Economics : Happy New Year?

Here’s wishing you prosperous new year. But let’s get real and accompany that greeting with sobering observation: bothersome portents just before Christmas were much grimmer than those at the start of 2006, the most recent year in which it could be said the economy was in reasonable shape (although even then there were imbalances and an exporter-hostile exchange rate).
It was hard to find an optimist among economic commentators – or politicians – in the run-up to the new year, except in the midst of rip-roaring Christmas party. The BNZ’s Tony Alexander – in his last newsletter of 2008 – said it would be great if he could say there is clear light at the end of the tunnel for the world economy and we are going to get by relatively unscathed this year because of easing monetary policy, tax cuts, falling petrol prices and (eventually) food prices, and the absence of housing oversupply.
“But that’s not going to happen,” he warned. “The outlook for world growth continues to get worse on weekly basis and increasingly offshore commentators speak in terms of the global recession extending into 2010 if not 2011.”
The New Zealand economy had slipped into recession early last year. Some forecasters expect negligible growth this year. Some expect slightly negative growth (which means the economy will shrink tad).
The Treasury, far from gung-ho in the December Economic and Fiscal Update, said the financial crisis had deepened and the outlook for global growth had been revised down significantly since the ­Pre-election Update economic forecasts were finalised at the end of August. Governments and central banks had reacted to the crisis with fiscal and monetary stimuli, but the world economy was headed for recession.
This was making it tough for New Zealand to crank up its growth rate. We were handicapped, too, by the hangover from decade in which Kiwi consumers (and those in many other developed countries) had built up hefty levels of debt, helped by the ease with which money could be borrowed at attractive rates and rising house prices which gave sense of security for many homeowners.
The Treasury expects New Zealand’s economic growth to be weak over the next two years as the economy is affected by low global growth and “unwinds past imbalances” (such as huge balance of payments deficit, reflecting excessive borrowing). Real production GDP is forecast to grow by 0.3 percent in the March 2009 year and remain weak over the 2010 March year at 0.8 percent (down from 1.8 percent in the Pre-election Update).
Real GDP growth is expected to lift to around three percent in 2011 and just below four percent in 2012 and 2013, as growth in our trading partners recovers and monetary and fiscal policy responses help confidence to recover. This will encourage increased export and investment growth. If the Treasury is right, nevertheless, we have two years of hard slog ahead, rising unemployment, and all the other ill-effects of negligible growth.
Nasty medicine from the Treasury was accompanied by bitter pill from the National Bank. Its year-end business survey found lift in business confidence (the good news), with net 35 percent of respondents expecting general business conditions to deteriorate over the coming year. Yep. Good news. It was eight percentage points better than the November result.
But firms’ own activity expectations slumped again. net 22 percent of firms expect worse times for their own business over the year ahead, the gloomiest expectation since April 1988. Employment intentions, profit expectations, investment intentions all slid from November. The grim forebodings were deepest in the retail and construction sectors, despite the tax cuts, stimulatory state investment plans and much lower official interest rates.
National Bank economists summed up their reading of the composite growth indicator for 2009 from the survey in one word: awful. But hey – inflation seems to have been beaten. Inflation expectations have eased and fewer survey respondents expected to raise prices over the year ahead.
But it was too much for Federated Farmers. Its economic spokesman, Philip York, described the Treasury numbers as “more than ugly”. The federation, he insisted, was “angry” that cash deficits are predicted to dip into the red by over $11 billion within four years. The Crown’s debt is predicted to almost double by 2013 and GDP growth is forecast to be just 0.3 percent this financial year, “growing” to 0.5 percent in the 2009/2010 year.
So what should the Treasury have done? Falsified its forecasts (fickle things at the best of times) and come up with something more comforting for farmers? That’s like hunting for doctor who will tell you your cancer has been cured when – sadly – it hasn’t.

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

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