Economics: A better year – for some

The NZIER’s Quarterly Survey of Business Opinion, showing surge in economic activity in the December 2012 quarter, was portent – here’s hoping – that we will enjoy prosperous new year. At least. It should be more prosperous year than 2012, although the goodies will not be enjoyed by all of us.
The survey found the measures of business confidence and respondents’ own trading activity at their best levels since mid-2007. As with other data published early this year, however, breakdown showed concentration of economic vigour in Auckland and Canterbury. The pickup was not yet flowing through to all regions or to the labour market, and investment intentions were low, compared to what normally would be recorded in recovery phase.
Similarly, the latest Westpac McDermott Miller Regional Economic Confidence survey showed economic confidence rising in most parts of the country. Again, big divergences were recorded. Economic confidence in Canterbury (leading the regional pack) was its highest since late 2009 and Auckland bounced back into optimistic territory. But somewhat ominously for the country’s balance of payments, developments were mixed in more export-oriented provinces: confidence was rising in some but falling in others (including the dairy-exporting regions of Waikato and Southland).
Even so, new-year data showing what had happened in the December quarter were generally encouraging. The construction sector certainly had something to cheer: building consents issued for the construction of new dwellings posted solid 4.6 percent increase in November (when volatile apartment figures were shaken out of the data) and non-residential building work continued to trend higher (boosted by the rebuilding of Canterbury). In retailing, year-end card spending, particularly in the ‘core’ retail categories, picked up after flat September quarter. And the brain drain was easing: net migration was positive for the third month in row in November, an upwards trend was apparent, and the net loss to Australia was at its lowest since February 2011.
The construction revival was in tune with Treasury forecasts published just before Christmas. The Government’s forecasters were not then as bullish as they had been at Budget time in mid-2012, but they nevertheless reckoned economic growth will increase to 2.3 percent and 2.9 percent in the years ending March 2013 and 2014 respectively before easing to 2.4 percent in the later forecast years. The Canterbury rebuild is main driver of quickening growth over the next two years, although officials are uncertain about the scale and timing.
For exporters the outlook is comparatively more sobering. Forecast trading partner growth is slower than at the time of the 2012 Budget but is still expected to pick up across the forecast period. The Treasury expects household and business spending growth to pick up moderately as their financial positions improve, but “compared with the past decade they are assumed to remain relatively cautious” .
On the monetary front, policy is expected to continue to buttress the economic recovery. As activity accelerates and inflation pressures pick up, interest rates are expected to rise gradually but – again, ominously for our balance-of-payments position – the exchange rate is expected to be drag on growth over much of the forecast period. The only comfort we can take from this is that exchange rates are notoriously difficult to forecast.
For second opinion, we can check out the NZIER Consensus Forecasts which are an average of New Zealand economic forecasts compiled from survey of financial and economic agencies. These affirm the economy is recovering gradually: economic growth will average 2.5 percent over the next three years and – again – the Canterbury rebuild will be key driver, though (according to this view of the future) it will be more protracted than previously thought.
A major concern for the Government, however, should be that the forecasts expect slow job growth and unemployment to remain higher for longer. Real wage growth is expected to be subdued, too, along with inflation. The consensus forecasts contain another concern for the Government. Despite borrowing costs remaining low, no return to fiscal surplus by 2015 shows up in this crystal ball. M

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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