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Do we really have a rockstar economy?

Paul bloxham, the hsbc economist who first called New Zealand a rock star economy, gets a little defensive when asked whether he’s revised his view. Sydney-based Bloxham hit the headlines in January, when he was quoted on American news channel CNBC saying New Zealand’s growth was set to outpace that of most other developed countries.

Now he’s more likely to use the “outperform” moniker, which he admits isn’t as sexy as “rock star”, but perhaps more accurate. “We stand by the idea that New Zealand has outperformed the rest of the world. Growth this year has been above trend, and a strong performance relative to New Zealand’s own history.

“The rock star reference was a relative concept – if you’re achieving solid growth above your peers, then that makes you an outstanding performer.” We may not be Freddie Mercury, but at least we aren’t Nickleback. New Zealand had an annualised GDP growth rate of 3.5% in the June 2014 year, the fastest pace since September 2007 and well above our more normal 2.5%. We’ve been near the top of the OECD growth charts, and our unemployment rate has fallen to a respectable 5.4% – lower than many.

Still, some or all of Bloxham’s peers are critical of the rock star label. BNZ head of research Stephen Toplis says it was an “inept way” of describing the economy. “It never has been outstandingly great and just because it’s doing better than everyone else, doesn’t mean it has ever been in that position.”

But even Toplis concedes New Zealand has performed well, relative to most of its developed market peers during and post the global financial crisis. “Some people will refuse to accept this for ideological reasons, but a lot of the reform in the 1980s and 1990s set us up in such a way that we were quite resilient to the shock of the GFC,” he says.

There’s general consensus among economists and the business community that the Government has made a good fist of managing the fiscal spend – keeping a tight rein on its own purse strings and repaying debt.

Bloxham thinks domestic reform has set the New Zealand economy up for more growth in the future. But others are concerned the economic uplift has been fuelled by the Canterbury rebuild and an Auckland housing boom, neither of which will last.

If you break out the factor of the Canterbury rebuild, the economy has only been growing at 2% a year, which is “okay but not great”, says NZ Institute of Economic Research economist Shamubeel Eaqub.

And the recovery is uneven across regions; 70% of all new jobs in the past seven years were in Auckland, 20% in Christchurch and the remaining 10% spread thinly across the other half of the population. “The rock star economy has, in many regions, not touched many people’s lives,” Eaqub says.

Moreover, the sharp fall in commodity prices and subsequent drop in the dairy payout forecast for next year has rocked our rosy economic outlook.

Short-term, the position still looks positive – though not top of the pops. Toplis believes we’re now at the peak.

“You can argue over the extent of the slowdown but it is a given that growth will be lower than it has been over the past two years. Commodity prices have dropped a long way.”

The good news is we emerged from recession before much of the rest of the world, the economy is still growing (without having had to resort to artificial stimulus) and there is “underlying momentum”, says NZIER’s Eaqub.

“The recovery is different from others in our history because it hasn’t been caused by high amounts of borrowing and new investment. So there hasn’t been the exciting zing rebound, which in most recessions is typically strong. But it may be more sustained and sustainable than it otherwise would have been.”

The NZIER’s consensus forecasts – an average of other forecasts – suggested in September our economic recovery cycle had peaked. Growth was moderating but remaining positive, on the back of continued upside in the construction sector, strong net migration and tourism numbers, low inflation, high business confidence and investment, strong employment growth, a depreciating dollar, and a fiscal surplus in sight.

NZIER expects economic growth to fall from 3.3% in the March 2015 year to 2.9% and 2.2% the following two years, and 1.98% in 2018. Meanwhile Treasury’s economic and fiscal forecast in August predicted GDP growth of 3.8% in the year to March 2015, falling to 3% in 2016, and 2.1% in 2018.

“There are points of vulnerability and we’re watching the global scene like a hawk. But under the bonnet I’d say we have enough petrol in the tank that we’ll be okay,” says ANZ chief economist Cameron Bagrie.

The threats

What are the risks to our sustained growth? The biggest one, according to Treasury secretary Gabriel Makhlouf, is complacency. Despite the hit from lower dairy prices, China and Asian markets are growing, with emerging middle classes interested in tourism and our export products.

“We have to channel the innovation that exists in New Zealand and take advantage of the value chains in the global economy. In some ways the biggest risk is to assume that everything is okay without making much effort in the short or long-term,” Makhlouf says.

ANZ’s Bagrie says the private sector still remains highly indebted, although not at pre-2008 levels. “The household savings rate prior to 2008 was minus 6 cents and now its plus one cent. It’s gone from being dreadful to poor. Net external debt has gone from minus 85% of GDP to minus 65%. Again, it’s gone from dreadful to poor.”

Another major challenge is getting value from current or pending Free Trade Agreements (FTAs) covering four billion people, Bagrie says.

For BNZ’s Toplis, falling dairy prices is a concern. Farmers can cope with a sub-$5 per kg of milk solids payout for one season, but are unlikely to feel the same way if the payout remains at that level for several years.

Worse, however, for New Zealand and the global economy are over-valued asset prices, he says. Meaning, where we store our wealth is under threat. Central banks have been pumping out money to gee up their economies post-GFC and there’s a lot of cash looking for a home. That’s forced prices up in the bond, equities and housing markets, Toplis says, even for riskier assets.

“Usually you pay relative to the safety of an asset, but triple B rated companies are not having a problem getting funds. People are simply looking at yield and aren’t that worried about the risk. And haven’t we heard that before?

“There could be a major re-rating of asset prices globally and that’s the single biggest risk over the next three years – and one we have absolutely no control over.”

The flip side is, if the proverbial hits the fan, New Zealand is well-placed, Toplis says. “We could have interest rates drop a long way and the Government could go into fiscal spending mood – we have the room for that. That’s where New Zealand is differentiated from the rest of the world. We have a bigger safety net.”

Westpac chief economist Dominick Stephens is forecasting a two-speed economy over the next year, with strong domestic demand and weak exports, though these should pick up towards the end of 2015.

His biggest fears are further out – he’s pessimistic about the boom turning to bust by 2018, when the Canterbury rebuild tails off. “It will be a real challenge for the economy. I’m deeply concerned that people are over-investing and over-employing in the mistaken belief that the construction sector will continue to prevail when the insurance money falls by the wayside.”

When interest rates inevitably rise again, our high housing valuations will no longer be supported, and there will be falling house prices as the construction boom ends, Stephens says. His concerns mirror a warning from Forbes blogger Jesse Colombo, who earlier this year claimed a crash was on the horizon in New Zealand due to the effects of a housing bubble.

Other economists don’t agree things will get that bad, although Toplis says the possibility of a recession in three to five years is quite high. Bloxham thinks New Zealand’s strong ties to Asian countries will provide a counterbalance to any fall off from the Canterbury rebuild while Eaqub thinks there are worse things to worry about, even though the rebuild is driving 1% of GDP. The bigger risks in the medium-term will be from the global economy and the Auckland housing market, which has been deliberately cooled by the Reserve Bank through loan value restrictions and interest rate rises, Eaqub says.

“Auckland is the engine for economic growth and if it is not firing there is a real risk to the economic recovery,” he says. “I expect house prices to go sideways for some time but I’m not expecting a huge slump nor strong growth.”

ANZ’s Bagrie rubbishes the idea the end of the Canterbury rebuild will push the economy into a downturn. “As soon as the Canterbury rebuild goes, so too will the restrictions on Government’s fiscal policy. The Government is already looking to spend more in the 2015 Budget than it did in 2014, with tax cuts around the corner. The Christchurch thing might have a geographic hit for Cantabrians but nationally there will be no Christchurch rebuild hole that we’re going to fall into.”

The opportunities

New Zealand has a number of things working in its favour, including positive signs on our typically low productivity level. Productivity, a major driver of GDP growth, rose 2.1% in the year to March 2013, well above the average annual rate of 1.6%.

As Bagrie says, the GFC gave us a “kick in the guts but it forced us to shape up or ship out” in terms of improving our efficiency. That, coupled with a high currency, has meant exporters and manufacturers have had to do things differently and innovate.

One of the long-term drivers of economic growth over the five-year horizon is getting that productivity story right, he says. “One of the precursors to the downturn was complacency. I think firms are now very focused.”

While most people look at the big picture stuff such as migration, house prices, commodity prices, and the NZ dollar, New Zealand – with its high number of small and medium-sized companies – is a micro, not a macro story, Bagrie says.

“The macro drivers of the business cycle we know about, but it’s the micro-economic facets that might be delivering the real economic muscle and allowing the economy to run faster without blowing a head gasket.”

New Zealand Trade and Enterprise chief executive Peter Chrisp says he’s both optimistic and realistic about whether our mainly small companies can deliver a sustained economic uplift.

Among the 540 companies his governmentfunded outfit currently works closely with, around a third are niche food and beverage producers, which have seen compound annual growth rates of 15% in the past 10 years. “It’s just growing and growing”, he says. Another third are digital and services companies with a business model of chasing growth rather than profitability, and these are also expanding at a fast clip, Chrisp says.

The reality is New Zealand is small and far away from most places it exports to. At 33% of GDP, our exports are still well below the 40%- 50% rate for similar-sized OECD countries. Chrisp is seeing many companies stumble once they hit growth pains at the $15m-$20m mark; others start to slow down at $70m turnover.

“There’s a lot with negative growth,” he says, for a variety of reasons, including founders without the capability to run a global organisation. Still, Chrisp is confident there are enough business owners with a mix of “character, edginess, disruptiveness, and problem-solving abilities” to maintain our export growth.

For the first time since the Treaty was signed, New Zealand finds itself located in the fastestgrowing region of the world, says Treasury’s Makhlouf. The challenge is to make the most of the opportunity.

“How can we effectively increase our external direct investment, how are we at welcoming foreign direct investment, how good are we at placing ourselves appropriately in global value chains, how well connected are we in terms of telecommunications and other media, and how well do our schools and universities deliver us the leverage for the next 100 years, when Asia/ Pacific is going to be where it is at?.

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