Economy inching towards growth

By TONY ALEXANDER – BusinessDay

OPINION: There is growing evidence that the New Zealand economy is near the bottom of the economic cycle and we can expect some growth to resume in the very near future.

But such growth is likely to be quite muted and we would suggest business operators remain strongly focussed on managing cash flows and undertaking lumpy expenditure only when their cash flow and capital and debt raising abilities are in strong safe zones.

One of the factors which will be constraining growth for the next couple of years is a still very weak world economy. Our trading partners usually grow 3 percent a year. But this year they are expected to shrink by over 2.5 percent and next year only recover 2 percent if things turn out well. That means it is unreasonable to expect a sizeable jump in our export commodity prices in the near future and this will in particular keep the dairy sector under pressure.

There will also be some pressure on a few exporters from the Kiwi dollar’s high rate against the greenback. To be near US64 cents at this stage of the economic cycle is extremely unusual and it is only small solace for exporters that we are still well below average against the Australian currency, Euro and Japanese Yen.

There will also be some restraint on the speed with which growth improves because of rising unemployment. There are still plenty of businesses who need to cut staff numbers and this process is likely to continue into next year.

Having said that, awareness of the structural shortage of labour in New Zealand is strong so this will tend to produce a firm lift in the number of employers looking to hire people when the labour market does in fact turn around.

Restraint on growth over the next couple of years will also come from the tightening up of bank lending criteria. The problem for the world in recent years has been too much money lent to too many people. That is now changing and while so far a lot of the changes have been voluntary there will be tighter restrictions and capital requirements put in place by central banks.

This is most relevant overseas but also has some lesser implications here where the lending surge was far more muted – apart from in the farming sector where debt growth has exceeded our expectations over the past few years.

But while growth will be constrained over 2010 and 2011, it should be growth nonetheless with assistance from a range of things. These include the low levels of short term interest rates and the lagged effect of tax cuts in October last year and April this year. There will also be stock-building undertaken by companies, and individuals will at some stage catch-up on delayed expenditure on large items such as fridges and motor vehicles.

In fact at some stage we are likely to see a lift in retail spending just as we have seen a turnaround in the housing market since March. But the extent will be capped by the absence of investors, of course, who have been quite active in recent months in real estate taking advantage of low funding costs, a good range of properties on the market, and increasingly willing sellers.

These buyers have also been aware of the expectations we have been writing about here regarding net migration flows soaring. The strong surge in migration we have been expecting is now solidly underway with the annual flow now up from 3,500 in November last year to 11,200 in May.

A net gain of at least 20,000 looks likely later this year and it will be interesting to see where the net flow goes once we see a decent lift in the number of people coming here. So far it is a 21 percent fall in the number of Kiwis leaving our shores, which is boosting the migration numbers.

*Tony Alexander is the BNZ’s chief economist.

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