Former Economics Editor of the NZ Herald

Ripsnorter or a bit better - take your pick

Damage from the Canterbury earthquake has hindered economic recovery. Photo / Mark Mitchell.
Damage from the Canterbury earthquake has hindered economic recovery. Photo / Mark Mitchell.

Chances are 2011 will be a better year for the economy than 2010, economists say.

It is not a very high hurdle.

Just before Christmas the statisticians confirmed what many businesses suspected, that the economy had not grown at all over the middle six months of the year. In per capita terms activity is still about 4.5 per cent below where it was three years ago.

And that is despite the support of high export commodity prices, low interest rates and the Government borrowing hand over fist.

But looking forward there are some grounds for cautious optimism.

World prices for New Zealand's export commodities are at a record high and even in New Zealand dollar terms are only slightly off their all-time high last May.

Export prices have risen 24 per cent over the past year and are 72 per cent above their cyclical lows last year.

Offsetting that are the continuing risk of drought, the impact of vicious late winter snowstorms in the south, Psa in kiwifruit districts and earthquake damage to rural infrastructure in Canterbury.

The flipside of strong commodity prices is a dollar uncomfortably strong for many manufacturers, especially those competing with imports, and the tourist sector.

The manufacturing sector has shrunk 15 per cent from its pre-recession peak three years ago.

But there are signs of a pick-up in business investment in plant and machinery. It rose 6.4 per cent in the September quarter, a period which also saw a rise of nearly 20 per cent in imports of capital goods.

Also positive is the pick-up in transport activity in the September GDP numbers and in the BNZ-Business New Zealand performance of services survey.

The construction sector, where activity is off 16 per cent from its peak three years ago, will benefit from rebuilding work in Canterbury.

Even the dismal housing market recorded an improvement in November with a pick-up in turnover (though only to levels 15 per cent down on a year ago) and prices (to levels 3.5 per cent down on a year ago).

The net inflow of migrants, which had dwindled to almost nothing by the middle of the year, has recovered since then although it is still running at below-par rates.

And the tourism sector will benefit from the Rugby World Cup.

The labour market seems to have turned the corner, employment growing 1.8 per cent in the year to September, enough to pull the unemployment rate down to 6.4 per cent from its peak of 7.1 per cent a year ago.

Firms' hiring intentions have rebounded and online job advertisements rose 2.6 per cent in the three months to November.

"A pick-up in investment and employment would go a long way to broaden and strengthen the economic recovery," says ANZ chief economist Cameron Bagrie.

"But whether the observed good intentions will actually be followed through on remains to be seen. Profitability is still under pressure, and false starts are quite possible, such as we saw in 2001-02. We suspect investment will remain weak for the next six months before picking up mid-2011."

Bagrie says 2011 looks likely to be a reasonable year on the whole but one with the growth back-loaded to the second half of the year.

"It won't feel like party time - not off such a weak base, and not when the growth is all in earning, not spending."

That rebalancing of the economy, away from spending on consumption and housing towards earning a living as a trading nation, is increasingly seen not just as desirable but imperative.

When the country's external accounts were released just before Christmas we were reminded of how much the debt-fuelled binge of the last decade was funded by imported credit and of the billions of dollars we need to borrow from the rest of the world every year just to pay the interest on our accumulated foreign debt.

New Zealand's foreign debt levels are high by international standards. Credit rating agency Standard & Poor's by putting the country on notice of a possible downgrade is in effect asking the Government: "What's the plan to get on top of this?"

Household debt, which had doubled in the five years to the end of 2007, has risen just 5 per cent over the last two years, in line with wage and salary earners' collective gross earnings. In real per capita terms it has not increased at all.

The question that has economic forecasters and policymakers scratching their heads is to what extent this newfound prudence is a transitory, cyclical thing that will reduce as memories of the fright engendered by the global financial crisis fade or represents an enduring shift in behaviour. Prime Minister John Key has indicated that increasing national savings will be the main focus on the May Budget.

Westpac chief economist Brendan O'Donovan says most methods of increasing savings don't work, at a national level.

"The one area where you have a chance of making it work is getting on top of government savings. That also goes down pretty well with investors and ratings agencies," he said. The Government getting its own books in order was where you got the most traction.

"Is it going to happen in 2011? No, because the Government has given a firm commitment that the sacred elephants are not going to be touched in the first term. It's a long list of things that need to be addressed: asset sales, Working for Families, student loans, age of entitlement for super, ACC. That is unfortunate but it is a political reality."

The Reserve Bank and Treasury have pointedly and publicly reminded the Government that when it comes to withdrawing stimulus the more that is done through the Budget the lower interest rates will be, and with any luck the dollar.

"[Governor] Alan Bollard is firmly in the camp that he wants to give growth a chance. He is assuming that commodity prices will drop quite markedly. We disagree but only time will tell," O'Donovan said.

"He is assuming inflation expectations will be dropping even as headline inflation spikes towards 5 per cent. We find that unlikely. But even if it doesn't, he has said he is not going to respond unless he sees it showing up in wage inflation."

The Reserve Bank is also assuming a step-up in household savings behaviour over the next year, O'Donovan says. It is forecasting 2.5 per cent employment growth but only 0.5 per cent real consumption growth.

However, O'Donovan expects that after years of restraint consumers are going to treat themselves a little bit, but only to the extent that consumption growth is in line with income growth.

"With all of these factors it is going to take a long time to see who is right and who is wrong. In the meantime what the Reserve Bank says goes."

Westpac thinks it will be September before the bank raises the official cash rate again.

Bagrie says the spirit of ANZ's forecasts is hard graft and payback.

"Overall, growth is going to be unspectacular yet again in 2011 as we continue to get our house in order," he said.

"There is a real risk the forecast rebound in growth from mid-2011 could be still further delayed. New Zealand is not out of the woods yet, and confidence is fragile. Another negative shock could yet send us into a double-dip recession."

O'Donovan is far more upbeat: "Personally I think New Zealand could have a ripsnorter of a year and I think we could be on the cusp of a golden decade in terms of economic prosperity.

"I know that is extremely unfashionable. We only seem to be happy when we are miserable."

- NZ Herald

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