When ANZ Bank chief economist Cameron Bagrie spoke to Tauranga City Councillors three years ago, he left them curled up under their desks in foetal positions, says Mayor Stuart Crosby.

He had a similar effect this week when he gave his views on what lies ahead for the world and New Zealand economies.

The dire outlook includes a universal fall in living standards as a result of the resetting process the world is still undergoing following the 2008 global financial crisis.

The only option facing many countries is whether the resetting will be ‘orderly' or ‘disorderly'.

'One of the reasons you are seeing a lot of angst globally is one of the determining factors between whether we go through this adjustment in an orderly fashion or a disorderly fashion is going to come down to political leadership,” says Cameron.

'There are no easy choices for those politicians in Europe. Living standards have to adjust downwards.

'The only uncertainty at the moment is whether we need to see an economic ‘accident' before we get the political will to make the necessary hard decisions.”

The brutal reality of New Zealand's situation is the national balance sheet is very weak, and the country is vulnerable to turns in global sentiment.

On the bright side, New Zealand is far better placed to weather the predicted economic winter than the European countries.

'In 40 years, I do not think New Zealand has been as well placed strategically as it is here and now,” says Cameron.

'What we are seeing is a shift in the balance of power globally towards Asia, and they want what we produce.”

New Zealand prices for soft commodities have eased over the past three or four months. The normal pattern when the global economy is fragile is for commodity prices to fall pretty sharply.

We have seen falls to date that have been modest. Part of the reason is there is a shortage on the global market of what New Zealand produces.

This is built around the continual emergence of the middle classes in Asia and demand for protein.

'More technically, it is a demand for fat in terms of the product people want, but there is a shortage of the goods New Zealand produces in the global market.”

Hard commodity prices are down about 30 per cent, one of the reasons why the Reserve Bank of Australia put up interest rates twice in the last couple of months.

New Zealand is steadily becoming more closely aligned with Asia.

New Zealand now has free trade agreements in place with 29 per cent of the global population and has under negotiation agreements with another 27 per cent.

In five to 10 years there could be free trade agreements in place with 56 per cent of the world's population.

'I know of no other country around the globe that is anywhere near even close to that,” says Cameron.

He's comparing what's happening in Europe with the significant state spending cuts introduced in Ruth Richardson's ‘Mother of All Budgets' in 1990.

'New Zealand was in a lot of economic trouble. We had received a couple of credit down grades and Jim Bolger's government needed to act,” says Cameron.

'That involved a very austere fiscal package and it created a lot of angst across New Zealand society.

'At that point New Zealand had net government debt of 60 per cent of GDP.

'There are countries here and now across Europe with debt in excess of 100 per cent of GDP.

'What they are facing politically is going to make what New Zealand went through in 1990 look like a walk in the park.

'The challenge, the issue, is how do you deliver or maintain a political mandate to go through with the necessary fiscal austerity because markets need confidence, they need credibility on behalf of the leaders.

'If the leaders do not have the confidence of the market, your debt borrowing costs go up.

'If debt borrowing costs go up you very quickly get into the debt spiral.

'What we are seeing at the moment is a lot of tension round the globe in terms of leaders knowing they have to act, but delivering certainty and gathering that political mandate to forge ahead is proving pretty difficult. Fiscal austerity is not without challenges.”

Running a country is no different to running a business, says Cameron.

If you are on the receivership borderline, once you start cutting costs and you start to see the revenue line keel over, one can very quickly get into the spiral.

A country or a business can work its way out of a jam if they can drive the revenue line, reallocate resources and get some serviceability.

The easiest way to get growth in an economy is to fire up the property market – which will not happen this time.

'That would involve borrowing and spending our way out of a debt-fuelled consumption jam. It doesn't pass the smell test.”

A successful country like a successful business, has to have something that is different, something respected and acknowledged by the market.

'That can be a brand, a product, a service, but you need to have a twist in terms of your offering,” says Cameron.

'If you don't have the twist and someone else has, odds are you will be eaten alive, because you will lose market share.

'Markets are looking for differentiation, and for leadership. If they don't see that they are not prepared to stump up the money to finance a country's debt. It's that simple.

'New Zealand received credit downgrade a month or two ago,” says Cameron. 'Receiving a one notch down grade is completely okay.

'There are countries out there right now that are receiving two to three notch country downgrades and they remain on a negative outlook.

'Demonstrating you have got a clear credible fiscal plan is a key part of maintaining the confidence of markets.”

New Zealand is fundamentally very well placed strategically, but you do not go from structural headwinds to unlocking strategic opportunities overnight.

'It takes time for capital to reallocate,” says Cameron.

'People do not respond overnight to different opportunities.

At the moment in New Zealand we are overweight as a nation in consumption investment, residential, retailing.

'We are overweight with feel good stuff.

'We are underweight in earning and making a dollar.

'Physically remobilising not just capital but labour is going to take a little bit of time. 'Five to 10 years out New Zealand needs to be getting a lot more growth from exports income generation.

'This is not just about identifying opportunities this is about getting the capacity to support those opportunities.

'Right now across New Zealand we have a massive shortage of engineers and trades people, IT specialists.

'If we make a change to the education system today, it is going to give us a different mix of supply side outputs in five years time.

'So there's no quick fix.”

There is going to be much volatility and part of the reason is that markets are not just trading economics. Markets are trading politics.

'And there are 27 countries up in the EU. Trying to get agreement across 27 countries is problematic and we saw that in the weekend.

'Unfortunately there is more downside risk than up.

'History will tell us that it typically takes an economic accident before you get the political mandate to bring in the necessary changes.

'Certainly Europe is going into recession, and it's going to be a decent one.

'America doesn't look that flash. Locally, confidence is holding at okay. It's scratchy, but people just seem to be getting on with business.

'One of the reasons I think New Zealand is holding at okay in the confidence stakes is because in 2009/10 we took the ‘bite the bullet' route as opposed to reaching for the sugar pill.

'New Zealand got back to basics and started to pay down some debt, so our net external debt went from 85 to 70 per cent of GDP.

'The household savings rate for every $1 we earned we used to spend $1.10.

'As of Thursday I think that ratio is going to be flat.

'That's called economic success. It's not called economic success if you are involved in retail or housing, because those sectors have borne the brunt of that structural adjustment.

'But it's not until the household balance sheet changes further, and I expected it to get to 5-10 per cent of income, that we will give the all clear in terms of where we are going.

'Europe, the US did not face up to reality in 2009/10 and now the sugar pill's gone, there's none left. They are facing the hard decisions.”

New Zealand has a net external debt of 70 per cent of GDP, a level Cameron says is appalling – and the country's key vulnerability in a world where the savers have the upper paw.

'At the moment financial markets are closed.

'No-one is prepared to lend money globally. That is not a concern in New Zealand at the moment because banks have got a lot more term funding on our books.

'We've got a lot more long dated deposits. In the last 12 months deposits have been coming in the door and there hasn't been a lot of lending. So technically we do not need to borrow globally for quite a while yet. We are in a nice position. That said, I would not like to see financial markets remain as dislocated as they are now in the second quarter of next year.”

Gradually the DNA of New Zealand society is changing from the decades long habit of borrow and spend to one of saving and getting back to basics.

'There's always going to be pockets of society that won't want to change, there's always going to be parts of the rural sector that still think farming is about capital gain,” says Cameron. 'Thankfully that group is now in the minority.”

'But what we are getting is an evolutionary process for New Zealand, not revolutionary a slow journey.

'One of the things I think is happening is recognising we are all linked in this together. The more responsibility we can take for the five year picture as opposed to the one year picture, the smoother that journey is going to be.”

In line with the changing spirit of the times the ANZ Bank is aggressively driving the Asian connectivity agenda and sharing costs with customers.

'What we are doing is joint trips to Asia pay their airfare, and we pick up the on the ground costs,” says Cameron.

'That is where I think New Zealand is headed, and we are making a lot of progress.

'You do not want to be in an environment where there is angst and self interest dominating.

'One of the reasons we are seeing the global prices escalating is because self interest in Europe is dominating the wider group interest, and unfortunately we are not going to see that come to a conclusion until we see the economic accident.”