Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Economic indicators that drive voters

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Many conditions that shape sentiment similar to 2005 election, when another government fought for a third term

House price inflation was much higher nine years ago. Picture / APN
House price inflation was much higher nine years ago. Picture / APN

As the general election approaches political opinion polls are coming thick and fast.

Pundits are busy divining the auguries they contain.

But there is another source of information about how people are feeling in the routine surveys of consumer sentiment.

They ask people such questions as: Are you better or worse off financially than you were a year ago? Do you expect to be better or worse off in a year's time?

Both the Westpac McDermott Miller survey and the ANZ Roy Morgan survey are recording levels of consumer confidence similar to those prevailing in 2005 and rarely seen since.

And 2005 is an interesting year to compare current economic conditions with, in that it was in the middle of the mid-2000s boom and the government of the day was seeking a third term.

So it might be instructive to look at some of the cyclical factors that have a bearing on household/voter sentiment: the state of the labour market, the housing market and (for rural areas) export commodity markets.

Last week's household labour force survey reported a drop in the unemployment rate to a five-year low of 5.6 per cent.

However, the decline from 5.9 per cent in March was largely driven by a drop in the labour force participation rate.

The economy added 10,000 more jobs over the June quarter but that was a slowdown from more than 20,000 in each of the three previous quarters. And when Canterbury is taken out of the national figures there was no net increase in employment.

It is one of several indicators that the pace of economic expansion has slowed from around 1 per cent a quarter over the second half of 2013 and the first three months of this year to something more sustainable.

Nine years ago, by contrast, the unemployment rate was just 3.7 per cent. That implies the labour market was more of a seller's (worker's) market than it is now.

But the employment rate - the proportion of the working age population (those aged 15 or older) who are employed - was virtually identical at 65 per cent.

Households' collective labour market income grew 6.3 per cent in the year to June, reflecting the combined effect of employment and wage growth. Nine years ago the comparable figure was 5.7 per cent.

The average wage rose 2.5 per cent in the year to June, or 0.9 per cent in real terms after adjusting for consumer price inflation of 1.6 per cent.

That compares with a rise of 3.5 per cent nine years ago but inflation was running at 2.8 per cent then, so real wage growth was marginally slower than now at 0.7 per cent.

However, the consumers price index does not include changes in the prices of existing houses or interest rates, both of which have been climbing.

House price inflation - 7.6 per cent over the past year on Quotable Value's nationwide measure - is not much more than half what it was nine years ago.

Households in 2005 were piling up mortgage debt at an annual rate of more than 15 per cent, nearly three times the rate prevailing now.

And interest rates were higher then, with floating mortgage rates at nearly 9 per cent versus around 6.3 per cent now.

A key difference between 2005 and now is that, so far at least, we are not seeing much of the wealth effect.

That is where homeowners react to evidence they are so many tens of thousand of dollars richer than a year ago in terms of housing equity by going out and spending a few cents in the dollar of that increased wealth, even if they have to borrow to do so.

The borrow-and-spend binge of the mid-2000s and its spillover into inflation saw the Reserve Bank push the official cash rate to an eye-watering 8.25 per cent by mid-2007 and tipped the economy into a homegrown recession by March 2008 - six months before the global financial crisis hit - doing a lot of collateral damage via the exchange rate to the export sector in the process.

This time round household debt and consumer spending are growing in line with incomes, or a bit less, which augurs well for the longevity of this upswing and implies interest rates will not have to rise anything like as far in this cycle.

However, while the housing market has cooled and house price inflation is moderating, some of that is involuntary, the result of Reserve Bank curbs on low-deposit home loans which it has indicated it might start to ease by the end of the year.

And the demand side of the market is being stoked by strong net immigration flows. Westpac economists expect annual net inflows to reach just below 50,000 people by early next year - or more than 1 per cent of the population - exceeding the peak in the early 2000s boom.

So there are risks that house price inflation will take off again, especially in Auckland.

In the meantime, though, the number of voters who own property and are benefiting from rising prices must exceed those who are struggling to get on the ladder and face an ever-receding target as a result of house price inflation and loan-to-value restrictions.

Meanwhile, in provincial centres, especially in regions where dairying and forestry are important, the steep declines in export prices for dairy and forest products are likely to be weighing on confidence.

But only up to a point. Cyclical swings in export markets are not a scary new phenomenon and we are talking about declines from levels that delivered the most favourable terms of trade for more than 40 years. It was unrealistic to expect that to last forever.

Again comparisons with 2005 provide some context.

The ANZ commodity price index is still 70 per cent higher than it was nine years ago in world price terms.

The exchange rate is higher too, but in New Zealand dollar terms commodity prices are 31 per cent higher than in mid-2005, or about 6 per cent higher in real terms.

There is a kind of bungy cord which should limit the extent of further falls in dairy and forest product prices, where the market is dominated by Chinese demand. Growth in New Zealand's largest trading partner is expected to pick up over the rest of this year.

And consensus forecasts for our trading partners generally for this year and even more next year is for stronger growth than we have seen since 2010.

Clearly there are differences as well as similarities between now and 2005.

The most important is the cold dark shadow still cast over Christchurch by the earthquakes. How the good people of that city rate the Government's handling of the recovery will no doubt have a bearing on voter sentiment there.

That aside, when we compare the economic backdrop to this election to the last time a government was seeking a third term amidst relatively good cyclical times, what do we have?

A labour market providing jobs for a similar proportion of the working age population and delivering similar real wage growth despite a higher unemployment rate.

A housing market where prices are rising but not at the runaway pace seen then, with a much weaker wealth effect on spending and less risk of a hard landing down the track.

And export markets delivering commodity prices which in real terms are pretty much where they were back then.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

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