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How strong is the recovery?

This week we get to see just how broad-based the economic recovery is.Updated current account and trade and current account data are to be released by Statistics New Zealand on Wednesday and Friday respectively.The current account figure will be the best

Rob Hosking
Mon, 22 Mar 2010

This week we get to see just how broad-based the economic recovery is.

Updated current account and trade and current account data are to be released by Statistics New Zealand on Wednesday and Friday respectively.

The current account figure will be the best for many years – the deficit is likely to fall below 3% of GDP. But the current account deficit – the difference between what New Zealand earns overseas and what we spend – always falls in a recession and not too much can be read into this.

The trade figures on Friday, which are for February, are likely to be mildly positive.

But it is the GDP data on Thursday which will be watched most closely. The data is, as usual, historical – it is for the fourth quarter last year – but it will provide an idea of just what sort of foundation the recovery is building on.

The average market forecast is for a rise in production GDP of 0.8% for the quarter. Now, by the standards of New Zealand’s economic recoveries – at least, those since the economic reform years – this is on the low side.

It is, however, higher than the Reserve Bank expects – the RBNZ’s economic outlook is for a 0.6% rise in GDP.

Some indicators late last year suggested the recovery was undergoing a slight wobble. Remember that the economy came out of recession ahead of most forecasts: a pick up in growth wasn’t expected until the third or maybe even the fourth quarter of 2009.

Instead the economy moved into positive territory – by the merest wisp of a smidgeon of -0.1% - in the three months to June.

Business and consumer mood surveys in the spring and early summer showed a high degree of optimism – one of the business opinion surveys showed the highest result for firms’ own activity since 1999.

Those mood surveys indicated firms were, in aggregate, planning to expand after the contraction which began, for some, as long ago as 2006. Indicators were for increases in investment net in plant and machinery over the next three months, and more were also starting to talk, tentatively, about taking on staff.

That didn’t really pan out – when the same surveys were run three months later, firms the numbers who had actually increased investment or taken on staff over the past three months were well below those who had, in the earlier surveys, indicated they would undertake such investment.

Unemployment also continued to rise and hit 7.2% of the workforce in January – much worse than average forecasts of 6.8%.

In short, the optimism was more a collective sigh of relief that the worst was over and that New Zealand had avoided what had, as recently as March, looked like a very unstable future.

But the fact the economy did not fall of a cliff, does not mean all was to be plain sailing.

Retail sales were unexpectedly low for December, when seasonally adjusted. There were also signs of the housing market pick up losing steam – signs which have become even more pronounced in the January and February sector data.

The slowdown in housing and consumer spending is not necessarily a bad thing, over the medium term. The debt-fuelled expansion in domestic spending since around 2003 had to be pulled back at some state, and that was always going to have a flow on impact on retail spending.

In short, the “rebalancing” that economists love talking about appears to be happening. That though is not going to be a painless process – a concerted move away from consumers spending more than they earn, and towards more savings, is going to be needed and that is a process that is going to take time.

But on the plus side, manufacturing – the New Zealand economy’s Cinderella industry for so long – is undergoing something of a surge.

Some of this is driven by a favourable New Zealand-Australia currency cross-rate. Much of New Zealand’s manufacturing goes into the Australian market and the favourable rate, plus the fact that Australia, alone in the OECD, managed to avoid a recession, is helping grow the industry.

Westpac economists believe manufacturing grew 1.9% in the last three months of 2009, mostly due to the Australian factor.

The Business New Zealand/Bank of New Zealand manufacturing survey, released earlier this month, showed continued “slow but steady improvement,” Business New Zealand’s executive director for manufacturing Catherine Beard reported at the time, although she added that although manufacturers were reporting a pick up in orders the mood was “still more cautious than positive.”

Whatever the figures turn out to be this week, that’s probably not a bad attitude for all of us.

Rob Hosking
Mon, 22 Mar 2010
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How strong is the recovery?