Has New Zealand A Rock-Star Economy?

Why does the Minister of Finance say this is is hardest budget ever? The economy may be doing moderately well, but it is by no means performing outstandingly.

In 1993 the New Zealand economy began to show signs of an upswing after the seven years of Rogernomics Stagnation. In a public comment I remarked that it seemed to be in the ‘recovery’ phase, which is the economist’s technical term for the stage in the business cycle when the economy leaves the bottom of the business cycle and goes into upswing.

The term was taken up by politicians including the prime minister. They thought, I think for their thinking was fuzzy, that it meant the economy was on a long-term upswing, at a higher secular growth rate than it had experienced in the past.

In fact the economy returned to growing at much the same as its past rate with a standard business cycle superimposed. It peaked in about 1997; its downswing with the Asian crisis was followed by widespread outrage that Rogernomics had not worked.

So sometimes an economist’s comment is seized on by the public and given a different meaning from what was intended. I’d like to think that was true about the claim that New Zealand was a ‘rock-star economy’. At the time New Zealand was doing a little better than some of the rich Western economies – we still are – but, on the whole, we are not performing at the giddy heights associated with a rock star.

New Zealand got through the Global Financial Crisis and (thus far) the Long Global Recession better than most for a couple of reasons. One was the strength of the Chinese economy. It was not just that it has been growing faster than other big economies, but that our Free Trade Agreement with it enabled New Zealand dairy and meat producers to open up new markets.

The other was the Cullen cushion effect. I use the name of the previous Minister of Finance, although there were others who contributed to an economic management regime which squirreled reserves away for a rainy day. When that day came in the form of the Global Financial Crisis and its aftermath, New Zealand was better placed than most to work its way through the difficulties. (The Canterbury earthquakes have also lifted economic activity. But, to make an obvious but often overlooked point, they have done more destruction and so the economy is actually worse off.)

This is not to say that Bill English has done badly but to remind us that compared to the fiscal messes many countries found themselves in, New Zealand was well managed. So many economies have stagnated, or worse, while New Zealand has gently powered on (but remember that we did not recover, in the non-technical sense, to the late 2007 level of output a head until late 2013).

Why then is English saying this is the hardest budget he has ever had to bring together? The cynics will say that the Finance Minister always says that; those with a more kindly nature might suspect he is getting bored – it is his eighth. In any case he is in a cabinet in which every other minister is baying for more government spending.

But there may be three other reasons. China is slowing down and the Cullen cushion has lost its padding. Besides the China issue, the world dairy market was in turmoil even before the EU ended its quotas on dairy production, which is expected to lead to a major increase in their dairy supply. (The minister may possibly also have some big expenditure blowout we don’t yet know about.)

Moreover, while the economy may have been doing well in aggregate, different regions are growing at different rates (or not growing at all). Regions which have benefited from the dairy boom are expected to be much less buoyant and in any case regions that have not been doing that well in the past have little prospect of doing better in the immediate future.

You may be puzzled about the six year stagnation. Don’t recall it? Possibly you were in a privileged part of the economy, but the government’s success in the 2011 election suggests that there was a general feeling of prosperity. (During the 2014 election the economy was expanding.)

What has been going on is that offshore borrowing – mainly for housing rather than increasing productive capacity – has given a false sense of prosperity. The catch is that some time the borrowing has to be paid for. You may think you can pay off your debts by selling your houses, but everybody cannot at the same time. Meanwhile the government is continuing to be a net borrower – that is what the government deficit means – and its debt is rising too.

So the economy has muddled through the past seven years; perhaps that is all we can expect from ourselves. But we are not as well placed as we were a few years ago to cope with a major external shock. The possibilities include another collapse of the international financial system and a physical catastrophe like an earthquake. (Will there be another global financial crisis? That is another column, but we should not rule one out.)

Key seems to be alienating the Auckland business community, probably because they don’t think his government is addressing such things (albeit with a business twist to their concerns). Perhaps others should be just as concerned (albeit without a business twist).

If we think we are a rock-star economy it may be because we are on hallucinogens. Withdrawal when reality comes to account can be painful.