Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Economic data will drive voters

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Home owners grow wealthier as first-time buyers chase dispiriting deposits and stress on low-income households rises

Prime Minister John Key. Photo / Greg Bowker
Prime Minister John Key. Photo / Greg Bowker

The National Party's pitch for a third term boils down to the slogan: Don't mess with success.

As it is five years now since the recession ended, it is fair to judge their economic stewardship by the current state of the indicators.

A lot of them are heading south.

The consensus is that we have probably seen the peak of the cycle in terms of quarterly growth rates.

That is no bad thing, however. Gross domestic product growth of 1 per cent or more a quarter, as we enjoyed between the June 2013 and March 2014 quarters, is more than the economy can handle on a sustained basis, given supply-side constraints like growth in the labour force and productivity.

The Treasury in its pre-election economic and fiscal update is forecasting quarterly growth to slow to an average 0.7 per cent next year, and between 0.5 and 0.6 per cent the year after.

Its forecasts for growth in private consumption, residential investment, business investment and export volumes all taper off from here over the next four years.

The terms of trade, a major boost to national income of late, has also almost certainly peaked.

The current account deficit is set to widen again. The Treasury is forecasting annual deficits of more than 6 per cent by March 2016 and subsequent years, which means the country's foreign debt will be growing faster than the economy which has to service it.

Employment growth is forecast to peak this year. The unemployment rate should decline, but only enough to deliver real wage growth of around 1 per cent a year over the next four years.

Interest rates are rising and fiscal policy is contractionary.

And all of that is predicated on the assumption that we will not be sideswiped by another shock from the other 99.8 per cent of the world economy at a time the level of geopolitical risk is higher than we have seen for a while.

So far, so not so good.

But when it comes to economic indicators, levels matter as well as growth rates and changes in growth rates.

If the rate of house price inflation declines, as the Treasury predicts, it will be a case of better late than never, given how high prices have gone relative to incomes.

If interest rates have risen since March, they are still in tailwind territory, a full percentage point on the stimulatory side of what the Reserve Bank reckons is neutral.

If the kiwi dollar has fallen nearly 4 per cent from its mid-July peak, it is still at altitude sickness levels for many in the tradables sector.

If the terms of trade declines, as every forecaster expects, it will be from a level last seen in 1973 and more than a third higher than its long-run average.

If employment growth has peaked, well, 82,000 more people have jobs than a year ago and the participation rate (the proportion of people 15 or over who are either employed or actively seeking work) at 68.9 per cent is just 0.3 percentage points off its all-time high.

So how people judge these indicators will depend on whether they focus on where we are or where we seem to be heading.

Then there is the rebuilding of Christchurch, estimated to cost $40 billion, give or take $5 billion.

It is a massive dose of demand, spread over a number of years. However it is the shape of that curve rather than the $40 billion area under it that affects GDP growth forecasts.

"Taking Reserve Bank estimates as a guideline, the likelihood is that the rebuild will peak at around 2 per cent of GDP in 2017," says ANZ chief economist Cameron Bagrie.

"But in terms of GDP growth and the battle for resources, it is the pick-up [change] in the rebuild spend each year that matters.

"The growth stimulus in terms of the incremental boost to growth is likely to be peaking about now, and will likely wane from this year. Assuming rebuild activity peaks in 2017, the growth impetus will turn negative from 2018."

That does not mean, he says, that the economy will fall into a hole when the stimulus of the rebuild wanes.

For one thing, while the need to rebuild our second largest city has been adding demand to the economy, the Government's determination to return to a Budget surplus has been working in the opposite direction. And the Treasury forecasts the "fiscal impulse" to be negative to the tune of 2.4 per cent of GDP over the next three years.

"As rebuild stimulus fades, so too will the impact of contractionary fiscal policy, according to Treasury estimates. The fiscal stance is still projected to be tight, but less restrictive than it has been," Bagrie says.

And that is without any potential political surrendering to the temptation of fiscal largesse as surpluses return.

There are a couple of other reasons not to worry about a post-rebuild slump. There is no shortage of building work that needs doing elsewhere, whether it is a shortage of housing in Auckland, seismic strengthening of commercial and public buildings or leaky buildings still awaiting remedy.

Secondly, just as the rebuild adds to inflation pressures and contributes to higher interest rate settings, the ebbing of that stimulus should have the opposite effect, all else equal.

Another thing to bear in mind when electioneering politicians brandish statistics at us is that averages can mask wide variations. If Bill Gates steps into a lift, the average net worth of the lift's occupants shoots up, but the others don't suddenly become multi-billionaires.

Take one indicator of poverty or financial stress: how much of a household's income goes on paying for the roof over their heads.

Over the five years from 2009 to 2013 inclusive the proportion of households spending more than 30 per cent of their income on housing held steady at 27 per cent.

But among the lowest fifth or quintile of households ranked by income it has climbed from 33 per cent in 2009 to 42 per cent last year. In the late 1980s it was just 16 per cent.

Just over one in four of the bottom-quintile households reported spending more than half their income on accommodation last year, up from one in five in the mid-2000s and higher than at any time since this statistical series began in 1988.

Their incomes, in short, have been rising more slowly than their housing costs.

And that is despite the fact rents have been rising relatively slowly, 2.2 per cent in the year ended June 2014 both nationwide and in Auckland according to the consumers price index. On average.

At the same time house prices rose 8 per cent nationwide and 12.3 per cent in Auckland, according to Quotable Value.

So we have a picture of home owners getting wealthier, would-be first home buyers chasing an increasingly dispiriting deposit target, and mounting housing stress among low-income households.

How many voters - actual not eligible - fall into each of those groups may explain a lot of the election's outcome.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

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