Weighing the odds of another boom year
06 January 2005
The economy bolted along at an estimated 5.2 per cent in 2004. Simon Louisson of NZPA looks at the prospects for this year.
Last Year fitted the quip that economists will keep forecasting the downturn till the economy gets it right.
The tunnel at the end of the light never came for the economy in 2004 and it appears reasonable to expect it will not happen this year.
When the economists finally get it right, however, the landing may come with more of a thud.
For more than two years they have been predicting a slowdown from the buoyant growth enjoyed almost uninterrupted through the 2000s.
Not only did it not come last year, but growth accelerated.
Both the Reserve Bank and Treasury now expect growth in calendar 2004 to have been 5.2 per cent - near the top of the 30-member OECD class - though the September quarter's growth of 0.6 per cent was below the Reserve Bank's expectations.
Each is forecasting the rate to slow to 2-2.5 per cent by the second half of this year.
But don't fall over if they are wrong again and you hear mutterings of "upside surprises".
The National Bank's December survey of business confidence, a good indicator of future growth, showed improving confidence, particularly for businesses' prospects.
Chief economist John McDermott expressed surprise. He had expected that the effects of the New Zealand dollar nudging post-float highs, combined with the Reserve Bank's six interest rate rises last year and surging oil prices, would have dampened enthusiasm.
So how has the expansionary period continued apace despite the Reserve Bank's best efforts to cool things for fear inflation will get out of control?
There have been two main drivers.
First, commodity prices have soared so much that New Zealand's terms of trade (the amount of imports that can be bought with a fixed quantity of exports) have hit a 30-year high. A very high correlation exists between New Zealand's terms of trade and economic growth.
Export prices have been underpinned by the global recovery and China's economic boom. Fonterra's recent rise in its forecast payout to dairy farmers is one factor that could give the expansion phase fresh legs.
Secondly, the domestic economy has been fuelled by a consumption splurge, which in turn was driven by a buoyant housing market - which shows few signs of abating - and the liveliest labour market in 20 years. High house prices encourage people to spend and more people in jobs helps almost every indicator except inflation.
The Reserve Bank argues exporters will soon feel the pinch from the higher currency and domestic consumers will rein in spending because of high household debt levels and higher interest rates on rolled-over mortgages.
However, Governor Alan Bollard's signalling on December 9 of another rate rise, rather than a fall, suggested that the Reserve Bank thought the growth phase had not run its course.
One thing that has allowed the boom in the housing market and the economy in general to run and run is the huge amount raised by foreign retail investors in New Zealand dollar-denominated bonds - more than $10 billion last year.
Japanese housewives and Belgian dentists attracted by New Zealand's high interest rates bought the bonds at yields of 5-6 per cent.
That cheap source of finance for local banks allowed them to offer two-year mortgages not far above the Official Cash Rate.
Despite New Zealand's growth spurt, Finance Minister Michael Cullen said the prospect of climbing to the top half of the OECD ladder in per head wealth remained dim. That was because Italy, the next country above, was a long way ahead.
Spain had outstanding recent growth and may have overtaken New Zealand, and the Czech Republic was snapping at our heels. Dr McDermott said he supported the Government's goal of rising to the top half of the OECD. But he noted that much of New Zealand's strong performance in the 2000s was the result of "adding more inputs" such as new migrants.
"On pure growth, we have been doing spectacularly well compared with the OECD but on a per capita growth basis, not so flash - just better than average.
"Certainly we've stopped falling down the ladder."
To climb, New Zealand needed to maintain the progress it had had, plus taste a little fortune, such as a further lift in terms of trade. But the latter may not be luck.
Dr McDermott suggested New Zealand may be experiencing a jump shift in its terms of trade. The century-long fall in the real price of primary commodities such as meat and butter may be reversing.
New Zealand's share of households' spending through much of the 20th century had been losing out to manufactured goods.
But Western eating habits had shifted toward quality and safety - something New Zealand had been able to cash in on. Further processing, better access to wealthy markets and the rising wealth of countries such as China and India had helped this process.
Parallel to this, there had been a world glut in electronic goods, which were becoming cheaper and cheaper.
"There has been a very subtle paradigm shift that has occurred over the last five years," Dr McDermott said.
This had been disguised by the cyclical rise in commodity prices.
Though New Zealand's commodity prices may still retreat, they were likely to trend up.
In the meantime, Dr McDermott said, the economy could easily run through this year at a brisk pace despite the strong currency and the cash rate being raised 150 basis points. And even if it slowed to the predicted 2 to 2-1/2 per cent, that rate would have been seen as very respectable in the 1980s and 1990s.
Dr McDermott warned that the longer the growth cycle continued beyond what was considered the sustainable rate, the more the chance of a "hard landing".
"The reality is economies don't soft land - it's not how things unravel. You know that running at a pace of 4.5-5 per cent economic growth is unsustainable.
"A nasty drought or another Asian-type crisis would be harder for us to bypass. The debt levels have increased, so debt servicing has increased accordingly. A lot of the foreign exchange cover corporates have been putting on is now running out."
A collapse in commodity prices and the terms of trade could knock the economy for six. "Instead of having a gentle slowdown, it would be a bit of a thud."
If that happened, economists who have forecast gloom will finally be able to congratulate themselves on being right
stuff.co.nz |
