The good news is, we're favourably out of sync

In the face of international terrorism and a global recession New Zealand's economy is doing well, writes BRIAN FALLOW.

It has been a year in which the New Zealand economy remained, as Don Brash put it in March, "favourably out of sync" with the rest of the world.

In the face of global recession, the economy expanded at what is generally taken to be its sustainable rate of between 2.5 and three per cent.

The unemployment rate is the lowest it has been for 13 years, lower than that of the United States or Japan.

Monetary conditions are stimulatory. After five cuts by the Reserve Bank interest rates are low enough to provide no drag on growth, and the dollar remains in that highly competitive neighbourhood where it was at the start of the year.

Business and consumer confidence are back to where they were before the September 11 attacks on the United State.s

The annual total of immigrants has exceeded emigrants since October, the first net inflow for three years.

Trade surpluses have pushed the balance of payments, measured against the size of the economy, to the smallest deficit for seven years.

Inflation, after being at or above the top of the Reserve Bank's target range for a year, is falling.

Altogether, not a bad report card for a year in which the world had to contend with the "tech wreck" in the US and then the aftershocks of September 11.

The consensus among economic forecasters is that economic growth in New Zealand's trading partners slowed to 1.3 per cent this year, compared with 4.2 per cent last year and 3.9 per cent the year before.

Next year is not expected to be much better, at 1.8 per cent.

Despite the focus on the new economy, typified by the Knowledge Wave conference, it's been a year in which New Zealand felt the warmth of good times from the old pastoral economy, first in the regions then in the main centres.

Export volumes grew 5.5 per cent in the September year, helped by a 3.7 per cent growth in agricultural products, aided by good growing conditions.

The terms of trade, which measure the quantity of imports a fixed basket of New Zealand's exports can pay for, strengthened 6.1 per cent in the same period, as export prices held up while import prices, especially oil, fell.

But commodity prices, as measured by ANZ's world price index, peaked in in May and have fallen 8.5 per cent since. Most of that decline (6.4 per cent) was over the past two months.

The third factor buffering New Zealand from the global recession has been the weak dollar.

It ends the year where it began it, at the export-friendly level of 50 on the trade-weighted index.

But there are signs that the export sector is running out of puff.

Until September, annual export growth was running at double digit levels. By November, they were four per cent lower than a year earlier.

The September 11 attacks have had dire effects on world air travel and New Zealand's previously buoyant tourism industry has not been immune to this.

Tourist arrivals in November were 10 per cent down on November last year.

The drop was especially acute among the freer-spending Japanese and American visitors.

Directly and indirectly, tourism represents 10 per cent of our economy.

But encouragingly, the domestic sectors seem to be taking over from exports the leading role in propelling the economy.

Any setback to consumer confidence from the events of September 11 had been shaken off when the WestpacTrust-McDermott Miller survey sampled sentiment this month.

Significantly Auckland and Wellington, where nearly half the country's consumers are to be found, have overtaken provincial centres as the most optimistic regions.

Underpinning consumer confidence has been strong growth in jobs and wages, which combined to produce income growth of six per cent for the household sector in the year to June.

Almost 40,000 more jobs were added during the year to September, and earnings growth has been around 3.5 per cent.

Recent pay settlements seem to have remained in the three to four per cent range.

There are signs that the tightness of the labour market is starting to ease. ANZ's tally of job advertisements in newspapers has been falling since May, on a monthly and annual basis, and the fall is accelerating.

After two years of decline, the housing market revived this year, at least in terms of turnover and building consents.

Turnover in the real estate market last month was 35 per cent up on November last year and at levels not seen since early 1999.

The comparative buoyancy of the economy this year is a reminder of the importance of the primary sector.

In that context the year is notable for two potential long-term blows being narrowly averted.

In the Gulf city of Doha, trade ministers succeeded in doing what they could not do in Seattle two years ago and launched a new round of trade liberalisation negotiations.

A second failure would have called into question whether rules-based multilateral processes still had a role in international trade.

The value of the World Trade Organisation system to small nations such as New Zealand was brought home by a successful appeal against US protectionism on lamb.

The alternative, a law of the jungle environment would be an uncomfortable for small fry like us.

The WTO round provides the best, if not the only, prospect for progress on reducing barriers to agricultural trade, especially export subsidies.

European export subsidies on milk powders are depressing prices as the year ends.

A longer-term risk to the primary sector is man-made climate change.

Against the odds the Kyoto Protocol, an international agreement to set up structures to tackle that threat, survived the withdrawal of the largest emitter of greenhouse gases, the United States.

2001 – The year in review