On Friday (25 June) New Zealand's GDP production figures for the first three months of 1999 were released. As expected, they confirmed that, in the wake of the 1998 recession, a consumer-led recovery is under way. Seasonally adjusted, the New Zealand economy grew by 0.7% in the quarter. It grew by 2.2% in the nine months from July 1998. With population growth having slowed markedly since emigration rates increased, GDP per capita grew by 1.8% since the recovery began.

From 1954 to 1997, New Zealand's post-war trend rate of per capita growth has been around 2% per annum, ignoring major "structural" recessions in the late 1970s and late 1980s (see graph). 2% per annum is low by international standards, which means that New Zealanders' incomes have been steadily falling relative to those prevailing in other OECD countries.

New Zealand has been falling off the pace more quickly in recent years, with the late 1990s representing another period in which average medium term (ie quinquennial) per capita growth rates are well short of the 2% benchmark. The following graph shows that medium term per capita growth rates will fall to around 0.5%, even if present quarterly growth rates persist into the year 2000.

There has been no growth dividend arising from the post-1984 liberalisation of the New Zealand economy. Rather, in the absence of convincing evidence that the 2% growth rates of the early 1980s could not be sustained, it has to be concluded that the "pain" associated with the reforms gave New Zealanders (or at least most New Zealanders) more pain; not "gain" as promised. Even Treasury, the driving force behind the liberal reforms "can't explain poor economic growth" according to a headline in the Evening Post of 18 June.

The main legacy of the reforms appears to have been a chronic annual (current account) balance of payments deficit of 6-8% of GDP. This means that, as a nation, New Zealand is not paying its bills to the tune of around US$4billion each year. New Zealand needs a recovery based in the "tradeable" sector; a pattern of economic growth that both leads to increased foreign exchange earnings and increased foreign exchange savings.

The following graph shows us what New Zealand got, instead.

The two key components of any country's tradeable sector are its agricultural and manufacturing sectors. In New Zealand, traditionally these two sectors grow in an alternating pattern. The pattern is to some extent a statistical artefact; when farmers are confident they buy more inputs from manufacturers. The result is that the value-added by farmers falls on account of the cyclical pattern of their input purchases.

In 1998/99, the traditional pattern appears to have disappeared. Both farmers and manufacturers are in the doldrums, despite rising consumer confidence, an inflation rate close to zero, and a significant fall in the exchange value of the New Zealand dollar in 1998.

In New Zealand, consumer confidence can sustain economic growth only if foreign creditors are freely investing in New Zealand. With the tradeable sectors' prospects seeming to be as bleak as they were in 1997 and 1998, foreign capital inflows are unlikely to be going to those sectors, where they are most needed.

My reading of the GDP figures suggests that New Zealand will face a very sharp recession in 2001 and 2002. There will be no return to a steady growth rate of 2% per capita per annum until New Zealanders find ways of simultaneously paying for their imports and servicing their expanding foreign liabilities.

© 1999   Keith Rankin

Rankin File | StatsWatch