More sputter from economy's engines

By Brian Fallow

Between the lines


Here are some reasons not to be alarmed by yesterday's unexpected news that the economy shrank 0.3 per cent in the June quarter:

* That was then, this is now. There are signs that the long-awaited export recovery is under way. Livestock was held back from the meat works in the June quarter to take advantage of good growing conditions, but their reprieve has since run out. The dairy season is off to a good start. World growth forecasts continue to improve.

* One quarter doth not a recession make. GDP also shrank in the March 1997 quarter only to rebound strongly in June. The quarterly figures are seasonally adjusted and that with all due respect to the statisticians is not an exact science.

* This is only Statistics New Zealand's first attempt at a figure. GDP numbers are notoriously revision-prone. March quarter growth, for example, has been revised up to 0.9 from 0.7 per cent.

The big unknown is how much yesterday's figures will affect the Reserve Bank's thinking about the timing of an interest rate rise. The bank had always expected the June quarter to be weaker, but not this weak.

It sets policy based on its estimate of the balance of supply and demand in the economy 18 months out.

If for the reasons above it sees the June out-turn as just a stumble on the path of recovery it could press ahead with a November rate rise, though perhaps a more modest one, regardless.

Yesterday's numbers were a salutary reminder of how lopsided the recovery from last year's recession has been.

The economy has been flying on one engine. And now, just as the export engine has begun to sputter into life, the domestic engine shows signs of running low on fuel.

Among the more sobering things in the data is that private consumption two-thirds of the economy was flat despite the stimulatory effects of last year's tax cuts and mortgage rates at historic lows.

Michael Cullen concludes that "the evidence of the last two years is that tax cuts give only a temporary stimulus, while putting more pressure on New Zealand's already fragile external accounts."

Maybe, but raising taxes will hardly help.

The pressure on the external accounts continues. Preliminary figures for August show exports picking up but imports growing even faster.

Bill English will now find it harder to keep saying that the economy is on track for 4 per cent growth next year (even though that is now arithmetically easier to achieve).

He said yesterday that the GDP result showed the Government had little room to move on fiscal policy. That comment may have been directed at those, including Ian Revell in his own caucus and for that matter the Herald, who have been calling this week for a cut in the company tax rate to match Australia's.