Brian Fallow: NZ economy faces a long, slow trudge

Small and medium firms continue to find it hard going as consumer spending power is limited by weak income growth. Photo / APN

The first time I visited Paris, in my distant youth, a French guy approached me and asked if I was English.

I told him I was a New Zealander. He shrugged.

"Better than nothing," he said and moved on.

Better than nothing is the general tone of the recent economic data. It presents a picture of an economy moving forward, but in a trudging, footsore sort of way.

There are encouraging, if still early, signs of the long-sought rebalancing of the economy, with growth led by sectors which earn the country's living in the wider world rather than those reliant on debt-fuelled consumption which dominated the last boom.

Export commodity prices last month hit record highs in the 24-year history of the ANZ commodity price index in both world price and New Zealand dollar terms.

Consensus forecasts for growth among the country's main trading partners average 3.5 per cent this year, and the same next year, with strength in emerging Asia and Australia offsetting weakness elsewhere.

Manufacturers' responses to NZIER's quarterly survey of business opinion, released on Tuesday, indicated exports are compensating for weakness in domestic demand. A favourable exchange rate with Australia, the biggest export market for New Zealand manufactured goods, obviously helps, even if overall the dollar is overvalued - by between 10 and 25 per cent, the International Monetary Fund reckons.

A better performance by the export sector may also help explain why the NZIER survey found large firms are doing relatively well while small and medium ones are still finding the going tough, as exporting is heavily concentrated in larger enterprise.

Indeed all of this would be better news if the export sector represented a larger proportion of the economy than it does.

As it is, the vast inward-facing majority of firms still face an uphill struggle as consumer spending power is limited by weak income growth and the need to deal with the legacy of debt from the boom years.

The economy started the year with 168,000 people officially unemployed - the most for 16 years - and even more jobless.

And if you look at businesses' hiring intentions it is a case of promises, promises. In the NZIER's last three quarterly surveys as many firms have said they expect to increase staff numbers over the coming three months as said they expect to reduce them.

But if you look at what they report doing three months later it has been to shed workers and by a considerable margin (a net 15 per cent in the latest survey).

The reported difficulty of finding the people they need when they do hire is gradually rising but still low by historical standards.

Clearly this is not an environment in which wages and salaries are going to race ahead.

Meanwhile, ACC levies have just gone up and from July 1 the emissions trading scheme will start to increase power bills and prices at the pump, over and above the increases the electricity and oil markets are already delivering.

The Reserve Bank says it will start raising the official cash rate from its historic low of 2.5 per cent "around the middle" of the year. Mortgage borrowers will feel the effects more quickly than in the recent past, as they have migrated to floating and shorter-term fixed rate loans.

As for the the tax changes in next month's Budget, the Government has said most taxpayers will be better off. But the whole package has to be revenue neutral so quite a few Peters will have to be robbed to pay all those Pauls, unless they turn out to be hardly any better off.

Part of the rationale for shifting the tax mix from taxing incomes to taxing consumption is to encourage households collectively to spend less and save more of their incomes. At the same time credit data the Reserve Bank collects show an economy intent on "deleveraging" or cutting debt.

Private sector credit to residents in February, at $281 billion, was unchanged on a year earlier. Compare that with the previous year when it grew 6.1 per cent and the year before that when it grew 13.6 per cent.

Over the year ended February consumer credit shrank 4 per cent, and business borrowing by nearly 8 per cent.

During the boom years in the middle of the last decade consumer spending outstripped income growth as homeowners cashed in on surging house prices and withdrew housing equity.

That has gone into reverse and people are injecting equity into their homes. Indeed ANZ's economists estimate that people are doing that at a record pace and have injected close to $7 billion into housing equity over the past two years.

They take comfort from that and from weak credit growth inasmuch as those things restore some health to the national balance sheet and enable a more durable upswing. But it comes at the cost of weaker growth in the near term.

Little wonder, then, that a substantial plurality of retailers in the latest NZIER survey report falling sales over the past three months and fewer expect the next three months to be better than was the case in the December or September surveys. Realism, it seems, has replaced relief at disaster averted.

The anecdotal evidence, in the form of the Treasury's summary of its pre-Budget discussions with businesses, tells a similar story.

Retailers told officials of tough trading conditions, with sales in December and January generally down on the same time a year ago. Spending on discretionary things such as restaurant meals, furniture and consumer electronics were hardest hit.

They expect sales to remain flat in the short term but pick up in the second half of the year.

Another big part of the domestic economy, the construction sector, is picking up but from a depressed base.

Builders in the NZIER survey report a rise in new orders and a fall in labour shedding, but profit margins remain under a lot of pressure.

Treasury officials' talks with firms in the sector left them with the impression that residential construction has begun to expand again and that government infrastructure spending is helping.

But several complained that the Super City project in Auckland had disrupted the supply of council work there, while commercial and retail developments are fewer and further between because of a lack of finance, low rents and rising vacancy levels.

Perhaps the starkest indicator of how soft domestic conditions have got is the tax data.

The most recent figures show PAYE revenue for the first seven months of the fiscal year running nearly 6 per cent down on the same period the year before. For the self-employed it was even worse, down 20 per cent, while GST was up less than 2 per cent on a year earlier.