By Alex Tarrant
Finance Minister Bill English has agreed that a technical recession in the second half of 2010 is possible, but says those kind of "bumps" are part of the process of a significant readjustment of the economy.
He was supporting comments made by Prime Minister John Key and reported on Interest.co.nz on Monday.
Appearing before Parliament's Finance and Expenditure Committee, English said the recovery would continue to have some challenges over 2011, and the onus was on the tradeable sector of the economy to grow jobs in order to get unemployment down.
After appearing before the select committee, English told media it was possible there was negative growth in the December quarter, but would not be drawn on whether he thought that would continue to the current quarter as Australian GDP growth weakens and China raises interest rates.
Australian slow down a risk to NZ exports
The New Zealand economy had been flat as people saved harder and paid off debt quicker than government had expected, English said.
"They’re not rushing back to the shops and are not rushing into the housing market. And the big export prices haven’t started feeding through yet," he said.
"So it’s possible [there was a recession in the second half of 2010]. We’re focussed on the longer term, which is getting sustainable high incomes from a growing export sector."
When asked about what he thought for growth in the current quarter, English replied, "Look, we’ll let the Statistics experts sort that out".
"We’re focussed on how to strengthen the economy in the longer term, because we can’t actually influence the quarterly figures," he said.
There were risks from the Australian economy, where the non-resource economy seemed to be slowing quite fast.
"That could affect our exports, and that’s another risk," English said.
"I don’t want to guess what the quarterly numbers will be, I’ll let the experts sort that out. What I do know is the adjustments New Zealand needs for the longer term are starting to happen. That is New Zealanders being careful with their spending, paying off debt. They’re not trying to pump themselves up by buying houses off each other," he said.
"They had accumulated very large debt. Debt in New Zealand households went from about NZ$60,000 in 2003 to NZ$107,000 in 2009 on average. So the average household now owes over NZ$100,000. Now they face rising interest rates at some stage in the next two years.
"They’re being pretty careful, and we think that’s sensible. That’s better than some short-term fizz recovery that gives us a couple of good quarterly numbers then falls flat on its face," English said.
Deleveraging warning
Speaking to the Finance and Expenditure Committee, English warned there would still be considerable adjustments the economy would have to go through as households paid down debt, or deleveraged, after a big increase in debt levels over the last decade.
Even though households were being careful about their spending and focussing on reducing debt and increasing savings, they had just flattened that out, English said.
"So if you think that the right level of household debt is almost twice as much as it was in 2003, then even to hold that level of debt, we’ve got pretty subdued [household] spending – a subdued housing market," he said.
"If you thought that households actually need to reduce that level of debt, then there would still be some considerable adjustment for the economy to go through.
"Where we were talking about economic growth, then that build-up of debt has been very substantial, and even holding it flat means that in the short term we wouldn’t be expecting consumer spending or the housing market to pick up in a big hurry," English said.
Consumer spending and the housing market were generally the drivers of growth out of a recession, and were to a large extent absent this time around, he said.
Jobs to come in tradable sector
The same kind of issue was relevant when it came to employment, English said.
"When we had this increase in consumption and debt, and a fast increasing housing market, you had employment in the tradable sector from 2003 and 2009 actually fell by 12%," English said.
"That represented a loss of 55,000 jobs in the tradable sector. But the tradable sector is a relatively smaller part of the employment base. The non-tradable sector in that period grew by 18%, which represented 267,000 jobs. So the non-tradable sector is just much bigger," he said.
"If it’s not growing jobs, then that has quite a big impact on total employment growth. So what’s happening at the moment is, in the export sector, job growth has come back.
Since 2009/10, jobs in the export, or tradable, sector grew by 6%, which was 25,000 jobs. In the non-tradable sector, there were more jobs – 35,000 more jobs, or 2% growth, English said.
"So looking ahead over the next few years. Because our non-tradable sector has had a lot of debt, it’s got to clear out that debt, it’s got households being careful – you’re going to have relatively low job growth in that area, which is actually about four times the size, in job terms, as the tradable sector," he said.
"So we’re going to need to see, off the back of these high commodity prices, fast job growth in the tradable sector to see unemployment sustainably drop.
"You will get growth from the non-tradable sector, but nothing like as fast as it was in the last decade.
Tradeable sector job growth would turn around “pretty vigorously” on the back of good profits and strong investment, if New Zealand was going to get a much faster drop in unemployment, English said.
The good news was that New Zealand’s export commodity prices were as high as they had ever been, he said.
(Updates with comments on jobs, deleveraging, comments after the FEC)
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