A very soggy recovery

Even before this week’s GDP announcement, economists have generally been lowering their sights. The latest NZIER survey of economic forecasters Consensus forecasts indicates that while the growth outlook remains positive and double-dip recession has been ruled out, the outlook is less optimistic than in June. Economists on average expect economic growth in 2011 of 2.8% (down from 3.2% in the previous survey) and 3.1% in 2012 (down from 3.3%). But not all forecasters incorporated the likely effects of the Canterbury earthquake – negative in the short term – in their calculations.

Their waning optimism was justified by the official GDP figures for the June quarter. The NZ economy expanded just 0.2% from the March quarter, well down from an expectation of around 1% (the RBNZ reckoned it would be 0.9%). sharp drop in manufacturing did most of the mischief. Construction growth was strong, but raft of recent data fortifies the view that the economy is losing traction.

However, Finance Minister Bill English managed to find some good news in deteriorating balance of payments statistics released earlier in the week. The current account, having recorded rare surplus in the March quarter, slipped back into deficit in the June quarter. This was consequence of rising profits and imports, which English says reflected lift in growth.

However, he was not so cheered by rise in liabilities to $164bn (up some 40% in the past five years). Net international liabilities are now 87% of GDP, among the higher ratios in the developed world. And as English laments, “it is not apparent that New Zealand has acquired good-quality assets as result of this big upsurge in debt owed overseas. One consequence is that the annualised balance on investment income is, again, more than $10 billion in deficit, despite interest rates falling, and that will be permanent drag on New Zealand incomes.”

Those data reinforce the case for tilting the economy towards savings, exports and investment, and away from excessive borrowing, excessive debt, and excessive government spending. That’s what the tax changes due to kick in on October 1 are all about, at least in theory – reducing taxes on incomes and profits and raising them on consumption to dampen spending and tax-driven speculation and encourage savings.

But things will get worse before they get better. When GDP growth picks up, so will the demand for imports and the outflow of profits. Accordingly, the current account deficit is likely to deteriorate further.


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