ECONOMICS: Forecast: Mixed Messages

A few weeks ahead of the presentation of this year’s Budget, Treasury analysis showed the economy recovering slightly more strongly than officials had forecast in December. The impact of the recession nevertheless would “be felt for some time”.
Business confidence readings were among the Treasury’s portents of sustained pick-up. The continuing recovery in the global economy was another factor. The global recovery had resulted in lift in world spot prices for the country’s key commodities, up significantly in the year to February and nearing the historic highs of mid-2008. Non-commodity exporters were benefitting from strong Australian economy and lower cross-rate against the Australian dollar.
A similar outlook was reflected in the NZIER Consensus Forecasts. The economy was recovering and the outlook was positive, according to this collation of the work of raft of economic forecasters. Cautious optimism was reflected in modest upward revisions to most main indicators.
GDP forecasts for the March 2010 year remained flat at -0.4 percent (the official statistics for that quarter won’t be published for few weeks), but the economic growth outlook brightened for 2010/2011 – an average 3.1 percent, up from the 2.8 percent forecast in December.
The caveat was that forecasters’ views remained mixed – ranging from paltry 1.8 percent to robust 4.1 percent. The unemployment rate was expected to peak at 7.2 percent in March but gradually recede to 6.2 percent in March 2012. Sustained high unemployment levels would cap wage growth for the foreseeable future.
The recovery from recession was affirmed by data showing 0.8 percent rise in real production GDP in the December 2009 quarter. More important, it had become more broadly based and the strongest growth (up 4.5 percent) was in manufacturing. This sector previously had recorded seven consecutive quarters of contraction, and manufacturing activity was still 16.5 percent lower than in September 2005, when it last peaked.
Much more sobering, gross fixed capital formation (measuring investment in fixed assets) decreased 0.9 percent. The Consensus Forecasts expected further significant contraction in investment in the year to March 2010 (-10.9 percent) before it recovered in 2010/11 (6.1 percent) and 2011/ 12 (8.7 percent).
The Government intends playing part. The decline in gross fixed capital formation in the December quarter largely resulted from reduced investment (-25.8 percent) in intangible assets, such as software and exploration. What to do? Hmm. Opening up more conservation land for mining exploration should do the trick.
Gerry Brownlee, the Minister of Energy and Resources, rebuffed the inevitable howls of protest by saying the Government’s proposals to open up portion of Schedule Four land for possible mining were modest and the critics were ignoring the facts about mining’s role in the economy.
“Green mining is not an oxymoron, and the Government has made it clear that should Schedule Four lands be released, and should those lands show viable mining prospects, only modest and environmentally responsible mining would ever take place,” Brownlee said.
He emphasised that 2008 had been record year of production for New Zealand mining and the industry has been growing strongly in recent years, driven by global demand for our resources.
Last year mining brought in $1.1 billion worth of export receipts, and the mining sector, including oil and gas, directly employed about 6000 people in New Zealand and thousands more indirectly. In 2000-2005 the mining sector (including oil and gas) returned an average $360,000 of GDP per full-time employee, nearly six times the national average. Workers in the mining sector averaged incomes of $60,000 per employee, more than double the national average.
Brownlee drew favourable comparison with dairying: mines in New Zealand used an extremely small amount of land (around 4000 hectares), less than 0.015 percent of the country’s total land area. The export value of that land is $175,000 per hectare. Dairy farming uses two million hectares of land with an export value of only $3500 per hectare.
The NZIER chimed in with paper intended to stimulate the debate. It noted that the public discussion of mining versus conservation had yet to examine the respective opportunity costs of restricting mining over such large proportion of New Zealand’s land area, or of encroaching on conservation lands. The opportunity cost for mining was reasonably easy to count as the foregone income from leaving mineral resources unutilised. But the opportunity cost to conservation was much less apparent, due to the absence of ready means to measure its value.
Economists had tools to uncover the hidden values, the NZIER said. These needed to be employed to better inform the available choices.

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

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