y2K recession," says Edward Yardeni, chief economist at Deutsche Bank Securities.

Yardeni, named top U.S. economic forecaster in 1997 by the Wall Street Journal, believes that the Y2K crisis, coupled with an economic downturn in the U.S. and the Asian economic crisis, adds up to a worldwide recession.

"The recession could be as severe as the 1973-74 global recession, which was caused by a disruption in the supply of oil... a disruption in the flow of information could be just as depressing for global economic activity," he said.

In New Zealand, however, economists are avoiding the issue of Y2K entirely.

Economists at both the ANZ and BNZ banks felt they could not comment on Y2K as it was so uncertain as to be beyond prediction and, while the ASB Bank does forecast at least a year ahead, it has yet to factor Y2K into its evaluations.

Alex Sundakov, director of the New Zealand Institute of Economic Research (NZIER), has been trying to research the issue but has had no luck securing funding.

"We've taken (the proposal) around the traps at government, but so far we haven't seen much interest," Sundakov said.

The NZIER has put together a framework on how to approach the issue -- treating Y2K like an earthquake seems to be the best approach.

The first step is assessing the potential damage it could cause.

"When an earthquake hits Wellington, you don't assume it's going to flatten all the houses. You think about the probability of damage," says Sundakov. After that comes the analysis of the economic impact itself.

"You have two things -- the negative effect of the destruction of wealth and the positive effect of the new output coming in to replace that wealth," Sundakov said.

The same could be said for the Y2K crisis, Sundakov believes. "If you have a system that becomes useless then its wealth is destroyed, but then demand is generated to fix it, which creates demand for new output, and so on."

Yardeni agrees. He believes there could be a huge capital spending boom in the years after 2000.

"Companies that are compliant and survive a few months of disruptions are going to be in a great position to buy out their competitors who are not compliant," he said.

Michael Draper, an analyst for PriceWaterhouseCoopers, has been studying the Y2K problem and says the situation is far more complex than economists have previously thought. "We estimate that 45 percent of systems need major work done and that two-thirds of companies are only at the analysis stage rather than actually fixing things," he said.

He explained that these two factors, combined with the lack of qualified IT staff, means many companies are going to be affected to some degree.

Draper believes many people aren't taking the issue seriously at a high enough level and tend to leave the problem to IT staff, when in fact it needs a lot of management attention.

"At the moment, there is nothing to coordinate on a regional or national basis, so the resources will go to those with the best cash flow, not necessarily those most important to the continuity of the economy," he said.

Draper finds the lack of leadership to be a major problem.

"Treasury is frustrating. They're saying we don't have enough evidence, therefore we won't do any analysis," he said.

New Zealand Treasury officials were unavailable for comment as Computerworld went to press.

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