Economics: Growth? What growth?

To nobody’s surprise, the Government’s 2012/13 Budget affirmed surplus would show up in its books in 2014/15. Or rather, the Treasury’s projections did the affirming, and the projections were critically based on the officials’ GDP growth forecasts.
The economy had continued its recovery from the 2008/09 recession over the past year, registering 1.1 percent growth in 2011, they said. Strong merchandise terms of trade, good farming conditions, the Rugby World Cup and the Government’s accommodating fiscal stance (designed to underpin demand in the wake of the global financial crisis and devastating natural disasters) had done the trick, and monetary policy had been supporting activity through low interest rates.
The pace of overall GDP growth would continue strengthening, to 2.6 percent and 3.4 percent in the years ending March 2013 and 2014 respectively (and the pace of growth would be sustained at around three percent beyond that). The growth will be helped by substantial employment and income impulse from the Christchurch rebuild, the maintenance of historically low borrowing costs and, for primary industry exporters, continuing solid demand for our produce from key trading partners.
Not all sectors of the economy were expected to benefit equally from this growth. In the first part of the forecast period, non-commodity exporters were expected to be bruised by the strong exchange rate: which will trim their NZ dollar earnings. The tourism sector, in particular, was expected to struggle against weak income growth in several countries that traditionally have been key sources of inbound tourists, the loss of infrastructure in Christchurch, and the effects of more New Zealanders taking advantage of the high value of the currency to holiday abroad instead of at home. The broader retail sector is expected to struggle, too, as householders moderate their spending and try to trim their debts.
Notwithstanding those assessments of the outlook for manufacturers, retailers and the tourism sector, the Treasury is more bullish than other forecasters. The Trans Tasman newsletter contrasted the official outlook with the bleaker picture painted by the Institute of Economic Research’s principal economist Shamubeel Eaqub. The economy was stagnant, he said. We were seeing little economic growth and the outlook was challenging. Low interest rates were discouraging new borrowing and investing, as debt was paid down. Periods of deleveraging typically lasted seven years, Eaqub pointed out. We still had the second half of the adjustment to traverse. Growing global risks, falling commodity prices and slowing exports portended tough year ahead.
The NZIER expected “only 1.5 percent growth” this year, recovering to 2.5 percent in 2013. Eaqub expected the rebuild in Canterbury to ramp up gradually from mid-2012 through to 2013 but he believed persistent aftershocks, tougher building codes and insurance issues would slow Canterbury’s recovery.
Another opinion? Let’s consult BERL senior economist Ganesh Nana. While the Treasury forecast could be termed optimistic, he said, his primary concern was the overwhelming dependence of the forecast growth on the rebuild of Christchurch. With little else to bank on, the prospects facing the New Zealand economy were one of modest economic growth over the coming three to four years. The winners, if all went to plan, would be the building and construction sector businesses and workers (although capacity constraints in these were already of concern).
More critically, Nana noted Treasury projections showing the Government achieving surplus while the nation’s debt position – the true bottom line for the Budget – worsened (a prospect “bordering on benign neglect”). Yet in the Budget speech just two years ago the Government had rightly declared “NZ’s largest single vulnerability is now its large and growing net external liabilities”.
Another observation by Nana was that trading partner growth (the size of our existing markets) was expected to continue to surge by 3.5 percent to four percent year. But New Zealand’s export sector would struggle to put together an annual expansion of two percent year. In other words, NZ Inc is expected to lose market share. “So we can’t even blame the rest of the world for our problems.” M

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

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