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Economics: That elusive slowdown

By Donal Curtin

Tuesday 1st February 2005

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There are a number of mysteries that perhaps (as the priests who educated me used to argue when faced with questioning on knotty points of dogma) God did not mean us to understand. Why don't we spin the rugby ball faster along the line to Rokococo? Why are we so much better at one day cricket than the five day game? Why do Auckland voters sack any mayor who produces a plan to resolve traffic congestion?

On the economic front, the most prominent puzzle is the ongoing resilience of the New Zealand economy. Despite persistent predictions of an imminent slowdown, the economy has routinely surpassed all the forecasters' expectations over the past year. Many economists, particularly in corporates, are hired as risk managers and so tend to be cautious. But the gap between the buoyant actuality and the conservative predictions has rarely, if ever, been as wide.

It's an important puzzle to try to understand for many reasons. For one thing, the unexpected growth has helped the strong performance of New Zealand shares (the NZX Performance index is up 25% over the past year), and it would be nice to know if we're in for more this year. However, if the slowdown is postponed yet again, then the Reserve Bank is in a spot of bother, as it's planning on cooler growth to resolve its inflation worries. My own suspicion is that calls for a substantial slowdown are, once again, premature.

First of all, there is still a tremendous momentum built up in the labour market. Merely filling all of today's available jobs would be enough to keep the economy rolling along for months. There were only 79,000 officially unemployed last September, making for a very low 3.8% jobless rate. But there were another 82,000 employed part-time, who would like to work more hours if offered, and another 70,000 again who, while not officially unemployed, were "jobless" in the statistics.

Can any significant proportion of those extra 152,000 be lured out into gainful full-time employment? You betcha: put a good job offer in front of someone, and they'll typically take it. And it's happening already. The "participation rate", the posh term for those of working age who are actively in the labour market, has been rising for over a year.

Another jobs market dynamic is people trading up to better jobs. Anyone in recruitment knows that they've lost some of their good people to bigger and better opportunities in the past year - making a big difference to the incomes of families with better jobs.

Outside the labour market, there are also what economists call "wealth effects". Indeed, it was the wealth effect from sharply higher house prices in 2003, in particular, that has played a large part in keeping the economic bandwagon rolling. There's some truth to the complaint about New Zealanders' over-investment in residential property, but it would be easy to miss the bleeding obvious: over the past two years Kiwis have been heavily in an asset class that has boomed in value. The housing cycle has peaked, but even if house prices didn't advance a cent further in the next year you'd still have a lot of contented households happy with their lot - and confident to continue spending.

There's also an additional wealth effect that wasn't there before: the share market's. The $52 billion that households own by way of unit trusts, super schemes and private share portfolios may only be tuppenny ha'penny's worth compared with the $344 billion they have invested in housing (as at last September, according to the Spicers Household Savings Indicators). Many investors used to poor returns in the past few years will get a pleasant surprise when they open their next valuation statement (assuming they or their advisers had any kind of exposure to New Zealand or Australian shares, and it wasn't all put into The Warehouse). That, too, will add to the mix of influences that we call "consumer confidence".

Finally, there's a third positive element: Asia. New Zealand used to get all excited about Asia as a market. Then along came the 1998 financial crises, SARS, bird flu and some English language schools falling over, and the Asia story largely vanished from the radar. The reality is that it's boomtime again throughout non-Japan Asia - demand is so strong that even the largest Australian metal and coal exporters can't physically ship product fast enough to meet the orders. We don't have the huge coal and iron contracts Australia has, but we'll be getting our fair share of what's going.

It is possible the economic cycle could, after all, go pear shaped this year. But I reckon the labour market, wealth effects and Asia are more supportive than generally realised. It wouldn't surprise me if in six months we are still wondering where the slowdown is.

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