While the economy is not doing too badly in output terms, external circumstances are not favourable, and there is probably a sizeable group of households struggling because of rising interest rates.
Last week’s announcement of a 0.9 percent increase in volume GDP for the June quarter had the commentariat backing down from their confident predictions of a few months ago that the New Zealand economy was in recession. Presumably not all of them. It is the doomsters who capture the headlines (and will continue to do so, since those who choose the headlines want to use large type rather than a track record of those with sober forecasts).
In fact the Treasury was not among the doomsters. Its PREFU 2023 expected GDP to rise 0.6 percent in the quarter – in the right direction and within the margin of forecasting error.
In any case what does the term ‘recession’ mean? As I have explained in previous columns, the definition is based on one used for the US economy and almost certainly does not apply to New Zealand, were we to do the systematic analysis which underpins the US definition. But who cares about systematic analysis when the objective is to get a headline?
However, we should not be complacent about what is happening to the economy. Allow me to compare the June 2023 year with the June 2023 one, which reduces the noise – some of which is forecasting error, some is for timing.
It turns out that volume GDP per capita is higher this year than last, perhaps by 2.2 percent. I confess I was surprised at this and had to think through what was happening. (I am not seeking headlines, just clarifying my thinking – and yours, I hope.)
Volume GDP measures output and not spending power. The difference arises because some of the output is exported and the sales price it gets may go down, as it has just done, which reduces spending power. Adjust for that decline, the spending power for the June 2023 year was similar to that for 2022. So on average we seem to be about the same.
That is for the economy as a whole. That need not be the increase for the household sector part of it. The disposable household income account for June 2023 is not yet published; let’s assume that it too shows no change. (I’ve italicised ‘assume’ to emphasise we don’t know.) Disposable income is a measure of spending power.
(Even then, we need to take care about recent migrant households. I am guessing they have a greater share of disposable income, so it may be that with the immigration surge, the disposable income of those already here is down a little. This is not to say that new migrants are stealing income from the rest. They are adding to production and being paid for it.)
However, if average household spending power is steady, that will not be true for each and every household. Some must have above average increases, some below average. Probably many of the latter households are paying higher mortgage interest – and increasingly, as their interest rates come up for renewal. Presumably they are very grumpy.
But other households with savings are receiving higher interest so their disposable incomes are going up. I take it they are not so grumpy, unless they take the commentariat promise of a recession as gospel. (Additionally, with rising interest rates more of ‘spending power’ must be going offshore to pay for mortgage debt funded offshore.)
The conclusion from a more careful than usual analysis is that while the economy is not doing too badly in production terms, external circumstances are not favourable, and there is probably a sizeable group of households struggling because of rising interest rates when they were not a couple of years back. (Observe that I have not had to use the ‘R’ word; not once.)
Is this column breaking my usual rule of not commenting on election matters shortly before an election? Not really – there is no prohibition on informing voters.
Nor am I blaming the government for the state of the economy. You will notice the two main factors in my story of sluggishness are external – falling export prices (plus low tourist arrivals) and rising international interest rates. It is too easy to blame the government – whatever its colour – for things going wrong.
The government can temporarily boost the economy but that damages the medium-term prospects. According to PREFU 2023 it has not. The current fiscal balance is currently contractionary – in contrast its figure 2.18 (p.58) suggests that just before the 2017 election the balance was expansionary; before the 2020 election it was much the same as today.
That may not seem to be the way matters are seen in the commentariat headlines or the political debate, neither of which has been particularly constrained by the facts.