insulated from the global financial crisis, affected by deflating asset prices. domestic demand could slow, asian countries turn protectionist, and current account surpluses rise. a material slowing in chinese growth appears a likely scenario. after recent extended efforts to moderate this economy, policymakers might need to apply the brakes in response to rising consumer prices. this could be very disruptive, risking loan defaults, poor bank balance sheets, capital controls, exchange rate tensions, import protection and a regional slowdown. one effect would be to hit industrial commodity prices. a disruption of this magnitude would have another undesirable effect : knocking australia ’ s terms of trade, and exposing rising imbalances in that country. new zealand would lose the advantage of the china / australia growth locomotive that has helped drive our own export demand over the last twelve months. in such a situation, some of the shock would likely be offset by a lower new zealand dollar, though this would have to be balanced against higher imported inflation. 4. the commodity boom intensifies one possibility for 2011 is that the commodity boom could intensify, surprising us with stronger export prices for primary exporters, continuing the theme in 2010. with a strong dollar hurting manufacturing exporters, so far the boom has been widespread across most commodities. this includes hard commodities, like the coal, copper and iron ore used to help bis central bankers ’ speeches fuel china ’ s growing economy, and also soft commodities like dairy, meat and fish, as food demand grows throughout the asian region. over the long term, the infrastructure construction in china is likely to sustain high prices for hard commodities, while rising demand by emerging middle classes in asia suggests increased demand for protein and soft commodities. moreover, as the global economy settles into a new post - crisis order, many long held structural supply chain relationships are changing, often exacerbated by weather - related shocks. in the last year we have seen the effects of ukrainian drought, russian log taxes, us oil spillages, chilean earthquakes, and brazilian and queensland floods on primary production and prices. la nina weather conditions could suggest more volatility ahead. new zealand farmers are still recovering from the last commodity boom when some overcommitted, and are still looking to reduce the debt they built up. a more measured reaction this time is important. new zealand stands well placed to benefit from some of these changes through 2011. as oil prices rise, western governments encourage bio - fuel conversion which exacerba

. more european countries are feeling the heat. managed sovereign defaults could still occur, and these could impact the banking systems of core european countries. investors continue to re - evaluate the price of sovereign debt in the euro area. moreover the countries that have implemented austerity plans could find the terrain rougher and the recovery harder than first thought. this would imply more spill - over to the wider euro area economy. some eastern european economies on the periphery could suffer, and countries outside the euro area might not be immune. renewed fragility in funding markets could have other effects. slow growth and high debt in japan, together with its skewed demographic profile, could worry volatile markets, and other western countries would not be immune from this. a scenario of renewed capital market fragility would also make life much tougher for australian and new zealand banks, and that would be extremely damaging to our economic recovery. 3. emerging markets out - perform and bubbles burst one feature of the post - crisis world has been the ability of emerging markets, characterized by the brics grouping of brazil, russia, india and china, to recover rapidly from the massive fall in global demand during the recession. this suggests that these countries now contain many of the institutional features, some put in place in the asian region as a result of the asian crisis, that will foster growth and provide more resilience to shocks that may hit the global economy across 2011 and beyond. this group of countries has managed to finally attain their place at the world table as the new g - 20 order is hammered out. this change in the underlying geopolitik will be complex and not just occur over 2011, but during the next decade. but in the short - run strength in the brics is underpinning the global recovery and this could intensify further. if this happens, it will boost new zealand ’ s trading prospects. at the same time there is a real risk of overheating. much of the strong growth in china was driven by the extension of credit through the latter part of the crisis. this helped china to post double digit growth rates for most of the past year. but now there are general signs of over - heating through asian economies, risking asset bubbles : chinese asset prices, hong kong and singaporean property, capital inflows into other east asian economies, inflation in india, and house prices in australia. a worse scenario for new zealand would see the asian banks, which until now largely have been