Gareth Morgan, Director of Gareth Morgan Investments
While there is growth in export sector incomes, most households are still struggling with static to declining incomes. In their latest economic forecasts Infometrics notes that the increasing burden of compulsory charges for households, and the high cost of debt, will mean the recovery in GDP being generated in the export sector will seep only slowly into a sustained upswing in household incomes and spending.
Infometrics view is that the upturn in growth over 1992 is not simply a cyclical swing in export fortunes, but rather a sustained lift in export incomes flowing from a fundamental change in the way businesses perform. Gone are the days of competing simply on price, or waiting for the next domestic upturn, or government handout. New Zealand firms are now winning market share by beating others on quality, customer service, technology, flexibility, etc. More and more producers are concentrating on overseas markets as demand conditions at home remain flat and exports become increasingly profitable as a result of the fall in the dollar and the low rate of inflation.
The degree to which the domestic economy lifts on the back of the export performance will be far less than in previous upturns. In the absence of inflation there will be no general boost to wages – a traditional means of transferring income from exporters to other households. With the government now fully funding its deficit the traditional spur to domestic demand from a large budget deficit financed simply by printing money, no longer plays a part. The domestic upturn will be constrained by the extent to which exporters spend their higher incomes in New Zealand. Despite economic growth in excess of 2% over the next two years Infometrics stresses that this will not translate into strong domestic activity. Household spending remains tethered by static incomes, worries about jobs, rising health and education charges and increasing pressure to build personal savings.
As the election approaches Infometrics expects a continuation of the fiscal softening that has been underway since austerity climaxed with Richardson’s 1991 Budget. Already the budget deficit has blown out to a projected $2.7bn this year – well ahead of deficits secured under the last term of Labour. National has failed to address the structural weakness in the government accounts, preferring instead to claim a “cyclical” deterioration that will disappear once activity lifts. The Government threaten further expansion of the deficit via a combination of “infrastructural investments”, and ongoing backdowns on social spending cuts.
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