Recovery: an oasis or just a mirage?

By Brian Fallow

Between the lines

The good news first: nothing in Friday's plodding economic growth figures threatens the prevailing view in the markets that Reserve Bank Governor Don Brash will be able to leave interest rates alone until November, if not the New Year.

The March quarter's 0.7 per cent rise in gross domestic product, bang in line with both Reserve Bank and market expectations, was sufficient to bring the level of economic activity back to slightly above where it was in December 1997, the previous peak.

The last two quarters' growth, annualised, comes to 3.2 per cent.

The not-so-good news is that neither private sector nor official forecasters see growth getting much stronger than that over the next two years. The June consensus forecasts compiled by the NZ Institute of Economic Research pick 3.1 per cent growth for the year to March 2000, rising to 3.5 per cent the year after before subsiding again.

Friday's figures reaffirmed the lopsided nature of the recovery so far. It is propelled by the interest-rate-sensitive domestic economy, while the export sector continues to struggle.

Consumers continued to do their bit for the recovery, but it is hard to see much further acceleration there. The 0.6 per cent increase in private consumption in the quarter was only fractionally above the 0.5 per cent average for the previous three quarters and some of the difference can be put down to the timing of Easter. Consumer confidence, as measured by the Colmar Brunton survey, weakened in June.

Business investment continued the pick-up recorded in the December 1998 quarter, rising 4.8 per cent in the March quarter. Some of that increase, however, may reflect businesses bringing forward information technology investment to avoid millennium bug problems, and to that extent may be borrowed from the future.

Unsurprisingly, given mortgage rates at historic lows, residential construction rose for the second consecutive quarter, but that followed four quarters of decline. Investment in new housing remains low - 5 per cent below year-ago levels.

As in the United States and Australia, much of the increase in domestic demand is being met by imports.

Our trade balance is deteriorating and the current account deficit for the year to March is a perilous 6.5 per cent of GDP.

Preliminary trade figures for May show import growth continuing to outstrip exports, with the annual trade deficit running at about $1.5 billion.

Clearly stronger world growth, and especially recovery in Asia, remain vital if New Zealand's sluggish upturn is to gather momentum.

We have to hope, in short, that the startlingly strong rebound in Japan's March quarter GDP proves an oasis on the horizon and not a mirage.