English knows risk of low-grade growth

Bill English is keeping on his steady-as-it-goes course. Photo / Mark Mitchell

Falling export earnings will put pressure on the Budget even as the domestic economy keeps rolling.

With commodity prices falling, New Zealand's strong economic run is at risk of faltering. Lower export earnings should add urgency to this month's Budget for Finance Minister Bill English.

Despite what mortgage-holders might feel, it isn't good news that the next move for the official cash rate is likely to be down.

There is no doubt the domestic economy is still humming, especially in Auckland. The country is very much in the afterglow of a commodity boom.

But New Zealand is not big enough or self-sufficient enough to run for long on GDP growth driven by domestic consumption.

English understands the risks extremely well. In opposition, and right through National's first term, English made a point of highlighting the poor quality of GDP growth during the Labour-led economic boom that preceded the Global Financial Crisis.

The Finance Minister had a slide in his economic presentations which showed the point (around 2005) when nominal GDP growth decoupled from real production and export-driven growth.

The gap between the two lines on the chart represented an unsustainable mix of debt-fuelled consumer consumption and Government spending, he argued.

Now, as commodities come off again, National is at risk of taking New Zealand through the same cycle.

Some things are different this time. We have been cautious about borrowing after the GFC and interest rates are much lower.

Despite good growth, we haven't seen much sign of inflation.

Still, there are worrying signs. Business confidence is starting to dip even as consumer confidence is at decade-long highs.

Just as it did last decade, strong price growth, in Auckland and Christchurch particularly, is making home owners feel wealthier than they really are.

We are at risk of complacency about our economic fortunes.

At this stage there has been no indication English is about to veer from his steady course. But if we can't hit surplus this year, it is hard to see what about the next will get us there - unless action is taken on the spending side of the ledger.

New Zealand has not yet escaped its reliance on commodities. That a shortfall in national earnings from this latest price slump will flow through the economy in the months ahead is a certainty. It is a certainty that we shouldn't be ignoring, but as a nation we have become well practised at doing just that.