By David Hargreaves
It's probably fitting, though purely coincidental, that as we reach the mid-point of 2015 (already!) so the economy suddenly appears to be at something of a crossroads.
The bullish enthusiasm of the last year and a half is giving way to a more measured dose of realism, particularly after the first quarter GDP figures came in much lower than expected.
If we were to compare the economy to something - say for sake of argument, a rockstar - the questions would now be revolving around whether our economy is just going through its "difficult second album" phase or whether we've embarked on the one-world-tour-too-many phase to be followed by "exhaustion" and a stint in a special rehabilitation facility.
At the moment the economists are giving the economy the benefit of the doubt and still see good prospects ahead, but they are trimming forecasts. The team at the country's largest bank ANZ, who deserve kudos for being on the money with interest rate picks (though ASB should get a big chocolate fish too for going out on a limb with a bang-on pick of just 0.2% GDP growth in the first quarter) are now picking 2-2.5% GDP growth this calendar year, down from a previous pick of 3.1% - which was also what the Reserve Bank was picking.
That would still be good. But remember, the economy is continuing to get a very big kick from the very artificial situation that is the Christchurch rebuild, while the historical GDP figures, which saw us record 3.2% growth in the March 2015 year, were boosted by very high dairy prices. More on dairy in a minute.
It is interesting to briefly observe how the economy has been viewed in the past 18 months through the eyes of those following it most closely.
The New Zealand Institute of Economic Research tracks the evolution of forecasts with its quarterly Consensus Forecasts, taking the averages of key economists, including all the big banks, plus the RBNZ and Treasury.
If we look back at the June 2014 forecasts, the consensus view was that GDP in the March 2015 year would grow by 3.8% (actual figure 3.2%). So, that was a bit on the high side. The thing that will be tested is the picks for the next few years. As of the latest (June 2015) forecasts, the consensus GDP growth figure for the March 2016 year is 2.8%, moderating to 2.7% in March 2017 and 2.4% in March 2018. Looking back over the past 18 months, the longer term view of GDP growth has actually strengthened - but it has to be stressed that the June consensus figure were collated before the March GDP figures were released.
It's fair to say, therefore, that the next lot of forecasts will get something of a trim.
The biggest change to economic forecasts in the past year-and-a-half has come in the predictions of interest rates. A year ago our economists were on average picking a 90-day bill rate (a proxy for the Reserve Bank's Official Cash Rate) of 5% by March 2017. The economists were also picking inflation above the RBNZ's explicit target of 2% by the same time.
Of course, what's happened subsequently is that the inflation genie has vanished - for now - and the RBNZ, courtesy mostly of the very sharp fall in global dairy prices, has been forced to start unwinding the four interest rate hikes it undertook last year. Right now it is looking more likely that prevailing interest rates in March 2017 could be a whole two percentage points lower than was expected 12 months ago. But of course given how much expectations have changed in the past 12 months who knows.
It's probably galling to have to admit it, but so much of the optimism about the NZ economy in the past year-and-a-half has been based on China buying up our commodities at inflated prices and on us rebuilding our second largest city, which we have been forced to do, and which is a one-off boost.
In that sense our economic growth has been based on nothing more stable than the rapid growth Australia saw in the earlier 2000s when it was simply digging up big parts of its country and flogging those to China, at inflated prices.
Australia's now suffering a hangover from that and I do wonder if we aren't heading for something a bit similar.
Much will depend on dairy prices. Right now the economists are picking a modest lift in global prices during the course of this year - and with the outlook for future years looking better.
My concern is that I'm not sure the extent to which future price predictions do, and can truly, take into account future levels of supply. That's the problem with an out-and-out commodity. It's priced according to supply and demand.
I don't claim expertise (at all!) on dairy production, but I would imagine it is not something that can be turned around quickly. If global supply has been ramped up to an inappropriately high level because lots of other countries have seen little old New Zealand wheeling gold milk powder all the way to the bank, then it might take a while for the over-supply to be reversed. And what happens here in the meantime?
It's reasonably easy to forget when swapping Parnell and Herne Bay houses at ever-increasing values that so much of the 'real' New Zealand economy depends on how much money the farmers have got kicking around in their wallets.
The fact is, if there isn't the hoped-for recovery in dairy prices during the course of this year then, with the impact of the Christchurch rebuild gradually weakening,so our economic growth figures could fairly quickly lose vigour. I genuinely hope I'm wrong, but my gut feeling is that two years out from now we'll be looking at next to no economic growth. And remember, any stagnation of our economy is likely to pretty quickly turn around the current (stimulatory for the economy) immigration influx, particularly if Australia starts to recover and regain its lustre as a place for Kiwis to flock to.
I base my thoughts on the economy on a gut-feeling belief that there won't be a significant lift in global dairy prices over the next two years. Look, really I hope I'm wrong.
But right or wrong, it is in any case worth reflecting on how narrowly focused our economy actually remains. Unfortunately, there's no sign from any of our current politicians that they have any genuinely innovative ideas. As a country we really do need some sort of collective vision of what New Zealand wants to be as an economy and how to get there.
Our rockstar needs that second album to be a killer. But if we just keep trotting out world tours with the same old material, well...
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