Economy increasingly unbalanced

Last updated 16:00 18/10/2012
Tony Alexander
Fairfax NZ
BNZ chief economist Tony Alexander

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OPINION: Let's have a look at what the most up-to-date data says about the state of the New Zealand economy, writes Tony Alexander.

First, we officially grew by 2 per cent in the year to June with 0.6 per cent growth in the June quarter alone. That is quite good in a world hit by debt overload, but things are not quite as they seem. If we take away the effects of things produced but not sold and instead placed in inventories then growth was only 0.2 per cent in the June quarter and the improvement for the entire year to June was only 0.7 per cent. And if we take away the rise in residential construction, which clearly owes a lot to the start of the Christchurch rebuild, then there was no growth in the quarter and about 0.5 per cent growth for the year.

Therefore our economy's underlying growth rate remains weak and that means in the short term the labour market is likely to also remain relatively weak. But will it weaken anew beyond the minimal growth of 0.6 per cent recorded in the year to June? Maybe not. The monthly National Bank NZ business survey found that a net 9 per cent of businesses plan on hiring more people. That reading for September was up from 6 per cent in August and above the 4 per cent average for September. So we are not fearful of a jump in the unemployment rate in the near future.

In fact a net 29 per cent of businesses expect that they will be busier in the next three months, which is above the net 22 per cent average and reasonably well up from 21 per cent in June.

In regards to our export growth, things have been very volatile from month to month recently but looking at the three months to August we see growth was a healthy 8.6 per cent, aided by the strong lift in primary sector output due to good growing conditions. However, farmers are not all that happy, with only a net 9 per cent expecting their activity levels to rise in the near future, well below the average reading of 20 per cent.

And because farming makes up the largest part of our exports this suggests only mild regional growth in the near future.

The caution of farmers stems substantially from the high level of the New Zealand dollar, which is keeping inflation suppressed near 1 per cent for now and helping keep interest rates low. Those low interest rates, in conjunction with high awareness of a housing shortage in some parts of the country, have helped lift New Zealand house prices by an average 5.6 per cent in the past year, with Auckland ahead 11.5 per cent. Dwelling sales in the past three months were 18 per cent ahead of a year ago while the number of dwelling consents issued was up 15 per cent.

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So housing is a firmly growing sector. If we add in recent firm growth in retail spending, weak manufacturing data, a flattening of growth in imports of capital equipment, an upturn in non-residential building consents, and a deterioration in economies in Europe, the United States and China we are left with a picture of an economy becoming increasingly unbalanced.

The construction rise does very little for growth in the country's productive capital stock or productivity. As housing rises further and imports grow, exports will be suppressed by the high dollar, and with trading partner growth weak this means a deteriorating trade balance and probably another credit rating cut within five years.

To try and forestall that the Government will work hard to get its accounts back in surplus by the end of 2014/15. But the chances are high that it will eventually delay that target by at least a year, which is not really here or there in the scheme of things.

- The Southland Times

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