Two weeks ago we considered the punts of four professional forecasting concerns- Infometrics, the Institute of Economic Research (NZIER), the Reserve Bank of New Zealand (RBNZ), and Ben. In last Friday’s NBR, forecasts from a further five analysts were surveyed. With one exception the views covered in the NBR survey add little to the forecast issues that we raised in this column earlier. That exception was the forecast presented by Chris Meads of tile National Bank, who is picking 6.7% and 5.1% growth over the next two years- an outlier at the top end, much as our own view is the outlier at the other. At first glance one might even think the forecast is somewhat off the wall, especially from our perspective that is so much more bearish, with 0.3% and 1.4% GDP growth predicted for that same period. But close comparison of Infometrics’ forecast with the Mead’s view reveals a remarkable affinity.
The interesting thing is that the National Bank forecast and our own, while at opposite ends of the spectrum in terms of the growth number, contain very similar trends in most aggregates;
- Both forecasts expect a slump in domestic demand, with consumption outlays flat, and investment outlays falling.
- Both forecasts anticipate contraction in imports as domestic demand slumps
- Both forecasts contain a fall in the terms of trade.
- Both forecasts contain strong recovery in exports- National Bank +7% and +17%; Infometrics +4.5% for each year.
It is in this last area where the critical difference between the two forecasts is lies, although we’re bound to observe that NZ hasn’t scored 17% export growth for at least 15 years. Ironically, the bullish National Bank forecast has a more severe slump in the domestic economy than we expect and so the contribution of net exports (export less imports) is where all their GDP growth is coming from. Despite the large difference between the two most extreme forecasts of the nine considered- the two outliers are in fact extremely similar in terms of their basic rationale for growth. The important point is very little growth in the domestic economy is seen over the next two years in either forecast- that is a recipe for political turbulence, a new government not withstanding, and if correct, is a strong indication that there will be major changes in the political setting of economic policy early in National’s term.
This should put the relevance of this week’s budget in perspective. With respect to the major macro impediments to NZ’s growth prospects under current policy settings- the cost of capital (real interest rates), and the cost of labour (real wage rates)- it is most improbable that the document will deliver any policies to bring either of those down to internationally competitive levels. Production of a financial surplus does not necessarily deliver any remedies for the balance of payments and external debt trends- as the recent experience of both Australia and the UK demonstrate. Accordingly, we expect this year’s budget to have as much influence upon New Zealand’s elusive economic recovery as last year’s.