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Opinion: Slowdown? What slowdown? Economic data tells two stories

By Catherine Harris of NZPA

Friday 18th August 2006

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It's been said, most recently by outgoing Fletcher Building chief executive officer Ralph Waters, that New Zealanders are far too gloomy for their own good.

He believes New Zealand business is the most pessimistic he has encountered, suffering from glass half empty syndrome.

But spring has almost arrived and with it a forecast by economists BERL which says the much hyped economic slowdown has already been past the worst point.

While corporate results this week added to the weight of those expecting a downturn over the next year, BERL - Business and Economic Research Ltd - said many of its key indicators have swung positive over the last month.

Meat exports, house building consents, employment growth, long-term migration, guest nights and short-term interest rate margins with Australia were looking positive.

And some other important signals were looking healthier: gross domestic product (GDP), employment and labour-force participation were all higher, and outward net migration was lower than this time last year.

BERL argues that while exports are looking less sickly, it's the welter of infrastructure projects that will continue to keep our economy buoyed.

It believes the trend has been evident for a while. Its State of New Zealand chart has been trending up for some months from a nadir late last year.

"Indeed, while there may have been a slowing in growth, it would be difficult to argue that there was ever a downturn," BERL senior economist Ganesh Nana said.

"Perhaps the other commentators and organisations that remain in a pessimistic mood do not realise that there is more to an economy than just domestic spending and monetary conditions?"

Other economists may dispute BERL's view, but Treasury has rated it the most consistently accurate forecaster of GDP out of a list of 16, between 1996 and 2005.

Asked why BERL differs from the rest, Nana says its forecasts look to the medium to longer term - three to four years ahead. And he suggests the general market tends to be focus on rising interest rates and ebbing house price growth.

"Clearly anyone focused on the finance or monetary markets, and anybody's who's focused on housing in particular is not going to be in the best of moods at the moment."

Is BERL right?

ANZ-National Bank economist Cameron Bagrie says no.

If it was, he says, the Reserve Bank would be forced to raise interest rates again to dampen growth and quell inflation.

"The Reserve Bank has noted it needs a period of sustained, slow growth. The Reserve Bank will not let the economy get its second, or third wind.

"Certainly economic barometers over the past few weeks have come in a little bit stronger but you need to step back and look at where we were a year ago."

No one believes New Zealand is headed for a recession - or negative growth - but most, including Bagrie, say there is likely to be a sustained period of low growth.

Looking more closely at BERL's case:

  • Actual inflation adjusted retail sales were up 0.9% in the June quarter from March. Stripping out vehicle factors, including fuel prices, retail volumes were still up 3.65.
  • Labour market figures for the June quarter were strong. Employment grew 1%, the labour force was still tight with a record 68.8% participation rate, and the unemployment rate at its lowest for a generation at 3.6%.

    The construction industry - including infrastructure - has increased its workforce by 56% in the last four years.

    "For the last 18 months, people in many regions have been telling us they couldn't see where the slowdown was coming from," Nana remarks.

    "As of the middle of 2005, most businesses in the tradable sector realised there was only one way the New Zealand dollar was going to go, and that was down. They started expanding then and have continued."

    "It's not retail that's been increasing these jobs."

  • Salary and wage rates grew 3.2% for the year to June quarter, and earnings growth was also strong.
  • Residential consents in the June quarter were up 0.8% from a year earlier. Non-residential consents were 1% higher.
  • Demand for houses is being boosted by the number of people migrating to New Zealand. The annual net inflow is nearly 10,700, up from 7000 recorded six months ago.
  • Exports receipts for the June quarter were 16% higher than a year earlier, aided by a softer kiwi dollar.
  • Add to all of that the National Bank's regional economic activity survey out this week, which shows a year-on-year composite growth from 1.6% in March to 1.9% in June.

    But Bagrie says some of these indicators are lagging ones. The labour market data is the "last cab off the rank" in a slowing economy.

    Retail spending, he says, was very soft and if one looked at the seasonally and inflation adjusted figures, volumes down 0.5%, with durables and discretionary spending - hardware, cafes, accommodation - hardest hit.

    "Obviously, higher petrol prices, mortgages, rates, electricity is starting to bite."

    Rural chequebooks are reportedly being closed and the motor vehicle and tourism sectors are struggling.

    Exports in the June quarter were influenced by a good late flush in the dairy industry, but poor weather conditions this season would see those numbers tail off quickly, Bagrie believes.

    And migration appears to have found a base after low levels - "I think it's a big jump to say it's re-accelerated".

    Building consents may have been up for the June quarter on year earlier levels, but Bagrie notes they were down 7.3% for the June year and down more than 11% for June compared with the previous year.

    Bagrie agrees the construction sector - including roading and other infrastructure - is strong, and there should be "reasonable income growth" from the tight labour market.

    But he says these will provide critical buffers for the economy as it decelerates.

    Pockets of the economy were doing well but "it's the old two-thirds, one-third rule".

    "You've got two thirds of the economy which is pretty firmly in a deceleration phase and one third which is picking up, and the two-thirds are going to dominate, unfortunately."

    Brent Layton, director of the New Zealand Institute of Economic Research, agrees.

    "Picking turning points is not a matter on which parties are very good because ... everything doesn't turn simultaneously. So trying to work out when you've gone round a corner when you've got an articulated truck is quite difficult."

    But BERL's argument provides a third alternative to the hard landing/soft landing theory the majority of us have been trying to pick.

    If it's right, our feet might not have even noticed we've touched the ground.

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