Is New Zealand's economy slowing or booming?

Economists are considering mixed signals

There is a debate currently among economists about whether the New Zealand’s economy is slowing or booming as different sources are sending contradictory information.

New Zealand’s statistic office on 19 September showed that New Zealand’s economy grew at its slowest rate in five-and-a-half years in the second quarter of 2019. The agency stated that the national economy expanded 0.5 per cent in the April-June quarter, which is lower than market forecasts, as mining and manufacturing activity weakened. That is what took the annual growth for 2019 to 2.1 per cent, the lowest recorded since 2013. Also, the latest ANZ Business Outlook showed a slump in business confidence.

However, credit ratings agency Moody’s released a report in September rating the New Zealand’s economy as “one of the few countries with its strongest ‘Aaa’ credit rating”. As well, New Zealand’s Treasury reported a strong surplus and low debt on 8 October. In like manner, the IMF latest Article IV report on New Zealand published in September stated that New Zealand’s economy is operating at “close to potential” and praised its low employment figures and rising wages.

The IMF went even to predict in its latest World Economic Outlook that New Zealand’s growth rate would be 2.7 per cent in 2020, well ahead of other developed countries which growth should be 1.7 per cent on average in 2020 according to the Fund, with UK at 1.5 per cent, Australia at 2.3 per cent, and the US at 2.1 per cent.

This triggered a debate among economists. On one hand, some consider these predictions will not come true as a reduction in global growth will have an effect on New Zealand’s economy. As a relatively small open trade economy, New Zealand is particularly vulnerable to global economy developments and outside shocks. Trump with its trade war with China and increases in tariffs, and Brexit are wild cards that add to the uncertainties surrounding where the international economy is heading.

Also, Economist Shamubeel Eaqub mentions that the latest NZIER Quarterly Survey of Business Opinion (QSBO) is showing the lowest level of confidence since 2009 and a New Zealand tourism industry – the biggest export industry, worth 6.1 percent of GDP – in particular would be directly impacted by a global downturn. Others point out to the Reserve Bank’s decision to slash the official cash rate to a lowest ever of 1% in August, a sign that the RBNZ might have early indications of a looming slowdown together with concerns about low inflation.

On the other hand, other Economists, such as Christian Leung, Chief Economist at NZIER, consider that New Zealand’s domestic economy is quite strong and resilient to deteriorating global conditions, relying on good household sentiment, together with good performances of transport and logistic industries.

Still GDP understates several economic contributions

Keith Woodford and NZIER share view that New Zealand’s agribusiness export industry is understated in New Zealand GDP as it does not account for intermediate consumptions such as fertiliser, veterinary services, software, hardware and other supplies necessary to produce milk, grain or meat in a farm.

Also, in the wider economy, as GDP accounts for the value of sales to the final consumers, the individuals, not the companies, all the outputs from factories, manufacturing plants, offices, and shops that are purchased by other commercial enterprises, are ignored in GDP. GDP was actually never designed to be a measure of the overall well-being.

Is GDP the good indicator anyway?

GDP comes under increased criticism of not being the right indicator of a performing economy anyway and especially of the happiness of its population.

Since 2009, the OECD has developed its own “better life” indicator as a more “qualitative” alternative to GDP to compare the performances of each of their member across 11 topics of well-being housing, income, jobs, community, education, environment, governance, health, life satisfaction, safety, work-life balance, as well as outcomes by gender.

Besides, New Zealand under PM Jacinda Ardern is the first country in the world who developed a “Well-Being Budget” this year to pay for policies to support the environment, cultural identity, housing income and social connections. However, as Bill Rosenberg pointed out in the May 2019 issue of the NZCTU Monthly Economic Bulletin, the “Well-being Budget” is substantially underfunded to respond to all the needs in health, education, housing, welfare, conservation, staff retention and the environment.

New Zealand has room for manoeuvre

Nevertheless, there is some room for manoeuvre. New Zealand has one of the lowest debt-to-GDP ratios in the world at 30.4%, while Australia is at 42%, the US at 82%, the UK and the EU at around 87% and Japan at 236%.

It would be fine to be almost debt-free if all needs in New Zealand were addressed and if we were not at risk of a major collapse due to our disinterest for decades to the environment and the loss of species, but it is far from being the case and these risks are becoming explosive if they are not dealt with.

Hence, to be on a par in debt level with Australia which still enjoys a ‘AAA’ rating from credit agencies, New Zealand could borrow as much as 12% of its GDP (NZ$ 36 billion) to invest in infrastructures, health, welfare for its poorer population, depolluting, banning chemicals from its environment and safeguarding its threatened species.

Another option, as New Zealand Taxpayers’ Union Joe Ashcroft proposed it, would be to substantially cut the 30% tax rate on income earned over $48,000 or to raise the threshold to a higher salary. Indeed, New Zealand low and middle-income earners are heavily taxed compared to their counterparts in other OECD countries. In Britain, low and middle-income only pay 20% up to NZ$94,000, in Canada 20.5% up to NZ$114,000 and in the US 22% up to NZ$134,000. Tax relief for the low and middle-income earners is the most effective way to boost the economy and increase well-being as they would spend any increase in their disposable income in what they need whereas higher income earners would just save it or use it to increase the bubble on the property market or on other speculative asset markets.

Beyond GDP and indicators, states of mind should be changed

We are living in an era of capitalism domination on the minds much like mercantilism dominated the minds in the civilised world from the 16th to the 18th centuries, but the consequences are much more serious today. Under mercantilism, all value was considered to be in possessing precious metals and concentrating the industry in the mother country. Mercantilists would not recognise value in anything else than precious metals and vowed to accumulate as much as possible of it. We have shifted form this conception and considered since the 19th century with capitalism that each country should specialise in whatever they are doing best and allow free trade to maximise revenue in monetary terms, ignoring along the way transport costs and damages made to the environment.

But this is another misconception. We forgot that money is actual virtual as it has been created to facilitate exchanges and even more so that money is no more convertible in gold. We misconceive money as real wealth, the same way as mercantilists misconceived precious metals as real wealth. This leads businesses around the world to sacrifice real assets like forests, clean water, clean air, animal species as well as the well-being of people for more profits and often with a short-term focus.

We have to change this state of mind if we want to save a liveable planet for future generations. The real wealth rests in a clean and safe environment, in a diverse ecosystem and in the welfare of our people. In this sense, New Zealand is very wealthy and must preserve this real value. It would make sense to sacrifice more of the fake value (money) by borrowing more of it (or printing more notes) to preserve the real value (the cleanliness of its environment, the diversity of its ecosystem and the welfare of its people).

Central banks know about this misconception as they have been trying to reduce cash rates to historically low levels in a desperate attempt to increase the money supply and investments and by the way, raise inflation and try to avoid the sceptre of deflation which is the nightmare of all economists. However, all this extra money created is trapped into savings and property markets which are bubbling and do not benefit to the workers and particularly the poor. So, the next step would be distributing free cash to the poor (helicopter money). Some economists are actually seriously considering this option as it would be a real solution to the current situation similar to the “liquidity trap” where any influx of liquidity in the system fails to be effective as it feeds bubbles in the property and other asset markets and fails to pass on to the working class and poor people whose salaries remain low and even makes their housing options even dearer.

But this revolutionary idea would collide with the conservative minds of most people. And central banks are not helped by ill-informed conservative or liberal governments currently in place in most countries and supported by the richest part of their communities who want to preserve their own interests. Even though, in the end, less inequal societies would benefit all, including the richest, as it would make businesses more sustainable, people healthier and the planet more liveable. Indeed, a more equal distribution of wealth would benefit the planet too as Oxford geographic professor Danny Dorling demonstrated, the rich are aggravating climate change because of their consumption of unneeded items like several cars, phones and even houses.

So, the issue that really matters is not if GDP is slowing or booming. This will have little importance for future generations. The real issue for them is are we losing the battle against the massive extinction of species, climate change and growing inequalities? If we want to fight these real battles which are critical for our future, it does not matter much if GDP is going up or down in the meantime. Only, in a marginal way, to pay for research and the development of new technologies to clean-up the environment if we are committed to do so.

The current reality is probably that New Zealand’s economy is strong and resilient thanks to the progressive – yet but insufficient – policies of its current labour government, but it is very vulnerable to the global economy which is slowing and increasingly uncertain.