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GDP Gloom?

GDP Gloom?
Keith Rankin
26 October 2000

The economy seems to be stagnating. 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 not stagnation; that’s economic miracle territory for New Zealand.

Something similar happened last year. GDP in June 1999 was down on March 1999. It is very likely that the pattern of seasonal variation in economic activity is changing, and that recent seasonally adjusted data will be subject to considerable revision over the next year or two.

All the allegedly 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 economic success, we need to be aware of the cycles whose timing appears to be independent of economic policy. To a large extent our cycles also run separately from other countries' cycles. That means our migration figures are sensitive to 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. Unlucky governments are judged by the existence of such recessions, and not by their management of them. Likewise poor governments who preside over cyclical upturns are thought well of.

Interest groups pushing pessimism as a way of attracting support for their agendas are particularly active during recessions. They are an easy stick to beat a government with. The Muldoon government copped much flack on account of the 1982-83 recession, despite the fact that New Zealand’s economy was one of the OECD’s 5 top performers from 1979-84.

We are not in a genuine recession at present. But I believe I believe we will be next year. 2001 is 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. Any recession in 2001 will be interpreted as proof that the government's economic policies are failing. More right-wing commentators (like the Herald’s Fran O’Sullivan on 23 October) will call for more government activism (“action agendas”). The right in New Zealand never did believe in hands-off government. The recovery, which will commence in 2002 if the past pattern of fluctuations continues, may be too late to facilitate the re-election of the Labour/Alliance government.

If a National-led government is elected to power in 2002, it should be well placed to carry the credit for the major economic expansion which is already beginning in provincial New Zealand.

Understanding the business cycle in New Zealand is critical if economic data are to be accurately interpreted. Cyclical changes make unreliable the seasonally adjusted data that is grit for much media comment about the economy.

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 nations’ business cycles. Indeed, exchange rate effects ensure that countries’ cycles cannot be in phase with each other.

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. National seasonal adjustment factors are strongly influenced by whichever part of the national economy is dominant at a particular time.

Good analysis of the New Zealand economy requires both a sense of history and an appreciation of the limitations of the statistics that are commonly used to describe the economy.

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 (as in 1984) snatch economic defeat from the jaws of victory? We must not interpret any cyclical recession in 2001 as evidence of systemic failure.

Much of what happens in economic life is self-fulfilling. If we can avoid the knee jerking and finger pointing every time we have a brief downturn, it is well within our capability to have sustained and sustainable economic expansion this decade. We can have US style productivity gains without US style inequality. Just so long as we avoid agenda-ridden politics of division by class, gender and ethnicity.

© 2000 Keith Rankin

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