Economics: Those bothersome forecasts

This time last year, this column focused on Finance Minister Bill English’s management style and the influences on his policy decisions. The exercise was somewhat handicapped by his refusal to be interviewed. Otherwise we might have been tempted to chime in with the other forecasters and commentators who eagerly foresaw the end of the recession and quick recovery.
They seemed to be on the right track with their optimism for the first few promising months of the year. But as BERL records in its latest forecasts, “the mood darkened and the incipient recovery stalled”. Further bad news from abroad added to the country’s troubles and by September the commentators were clucking about the prospect of double-dip recession.
Just in time to dilute the joy of Christmas, statistics for the September quarter showed gross domestic product contracted 0.2 percent. But English did his best to cheer us, insisting the economic recovery remained on track, despite the contraction.
Before that result, five consecutive quarters of growth had been recorded and “I’ve said all along that this recovery would be bit bumpy at times…”
More critically, in terms of his policy emphasis this year, English said New Zealand’s economic imbalances had built up over more than decade – exacerbated by the global recession – “and so it will take us more than year or two to fix them”.
Indeed. The NZIER’s year-end Consensus Forecasts survey showed economic forecasters expect slowing recovery before conditions strengthen in the March 2012 year. Treasury forecasts for the short-term outlook were among those revised down. Economists on average expect positive economic growth in the year to March (2.1 percent, down from 2.8 percent in the September survey) and 3.5 percent, (up from 3.1 percent) in 2011/12. But the outlook for March 2013 is subdued 2.6 percent.
Bearing in mind the Government’s priority of rebalancing the economy, the deteriorating current account forecast is much more bothersome. It was significantly reduced in the March 2010 year by the banking sector’s one-off tax payments and an improved trade balance.
But slowing exports, rising imports and increased costs of financing New Zealand’s large net foreign liability position are expected to widen the deficit again, from forecast -$7.4 billion in 2010/11 to -$11.9 billion in 2012/13.
This will exacerbate the country’s indebtedness at time when international financiers are pulling the plug on highly indebted economies. It will also stiffen the Government’s resolve to remedy the imbalance which English regards as New Zealand’s biggest vulnerability.
The Budget this year, accordingly, “will clearly outline the next steps in the Government’s programme to lift economic growth, with particular focus on improving national savings and reducing our reliance on foreign debt”, he said when releasing the Budget Policy Statement and Half Year Economic and Fiscal Update.
English will take his cue from the Savings Working Group and expects any policy responses in this area to be included in Budget 2011.
But he also said it was important the Government plays its part in improving New Zealand’s national savings. It would do that “by setting credible path back to fiscal surplus as soon as practical” and will continue to keep lid on new spending initiatives. Yet this state-sector austerity will exacerbate the effects of greater householder saving, or debt reduction, in reducing business turnovers.
The rebalancing is meant to pitch the economy in favour of exports and investment as well as saving. But surge in investment activity forecast this year owes more to the Canterbury earthquake than to government policy.
More ominously, the Consensus Forecasts survey found the trade balance outlook remains negative. Export growth forecasts are positive but have been trimmed, (to 2.6 percent from 2.8 percent in the year to March 2011 and to 4.9 percent from 5.2 percent the year after), reflecting uncertainty over the exchange rate and global growth outlook. Imports are expected to outpace exports in all of the forecast years, too. That’s no way to shake off debt.