POLITICS : If the economy slides so do Labour’s prospects

We used to talk about “managing” the economy, as if it was project. Then we talked about the economy as organic, self-balancing and free as the breeze. But managed or free, the economy is core focus of government – and critical to its electoral health.
In 1999 the economy was picking up after low patch – but too late to save the Shipley government from third-term blues.
In 2002 and 2005 the economy was humming. Though real wages weren’t rising in synch, property prices were and jobs were increasingly plentiful. The Clark Labour party scooted back into office in 2002 then added another 97,000 votes and two percentage points in 2005 (even though only squeezing back).
In 2008 the economy is not likely to be so friendly to Labour.
At some point the serious imbalances will unwind: the dangerously high balance of payments current account deficit; the unaffordably high house prices; household debt at more than one-and-a-half times household disposable income; dollar overpriced by between 20 and 50 percent, according to Morgan Stanley; mountain of Uridashi and Eurokiwi bonds, now equal to third of GDP and likely to evaporate if the currency slides.
This unwinding can be in one of two ways.
It can be sudden – which means recession and much pain to those who are seriously indebted, drop in house prices, falling retail sales, slumping business profits and probably jump in unemployment.
Or the unwinding can come slowly over number of years – which means flat house prices, sluggish retail sales, lower profits and slow overall growth but not disaster for households. Japan’s long rebalancing after its 1980s’ bubble collapsed is pointer.
Moreover there is an offset to help us through long rebalancing: the terms of trade have turned for the better over the past decade or so after century of decline. The expanding middle classes in Asia are generating demand for high-quality food at the same time as Asian producers have cut the prices of manufactured goods and some services and also lifted demand, and prices, for aluminium and wood.
This has been most visible in spike in world dairy prices, which is the result of several special factors. But there is reason to think the outlook will remain good after the spike subsides.
The dairy spike might also conceivably tide Michael Cullen over to the election late next year by offsetting the slowdown most economists think is at last on the way (with slowing retail sales growth in April and May providing some early evidence). Certainly, it helps Cullen pack his election year Budget with goodies – probably by around half billion dollars in extra revenue, just as profits of other companies are slowing.
This is the scenario Labour hopes for going into the election campaign year from now. Employment would still be strong, the relentless rise in house prices would have stopped and interest rates might at last be on the way down. The long adjustment would still be ahead and so would, at election time, be still largely unfelt by households and Cullen could assert capable economic stewardship.
That would give some basis for Labour to claim leadership and fair record in government – assuming it can first somehow put an end to its long run of bad news, coupled with indifferent-to-poor political management.
It might then hope to present itself as still full of ideas and action on topics other than the economy and contrast National as inexperienced and not (yet) ready to govern.
This is long enough bow to draw. But what if instead of that relatively benign scenario, something goes seriously wrong – say, house prices fall or maturing Uridashi doesn’t roll over and interest rates jolt upwards or there is shock in international markets?
All of these are distinctly possible. There are serious enough imbalances in the world economy for the usually restrained Bank of International Settlements to have warned in June that conditions are similar to those preceding the 1930s’ depression and the 1990s’ Asian slump.
Well, there is Labour plan B: in heavy swell, stick with the crew you know. That was what voters chose in 1931 in the midst of the depression, despite widespread doubts about the government.
But that is very long bow indeed. The odds are with National. And so is the economy.

Colin James is Management’s regular political writer. [email protected]

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