By BRIAN FALLOW
The year 2000 ends with many economic indicators looking strong - growth has resumed, the dollar has risen, the balance of payments has improved, unemployment is the lowest for 12 years and business and consumer confidence is resurgent.
The avalanche of pessimism that descended back in May seems a distant memory.
But economists warn that just as that collapse in confidence went way beyond what the situation warranted, there is a danger that too much is made of its recent resurgence.
Bank of New Zealand chief economist Tony Alexander said: "The jump in [consumer] confidence is a bit surprising given the 1.5 per cent fall in real wages over the past year and the 1.5 per cent fall in house prices.
"But it is likely consumers were breathing a massive pre-Christmas sigh of relief that the economy is not heading for oblivion after all."
Economists put more weight on what firms in business confidence surveys say about their own activity than what they say about the general business situation.
On that basis, the most recent National Bank surveys are consistent with an economy that is growing about 2.5 per cent now and is headed towards 3 per cent by the middle of next year - respectable but not rip-roaring figures.
Economists' average pick for growth in the year to March 2002 is 3.4 per cent, provided the United States manages a soft landing.
At the start of the year the economy was coming off a high.
In the second half of 1999 households were still feeling the warmth of interest rates at 30-year lows.
The export sector had perked up as world growth strengthened, the exchange rate declined and a good agricultural growing season succeeded two drought years.
One-off factors had also boosted demand, such as the America's Cup and businesses building up stocks as a precaution against Y2K bug disruptions.
The net effect was that the economy grew in the second half of last year at an annual rate of 9.5 per cent, far faster than it can sustain.
A slowdown from that heady pace was inevitable and expected.
In the space of six months the Reserve Bank pushed up interest rates 2 percentage points, reaching 6.5 per cent by May, a level that it considers broadly neutral, providing neither stimulus nor constraint.
The aim was to cool domestic demand while the export sector took over the task of propelling the economy.
But two shocks intervened to upset this neat scenario, or at least delayed it: oil prices soared and business confidence collapsed.
It has become conventional to dismiss the drop in confidence as business thumbing its collective nose at the Government for pressing ahead with policies it did not like: raising the top tax rate, renationalising ACC and repealing the Employment Contracts Act.
Undoubtedly those were relevant factors, but the collapse of sentiment also reflected the impact of an old-fashioned oil shock.
Higher fuel prices, driven by both the international price of crude and the weak exchange rate, left consumers with less to spend on other things, as well as raising businesses' costs and squeezing their profits.
By pushing up inflation they raised the risk of a damaging return to a wage-price spiral - or the Reserve Bank lifting interest rates to deter that.
Two other underlying factors also served to keep the domestic economy subdued: a reluctance on the part of households to take on more debt, and a net outflow of people.
A year ago household borrowing was increasing at an annual rate of around 10 per cent; that has slowed to 7.5 per cent.
Underpinning the very rapid economic growth of the mid-1990s was a big increase in the debt-to-income ratio of households.
Over the decade the ratio roughly doubled from a very conservative base to levels of about 100 per cent, which are more normal by OECD standards.
A central assumption in the Reserve Bank's thinking, and that of most private-sector forecasters, is that households have become and will remain reluctant to pile on debt with the same gusto as in the 1990s, especially with a soft housing market.
Which brings us to the other driver of mid-90s growth now absent - strong immigration.
Where New Zealand enjoyed an inflow of migrants for most of the 1990s, peaking at 30,000 in 1996, there has been a net outflow for the past couple of years of about 9000 a year.
The economy's salvation this year has been the export sector.
Conditions were about as good as they get for exporters. World growth was strong, commodity prices high and the currency at all-time lows.
Since May export revenues have been growing faster than imports on an annual basis, even with a doubled oil import bill.
In the three months ended November, export revenues were 28 per cent up on the same period last year.
Only half of that can be explained by a decline in the trade-weighted exchange rate over the same period.
Imports were 16 per cent higher.
Rural areas and the provincial towns felt the benefit first, but by the end of the year there were signs that the main centres were catching up and that both sides of the "two-speed economy" were converging again.
The National Bank's composite index of regional activity, which groups 34 indicators such as new vehicle registrations and building permits, was telling a story of urban areas catching up by the end of the year.
Activity in the three main centres was up 1.2 per cent in the December quarter, compared with 0.4 per cent in the rest of the country.
It was the first time all year that metropolitan areas outperformed the hinterland.
And the WestpacTrust/McDermott Miller consumer confidence survey recorded a strong rise in Auckland in the December quarter, making it the second-most optimist region after trailing in the confidence stakes for several quarters.
Herald Online features:
2000 - Year in Review
2000 - Month by month
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