What is the actual state of the economy?

When I was closely associated with a business opinion survey many years ago, we found that the responses about the state of the economy were virtually valueless. If you asked a business whether they were taking on labour, selling more or investing more, their predictions in one survey correlated with what they say happened in the next. But we could never find any systematic relationship between their opinions and economic activity as a whole. I see that Bill Rosenberg of the NZCTU came to a similar conclusion using more recent data.

The reason for this disjuncture is that businessmen and women know a lot about what is going on in their businesses, but very little about what is going on in the whole economy. Why should they? If you are a Vegemite manufacturer, you are unlikely to be particularly knowledgeable about the housing market, exporting prospects or most other bits of the economy. Your main source for the state of the economy is what you learn from the news and what other business people tell you (and that is largely from the same external sources). One reads business pages to find out what business is being told, rather than what is happening in the economy.

As a result, ‘business opinion’ is a mix of assessments about the economy and political opinion. When the economy is trundling along (I explain more below), business opinion is dominated by politics. What we are being told at the moment is that business is not very happy with the government.

That is no surprise. My impression is that Labour does not have good connections with business, Ministers are, of course, assiduous at turning up at meetings of business people, but their interactions are generally no deeper than that. (The exception may be Andrew Little – you cannot be a successful private sector trade union leader without a good working relationship with, and knowledge of, business – but he has no economic portfolios.)

The Clark-Cullen Government had similar difficulties – perhaps worse, given the ‘winter of discontent’ in 2000. The background was that in 1988 the Lange-Douglas Government had passed the State Sector Act without really consulting the state sector unions; in 1991 the Bolger-Birch- Richardson Government passed the Employment Contracts Act without really consulting the unions; in 2000 Labour passed the Employment Relations Act without really consulting employers; the Key-English Government then modified the ERA without really consulting the unions. This tit-for-tat has been going on for a long time, in contrast with the earlier post-war consensus which was based upon ongoing tripartite consultations.

The appointment of Jim Bolger to lead the employment working group on the design of Fair Pay Agreements may be the beginning of a new direction (or a return to the old one). How they decide may be more important than what they decide. In the interim business is uneasy.

It is perhaps a good thing that, despite being headlined in the news, business opinion is so ephemeral Suppose that business believed it themselves, then they might precipitate a self-generated recession. (Don’t say ‘serves them bloody well right'; others will suffer too.)

Some business and political commentators have joined in, presumably taking their lead (it makes for copy and easy thinking). In case of the New Zealand Herald it almost seems editorial policy. They too may regret what they demand. I was told during the recession of the early 1990s, that the Herald management wanted their journalists to beat up the economy in order to encourage more advertising revenue.

Cutting across all this is the Opposition joining in. I am not sure that strategically that makes sense. They want the recession in 2020, not earlier for the upswing which would follow would coincide with the election, Perhaps they hope an early recession will destabilise the government.

Simon Bridges and his team is bedding in. It is hard being an opposition early in the parliamentary cycle. One version is that he is under threat from caucus disquiet. I would not know, but too often the main activity in opposition is plotting against one another in order to promote oneself.

The current indications are that the economy is not in a bad state. The consensus of the systematic forecasts is that the economy has been powering along, with GDP growing at about 3 percent p.a. for the last five or so years and that is expected to continue. Unemployment has been falling but the rate is expected to level out as we run out of accessible labour reserves. This is not the stuff of journalists’ headlines.

(Incidentally, business opinion on the economy in the monthly ANZ survey peaked in mid-2017 and began sliding when the election of a Labour Government was the remotest possibility. The result is consistent with the NZIER's larger and more representative quarterly survey.)

We’ve actually been doing better than what the GDP growth figures show because the price of our exports has been generally rising faster than the prices of imports (i.e. the terms of trade have been increasing) so National Income is rising faster than GDP. However, the benefits do not seem to be shared through the economy.

There are, as usual, numerous caveats and nuances to this assessment. The big one is that the forecasts assume that the international economy remains benign. A good forecaster is similar to the wise yachtie or tramper who, no matter how blue the sky is, keeps an eye out for a change of weather, knowing squalls can come up fast.

There are potential international squalls. There has been a longtime weather eye on the Chinese economy because nobody understands its financial system. There are nasty clouds on the horizon from Trump’s trade war.

There was glee in certain quarters when John Key cautioned about the state of the economy. His focus was on the potential downside from the world economy; fair enough. He opined that he and Bill English would handle any squall better than Grant Robertson. I hope he is wrong. I hope that the Robertson team would do just as well.

The world economy aside, the biggest pressure is almost certainly public sector wage demands which are news headlines but not generating much informed comment. Everyone knows the Richardson-Shipley slashing of benefits cut government spending, bedding in the low tax regime on high income recipients. Less appreciated is that, a few years earlier, the Lange-Douglas government had cut back public sector wages by changing public sector management (mainly via the State Sector Act and the Public Finance Act) with similar effect. The process of repressing public sector remuneration (except at the top) has been going on for three decades.

A generation later we are facing a public sector wage breakout which is adding to government spending pressures. It would be easy to say that the unions are taking advantage of a weak Labour Government, but the dam was leaking under the last National one. Perhaps there is a fundamental structural change going on; but what, why and where? This should leave one’s opinions thoughtful and certainly not complacent.

Comments (2)

by James Green on August 05, 2018
James Green

I think business confidence surveys arose out of a desire to find data inputs for econometric models to work "better". I don't put any trust in such models.

Opposition parties plot when they don't have a good idea of what to do when in power, Labour was just the same in the last cycle.

A great forecaster is one who is constantly adjusting and learning from their past mistakes. I think there was a book about this, "Superforecasters".

by Brian Easton on August 05, 2018
Brian Easton

Surveys of buisness opinion began before macroeconometric modelling, James. They were very much about getting up to date information on the state of the economy when business cycle monitroing was all the rage.

New Zealand's first was set up by Conrad Blyth at the NZIER who had worked briefly at the NIESR in London in the mid-1950s.  The United States economists started collecting such data even earlier (1950). 

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