How much prosperity can you expect to enjoy in the year ahead?
Your columnist, alas, is not forecaster. And anyhow, forecasters are forever changing their minds.
Armed with his latest Treasury economic and fiscal forecasts, Finance Minister Michael Cullen year ago signalled the introduction of family assistance package as the centrepiece of this year’s budget. He could afford to be generous: the fiscal outlook was better than anticipated just few months earlier, and based on economic forecasts for growth of 2.8 percent in the next two years, rising to 3.4 percent in 2005/06.
During 2003, strong overall growth increasingly had been dominated by domestic demand as export growth was slowed by the Iraq conflict, the SARS outbreak and drought. Nevertheless, over the short term, GDP growth was expected to continue to be “robust”, thanks to ongoing strong household and business spending.
Real GDP growth of 2.8 percent was forecast in the year to March 2004.
During the 2004 calendar year the pace of domestic demand growth was forecast to abate. The housing investment cycle would run its course and households would ease back their other spending. Export growth would remain low.
Growth of 2.8 percent in 2004/05 was forecast. similar outlook showed up in the “NZIER Consensus Forecasts” from the Institute of Economic Research at that time. These are an average of economic forecasts compiled from survey of financial and economic agencies.
Growth was reckoned to be 2.7 percent both in 2003/04 and 2004/05.
But the forecasters understated the robustness of “robust”. By March, thanks to expectations of stronger retail spending and housing investment, they had hoisted their 2003/04 GDP growth expectation to 3.2 percent.
Growth in the year to March 2005 remained forecast at 2.7 percent. This growth would be more evenly balanced between domestic demand and export growth. Falling net migration, slowing housing market activity and slightly higher interest rates were expected to continue to ease growth in domestic demand, but robust wage growth would help sustain consumer spending.
Residential investment growth would decline dramatically during the year, but the level of housing investment would remain high.
Along came the June-quarter round of forecasts and another upward revision in the 2003/04 forecast. Forecast? Yep. The March year had expired three months earlier, but the official GDP statistics were still being compiled.
The “Consensus Forecasts” reckoned growth would be 3.4 percent, having revised their estimates of export growth on the basis of strong world growth and record high commodity prices in the March quarter.
Oh, and GDP growth in 2004/05 now was lifted to respectable three percent. An expansion in external demand would be driving export growth at faster clip, although growth in domestic demand was still expected to slow on the back of falling net migration and higher interest rates.
The latest Consensus Forecasts available to your columnist at time of writing were published in September. By then, the 2003/04 GDP figures had been published: 3.6 percent. The forecasters therefore had gone back to their computer-driven models for another crack at 2004/05 GDP growth. And guess what? There was another upwards revision. hefty one, from three percent to 3.8 percent.
The emphasis of the analysis now went on to inflation. The forecasters were seeing strong economic growth contributing to upward pressure on prices.
The robustness of the growth was reflected in Cullen’s speeches, too. On 12 October, talking to the Rail and Maritime Transport Union Conference, he could boast that in the past five years (roughly coinciding with his government’s term in office), New Zealand had made significant advances in terms of economic growth, and the wide distribution of its benefits through job growth and growth in incomes.
Economic growth had been consistent and in OECD terms impressive. New Zealand had maintained annual growth at around 3.5 percent or more since 2000, with growth for the June year just ended coming in “at very pleasing 4.4 percent”.
Much of the growth has occurred in domestic sectors (for example, construction, education, and hospitality), which have benefited from high population growth, low interest rates and, until recently, high farm incomes. It has also been job-rich growth. The number of people in work has risen considerably in the past four years – combined rise of 193,000 or 10.8 percent between March 2000 and March 2004 quarters. The unemployment rate has fallen from around seven percent in 1999 to four percent in June 2004, 17-year low and the second lowest rate in the OECD.
A new set of forecasts will be out before Christmas, giving us an idea of the strength of the prosperous new year we can expect. But don’t treat them as gospel: the only certainty is that the forecasts will be subject to regular revisions before next year has expired.
Bob Edlin is regular contributor to Management
