Published 27 August 2018
Does an exhortation beat analysis when it comes from an economist?
I looked at the hope expressed by ASB Bank chief economist Nick Tuffley heading the bank’s quarterly economic forecast report, out today: “Don’t worry, be happy (please).”
And I found it unsettling. If the claims by critics of the Government – largely amounting to allegations of incompetence on the one hand, and support for the failed government that preceded it on the other – are accurate, asking us not to worry is to invite the nation to ignore risks.
And if those claims are inaccurate, the bank’s economists should be able to demonstrate through their analysis what the true state of the economy is and why the criticism should be dismissed.
Mr Tuffley writes: “There is a lot of debate at present about the direction of the economy, particularly given the depths to which business confidence has plummeted over the past 9 months. Our forecasts put us at the ‘cheerleading’ end of the spectrum rather than the ‘Chicken Little’ end. Where will reality end up?”
Surveys versus performance analysis
I distrust most surveys, and the recent spate of business confidence surveys in particular. Assuming a high proportion of business owners & executives would vote National, it’s understandable they would be upset that their party has lost power.
It’s an expectation that your opponents will perform badly. That’s very different from analysis of the effects the new government has had, and is likely to have, on business.
Both Labour’s & National’s 3-term governments ended their days governing to stay in power instead of governing for the common good. Deservedly, they were removed.
There are many very obvious reasons around the world which could cause economies everywhere to turn to custard, led by the US desire to remain all-powerful versus the Chinese desire to expand its power, followed by disagreement between those 2 countries over trade practices, policies & tactics.
At the same time, both countries are opening up opportunities. China’s Belt & Road initiative will lift dozens of countries’ economies, while the Americans see it as a push for power. The US had a one-quarter jump in its economy that followed a quarterly decline. Both countries have serious debt issues.
Equations have more than one side to them
30 years of neoliberalism internationally – and with former Labour ministers as its early cheerleaders in this country on their way out that door and into the hard right side of politics by forming the Act Party – has demonstrated that “Me! Me!” economics has serious downsides.
2 current issues put the spotlight on “Me! Me!” versus a more sharing economy that can, if managed carefully, boost everybody’s standing. One is the debate about our prison population: How did it get to this point? If a high proportion of your population turns to crime, don’t you look for causes, then try to change those causes? Locking more people up for longer is an answer to the immediate issue, but it doesn’t solve the underlying issues, which amount to economic failure.
That’s very much the way New Zealand’s neoliberals in the Labour government of the 1980s approached the much-needed performance lift in government sectors, such as rail. Reorganisation was vital to success, but the other half of the equation was the people washed out of their jobs – and the loss of skills from that action, and from other industry changes.
The second issue is housing: Importing record numbers of people for a sustained period lifts the economy, but also creates problems and, while the total economy may grow, the per capita performance can easily decline. The focus was on total, because that suited the politicians in charge.
Importing over 70,000 people/year, net of exits, is fine if you provide for it. We didn’t. Not just in the latest spike, but in one a decade earlier. You need far more homes than were built, the shortage of supply naturally escalates prices, but incomes of the great unwashed haven’t grown to match.
Immigration is declining and, if Australia’s economy starts to rise, we can expect immigration to drop sharply. That changes a number of parameters – the demand & need for more homes, more infrastructure, more suburbs, more apartments are in the first batch. The kind of skills we’re training for may also change – after a belated recognition that more people would be required in construction, that demand is likely to fall away.
The new government has found itself rescuing polytechnics, which don’t have enough money to conduct their primary task of teaching. Unitec’s annual accounts show how it was being pushed toward making losses, and it was reducing teaching staff. That, like the growth in criminal numbers, is an indictment on a country that prides itself on a history of opening education to all-comers.
Our new government was mocked for starting scores of inquiries in its first year, when it should have been praised for acknowledging concerns, inviting opinions and looking to do things better. You might still criticise, but at least you know a course is going to be followed.
Housing is a supreme example. Mockery for the suggestion that a government can build 100,000 houses in 10 years, but no mockery for the failure that got us to this sad, embarrassing point? What was plainly needed was a system to build homes at the bottom end of the price range – private sector builders were, unsurprisingly, building increasingly expensive homes for buyers who could afford them, and less & less at the basic end of the market.
Expensive, but not necessarily quality. I was given the example over the weekend of a $1 million-plus year-old home, up for an oil stain for the external timber to cover the initial water-based stain, which was always going to be inadequate. Over the last days of the last government I watched as its housing minister pushed for more construction, without offering any support – and looking for shortcuts. Auckland Council was concerned about the rules for special housing areas, the minister warned that the Government would take over the job of issuing consents. Doing things better, yes; that kind of shortcut, no.
Tuffley sees growth despite threats
And now back to Mr Tuffley at the ASB, who said in the summary of his quarterly report: “NZ growth should still benefit from a variety of drivers to keep growth around 3%. Healthy export earnings and resurgent house-building will offset softer business investment. But trade tensions and the risk of talking ourselves into a downturn are threats to that performance.
“The first thing to say about NZ’s growth outlook is that we [the bank’s economists] are positive about it. We expect growth to pick up from the moderate pace that set in from the middle of last year, and head back to a 3+% pace heading into 2019. Over 2020 per capita growth should settle around the pace averaged over 2012-16, the purple patch of our post-crisis economic expansion.
“We see an economy that is being supported by solid fundamentals, with the drivers of growth being slightly more tilted to net exports. Global growth prospects remain very respectable – provided full-blown trade wars don’t occur. Our terms of trade will hold not too far off their recent record high, courtesy of strong export prices. This export performance is boosting incomes across many regions of NZ, evident in our regional scoreboard. For the past 3 years, provincial NZ has continuously taken the No 1 ranking in the scoreboard.”
House-building to surge?
In his summary, Mr Tuffley sees a surge in house-building this year despite falling immigration, and makes the commonly accepted point that, following Fletcher Building’s highrise miscalculations & Ebert Construction’s collapse, the commercial construction sector is confronted by big challenges
The commercial construction sector has been a weak performer for several years, boosted by remediation jobs and a boom in apartment development. Apart from regulatory controls, banks’ own controls on lending are likely to maintain construction at a subdued level.
However, Mr Tuffley sees a firmer economy than I do: “Domestically, a number of supports remain in place. Interest rates will remain low into 2020 on our updated official cashrate outlook. Population growth will continue at an above-average pace, even as the net migration inflow gradually slows. And a stronger focus on the quality of inbound migrants, such as refining lists of needed skills, should mean a greater economic contribution from the slight mix shift.
“Housing construction is set to surge again this year. The new government is delivering more stimulus through more welfare support & added infrastructure development. But there is likely to be some drag from commercial construction, particularly in the wake of the construction sector’s internal challenges. Weak business confidence risks holding back investment by businesses.
“There is a lot of debate at present about the direction of the economy, particularly given the depths to which business confidence has plummeted over the past 9 months. Our forecasts put us at the ‘cheerleading’ end of the spectrum rather than the ‘Chicken Little’ end. Where will reality end up?”
In the full report, Mr Tuffley adds: “We expect a strong labour market, rising wages, population growth & low interest rates to support consumer spending growth. However, there is some risk that a weak housing market in Auckland and a slowdown in visitor arrivals may weigh on retail activity in the near term. A key driver of our GDP growth forecasts is our expectation that stronger wages will boost consumer spending. A tight labour market, higher inflation benchmarks & minimum wage increases are all factors which should see wage inflation accelerate over the next few years.”
And some “if not, maybe”
And, back to his summary, he sees a number of factors & tensions to work through: “What does seem relatively certain is that NZ’s expansion has been going for a considerable period, and it does need some fresh drivers as recent ones mature. Businesses are starting to face – or at least anticipate – added cost pressures, but seem less certain of their ability to pass these on or sufficiently adapt. And businesses have genuine anxiety about potential shifts in government policy, such as industrial relations, which may not recede until clarity is provided.
“Aside from the risks from current trade tensions, business uncertainty is the biggest risk to a decent growth outlook. Downbeat perception is bumping up against what appears to be a decent reality. What will win out? At this point we anticipate reality will eventually bolster perceptions, rather than the other way around. But the risks are clear.”
Attribution: Bank report & summary.