What to expect from the economy in 2013
It’s the time of year when those of use who have not buried our noses in a brandy glass are instead gazing into crystal balls and pondering the year ahead. So here’s a few economic predictions for 2013. If they are more than 50% accurate, the author wants the same pay as staff in the forecasting division in the Treasury and in the main banks.
The Big Dry
Its been famously said economic forecasters exist to give weather forecasters a good name – so let’s kick this off by seizing two bulls by the horns at the same time.
Summer 2012/13 is shaping up to be a drought. It has already been an unusually dry spring in one of the country’s two main dairy regions – the Waikato.
A drought, New Zealand Institute of Economic Research’s principal economist Shamubeel Eaqub has calculated, usually shaves about 0.5% off annual GDP. If there is a big dry, look for lower growth over the coming year.
So while most of us might want a fine summer – especially after last year’s non-event – there’s a downside. It’s a downside the country pays for in lower growth, lower volumes of exports, not just for that year, but usually the following year as there is less feed over the winter and farmers carry lower numbers of stock. There can on occasion be a repeat in the year after drought: there’s a drop in meat production as farmers are restocking their herds and send fewer numbers to the freezing works. All this moves through the country’s economy in the form of less money to spend by farmers.
And it also sees fewer people employed. With unemployment now seemingly stuck above 5% for the foreseeable future
Construction to trickle rather than surge
A pick up in construction activity has been long forecast and it should be happening soon, for a variety of reasons. But the pick up may be gradual rather than the usual post-recession surge (and more of that, in a wider context, below)
Confidence in the sector is not as robust as the business mood surveys suggest.
Consents for new buildings have been approved – building consent data is usually one of the more reliable economic indicators because it is not based on surveys of what people say they will do, but on an actual process.
Yet obtaining consents is only the start of the matter, and there has been an unusual lag between consents being obtained and the building work actually starting.
There is enough pent-up demand to suggest construction should be taking off. The most obvious area is the Canterbury reconstruction, which should keep the industry busy for several years’ to come.
There is also the Auckland factor. Construction work came to a virtual standstill when the recession hit in 2008 and has been flat since the recession officially ended in 2009.
That, plus migration, is the main reason for house price spikes in Auckland: supply is constrained as population numbers are growing.
Building standards are now higher, due to a mix of post-leaky building regulatory requirements and earthquake strengthening rules. So work is happening, but slowly and tentatively.
Into the valley of debt
The delayed pick up in construction is a sub-set of the wider slow pick up in growth. The economy stopped shrinking in 2009 and has been growing since. Just not very much.
The past three recessions have seen the New Zealand economy come out of the downturn with a hiss and a roar, usually with a burst of 4% plus growth.
The trouble is this has been driven, or at least accompanied, by a surge in debt accumulation, every time.
The two graphs accompanying this story tell the tale. Both taken from Reserve Bank data, they show why this recovery needs to be slow.
The first shows how private sector debt – mostly for housing – has been increasing above the rate of economic growth for much of the period.
The second shows how the actual value of the debt just kept going up, and up, and up, and has only tailed off since the 2008-09 crisis.
But the value of the debt remains high. The most recent 12-month period increase was 3.2% for the year to October, the lowest rate of increase for the entire period the Reserve Bank data covers.
But it remains high – at $307 billion.
The relevance for the coming few years is this: any recovery has to be slow. The world is much more nervous about high debt levels since the crisis and any major pick up in borrowing is going to be punished with either higher lending conditions oar higher interest rates.
New Zealand has maxed out its credit card and now begins the long payback of debt.
That is why economic growth is sluggish, running around 2-2.5% a year for the next few years. More cannot be expected.
The main consolation is most countries are in much worse shape.