SMELLIE SNIFFS THE BREEZE: Shroud-waving

SMELLIE SNIFFS THE BREEZE: Shroud-waving on the recovery

By Pattrick Smellie

July 6 (BusinessDesk) - For such a smartly dressed, carefully spoken chap, Shamubeel Eaqub from the New Zealand Institute of Economic Research sure knows how to wave a shroud.

For Eaqub, there are no half measures. He is seemingly never worried about anything, only "very worried" or, in the case of many of the results of yesterday's June quarter NZIER Quarterly Survey of Business Opinion, "very, very worried".

Throw in a few "deeply concernings" and you're left with the feeling that the country's pre-eminent independent economic forecasting agency is seriously down on the Kiwi economy.

Looking at the lastest QSBO results, pessimism is hard to fault, albeit that most sectors are still dramatically more optimistic than they were a year ago, when the evidence was unimpeachably clear that we were in the crap.

After all, the QSBO is not an economic forecast, but the sum total of replies from businesses large and small all over New Zealand to a quarterly survey that has been running for many years. Its results are as useful a harbinger as any.

When Eaqub says small enterprises are the "canaries in the cage" for future business conditions then it's worth listening.

However, for all the gloomy rhetoric, the QSBO numbers are open to interpretation.

Where Eaqub saw only gloom and called for an immediate halt to further monetary policy tightening, ASB's Jane Turner saw pin-pricks of light at the end of the tunnel, with the QSBO painting no more than a picture of "slightly softer economic growth", and "the current level of firms' assessment of own activity still suggest reasonably healhty economic growth over 2010".

Where NZIER saw little evidence of any inflationary pressure other than the expected emissions trading, ACC, and GST increases pushing headline inflation higher, ASB says "inflation pressures still clearly exist", and "should be of concern to the Reserve Bank of New Zealand."

And while investment intentions are definitely softer, the fact that capacity utilisation measures are at long term average levels "suggests firms continue to face capacity pressures." Similarly, while hiring intentions weakened in the June quarter, Turner says "firms are noting increased difficulty in finding both skilled and unskilled staff, thus pointing to wage pressures over the coming year."

The future being the future, we'll only know who was right in a year's time.

But it's clear that the economic mood is fracturing again. On the other hand, think back to the course of the last six months and gyrations in sentiment are hardly a new thing. Many businesspeople came back from the Christmas holidays with a spring in their step, only to encounter the economic equivalent of wet cement to walk on. By the end of the March quarter, things felt marginally better. Now, in mid-winter, the auguries appear somewhat malign again.

Some of that is to do with a slowdown in our new economic saviours - China and the rest of Asia - where as Westpac chief economist Brendon O'Donovan points out, monetary policy is "super-easy", comparable to the looseness seen in the developed world as it grappled with the depths of the global financial crisis in 2008 and 2009.

But it's also true that those economies continue to grow strongly, and that their medium-to-long term prognosis has to be regarded as optimistic for New Zealand. Sure, the old world economies are flat on their back, and there is always the risk that an overheated China will face setbacks. But the fact remains that, apart from hopelessly indebted and ageing Japan, Asia now holds a growing chunk of the world's savings, and has the pre-conditions in cheap labour, land and resources to continue to grow.

The question is how fast, and in how predictable a fashion?

What no one is arguing over is the state of the domestic economy. We're not yet talking about the dreaded double-dip recession, but the outlook for anyone exposed only to New Zealand activity is far from fun.

On the other hand, the prognosis should hardly be surprising, given the growing realisation across the developed world that the good times are over and a decades-long trudge beckons.

It's a bad time to own a shop, a dumb time to buy a house unless you need somewhere to live, a hard time to get a loan on a good idea, and the wrong time to buy that speedboat.

Perhaps this fragility simply reflects where we sit in the world. On the one hand, a highly indebted First World country facing the same long trudge back to credit-worthiness as Europe and the U.S., with the attendant potential for further painful adjustment in asset values, especially houses, albeit that we don't face the pressure to cut wages, social services and government debt as, say, Greece, Britain, or Spain.

On the other hand, we sit on the edge of the part of the world that is emerging to replace the traditionally most powerful arbiters of global economic power, with all their attendant potential for growth that comes in fits and starts.

Perhaps rather than talking the economy up or down on the basis of undulating business opinion, what Eaqub should really be saying is: "Get used to it."

(BusinessDesk)

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