Growth figures question the confidence story, but don't settle the argument

Thursday, 20 September 2018

Finance Minister Grant Robertson could justifiably be pleased by Thursday's economic growth figures, with the economy showing healthy and broad-based growth. But he knows the economy is in transition and that this could see growth cool in the coming quarters.

OPINION: Was all the talk about business confidence just a whole lot of nothing, with the fog suddenly cleared by signs of good news?

News that the economy sprung back into life, revealed in figures published by Statistics New Zealand on Thursday, is not only good news, it appears to fly in the face of the prevailing narrative surrounding the economy.

Depending how you measure it, business is either at its most gloomy since the aftermath of the Christchurch earthquake, or the depths of the global financial crisis.

But the new figures paint a picture of an economy not only growing, but growing in an unusually synchronised way. Statistics NZ divides the economy up into 16 sub-categories when calculating gross domestic product and 15 of them are growing. For all the gloom surrounding Fonterra, it was dairy that led the way, with agriculture recording its strongest quarter of growth since 2014.

**READ MORE:

Council of Trade Unions president Richard Wagstaff said 'vested interests' have been trying to drive down business confidence but Thursday's economic growth figures showed they were out of step with reality. But Thursday's figure paint the picture of what was happening months ago.

* CTU blasts campaign by 'vested interests', as NZ economic growth surprises

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* NZ economy may not be as slow as business confidence suggests - for now**

The heat of the debate around business confidence quickly came through from the Council of Trade Unions.

For several months, Richard Wagstaff, the CTU's president, has been pushing back against what he sees as a campaign to undermine the new Government by big business, and on Thursday you could almost sense his relief.

Dairy production and exports helped agriculture record its strongest quarter of growth in four years.

'There has been a carefully coordinated campaign from vested interests to talk the business community into depression,' Wagstaff said in a statement.

'But the stats out today show that businesses are doing well. Overall, [gross domestic product] was up by 1 per cent in the three months to June. This exposes the gloom merchants trying to undermine better sharing in our economy with their Chicken Little rhetoric.'

Wagstaff is right that the economy is doing well. Or rather, it certainly was doing well.

The figures released on Thursday related to a period which ended on June 30, almost three months ago. How well is the economy going now? We will find out for sure a few days before Christmas, but the recent indicators are quite mixed.

It is certainly true that Thursday's economic growth figures were better than expected. The growth was stronger than expected, and some of the temporary factors which observers thought might make things look flattering, were less significant than expected.

But in general terms, economists expected that the figures for the June quarter would be at least respectable. The rubber will start to hit the road in the second half of the year.

ASB in particular predicted strong growth in the June quarter, yet even afterwards continued to warn that in the period we are in now, momentum may have slowed.

'Alas…growth may have lost some momentum over [the September quarter],' ASB senior economist Jane Turner said.

'Negative business sentiment poses a threat to economic growth sustaining at current rates over the coming year.'

While the stronger than expected growth in the June quarter may cause experts to re-evaluate the state of the economy for the rest of the year, Turner said its current forecasts may be too strong.

'Taking recent business confidence readings at face value, in particular business investment and employment intentions, suggest growth could be much weaker than we are forecasting over the second half of the year.'

There has been more concerning news this week, with the release of the Westpac-McDermott Miller consumer confidence survey, which suggests households are less confident now than at any point since 2012.

It would be easy to dismiss that as a reflection of headlines, with households becoming concerned by reports of weak business confidence (on a personal level it would be gratifying to believe business journalists are that influential).

That is possibly at least partly correct, but the survey showed a particular fall in Auckland, where the housing market (after a spectacular increase) has weakened more than other parts of the country.

Whether or not it is clever to do so, households tend to feel more confident and spend more when the value of their home is increasing. When it stops going up, or starts to fall, wallets start closing. Consumer spending has a major impact on many parts of the economy.

Thursday's economic growth figures should be welcomed for what they are - better than expected results from an economy which has been growing solidly for years.

But they do not prove that the economy is not slowing. The challenges posed by falling business confidence - if indeed they do exist - will not start to be seen until the second half of the year.