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 GDP Gloom?

 Keith Rankin, 1 October 2000

 

Once again, the economic news seems bad. Real GDP (gross domestic product) for the three months to June 30 is, on a seasonally adjusted basis, 0.7 percent down on the previous three months.

Yet, if we look a bit deeper, we find that real GDP for the June quarter is up 4.4 percent on the same quarter of 1999. That's economic miracle territory for New Zealand.

It is also constructive to note that, using seasonally adjusted figures, GDP in June 1999 was down on March 1999. It is very likely that seasonal patterns are changing, and that these data will be subject to considerable revision over the next year or two.

All the apparently gloomy figures tell us is that GDP was unusually high in the first quarter of 2000. One doesn't have to be a Nobel laureate to understand that that was due to the America's Cup.

There is no reason to be pessimistic about the prospects of the New Zealand economy in this 2000s' decade. Yet I am sure that the pessimism will be around for a while.

If we are going to use GDP or employment data to judge our nation's short-term economic performance, we need to be aware of the cycles that appear to run quite independently of economic policy. To a large extent our cycles also run separately from other countries' cycles. That means our migration figures are a sensitive indicator of the rhythms of our national economy.

Almost any quarterly statistics on the New Zealand economy, if plotted over the last 35 years, suggest short-period inventory cycles of 2.6 years and longer period investment cycles of about 10 years duration. These cycles are especially apparent in import data.

Recessions occur when downturns in both cycles coincide. That happens twice per decade. Interest groups pushing pessimism as a way of attracting support for their agendas are particularly active during recessions.

2001 is such a year in which, if the pattern continues, both cycles will bottom out together. Other double downswings have been in 1998, 1991, 1988, 1980, 1977, 1970 and 1967.

All the signs are that the coming recession will be much smaller than those of 1991 and 1998. We will be entering 2001 neither with an overvalued currency, nor with grossly excessive interest rates.

Nevertheless, a recession is a recession. All recessions have political consequences, even when government policy has successfully minimised the extent of a recession.

Any recession in 2001 will be misinterpreted as proof that the government's economic policies are failing. The recovery, which will commence in 2002 if the past pattern of fluctuations continues, may be too late to facilitate the reelection of the Labour/Alliance government.

Whoever is elected to power in 2002 should be well placed to carry the credit for the major economic expansion which is beginning in provincial New Zealand right now.

Understanding the business cycle in New Zealand is critical if individual items of economic data are to be accurately interpreted. Cyclical changes make seasonally adjusted data unreliable.

Mid-decade upswings in the investment cycle have coincided with a high New Zealand dollar exchange rate. Even in the 1970s, before the dollar was floated, a currency revaluation in 1973 created a consumer-led boom.

A high exchange rate tends to boost consumer confidence while eroding business confidence in the tradeable sectors. Exchange rate sequences represent a crucial part of the explanation of the 10-year investment cycle.

When the New Zealand dollar is overvalued, the national economy is dominated by Auckland and Wellington, and by the finance sector. The seasonal patterns on Queen Street and Lambton Quay are very different from those of Taranaki and Timaru. Hence current seasonally adjusted data are distorted by seasonal patterns that applied to the mid-1990s' expansion but do not apply today.

Good analysis of the New Zealand economy requires both a sense of history and an appreciation of the limitations of the statistics that are food and drink for the business press.

The prospects for New Zealand this decade are good. Will we recreate a prosperous New Zealand? Or will we, on account of historical myopia and a sense of post-Olympic disillusion, once again snatch economic defeat from the jaws of victory?

Much of what happens in economic life is self-fulfilling. It is well within our capability to have minimal recessions followed by long upswings. In this decade, we can succeed. We can avert class-war politics, adopt environmentally friendly business practices, and reap US-style productivity gains.
 


© 2000   Keith Rankin


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