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When the Prime Minister expressed some frustrations with the media in general, and this newspaper in particular, one day last week, he probably had more important frustrations on his mind. One of them might have been the drop in quarterly retail sales we had reported that morning. Or he could have just received a briefing on the Budget his Finance Minister will present on Thursday.

The first Budget of the Government's second term arrives with the world economy in a fourth year of little or no growth and New Zealand's is no exception. Britain and some other European economies have slipped into a second recession (two successive quarterly contractions) since the global financial crisis and the region faces the possibility of a new currency shock if Greece finally has to give up the euro.

Meanwhile, China's economy has come off the boil and Australia has felt the consequences. Prices for New Zealand's primary exports have dropped. A decline in the exchange rate since the beginning of May provides exporters with some relief but it will be a desperate day if the Budget has to celebrate a currency depreciation for a sign of hope.

Last year's Budget looked forward to a stimulus from the Rugby World Cup and the rebuilding of Christchurch that was expected to gather pace in the second half of this year. The rebuilding prospect was knocked almost flat when another magnitude 6 aftershock hit the city just before Christmas. Some rebuilding is under way but not enough to justify another Budget based on wildly optimistic calculations.


The World Cup contributed to growth of just 0.3 per cent in the three months to December. While some traders were well positioned to cash in on the event, many others said they had suffered a loss of normal custom. Sectors that drew most benefit, supermarkets and petrol stations, recorded a 7 per cent drop in sales in the period January to March.

Motels, which had seen most World Cup visitors pass in campervans, suffered a 5 per cent slump over the wet summer and retail sales overall are down 2.5 per cent this year. Bill English will say on Thursday that this means households are still "deleveraging" (saving in plain language) after excessive borrowing during the housing boom of 2002-2007.

The Budget will describe an economy gradually being realigned from housing and consumption to more productive investment and broader trading possibilities. The problem with this picture is that house prices have not slumped and sales appear to be picking up. The slump has occurred instead in construction, leaving Auckland under-supplied in housing, as is Christchurch for a different and obvious reason.

The ASB Bank's latest quarterly survey found a net 45 per cent expecting house prices to rise, nearly twice the figure in its previous survey.

Nevertheless, the Reserve Bank expresses no concern that prices might take off again, which means it is unlikely to lift its official cash rate for the time being. In the present global economic outlook it seems more likely to lower its rate, as local trading banks must be expecting since they lowered their fixed mortgage rates last week.

Governments around the world are in the same dilemma: whether to give lacklustre economies an even greater stimulus or demonstrate budgetary control. John Key has indicated he will not keep his 2015 date for a surplus if world conditions turn for the worse. But he ought not relax that target too lightly. New Zealand can bear more restraint in public spending. The economy has more to gain from fiscal discipline than from a further stimulus. The Budget needs to brace us for more passing squalls and keep the economy geared for greater national wealth.