Liam Dann: What went wrong? Why is the economy doing so well?


Why are things going so well for the New Zealand economy?

Latest unemployment numbers came in at 5.3 per cent last week – a figure that for most of the past few decades would have been considered pretty good.

It isn’t good, of course.

The pandemic and the closure of New Zealand’s borders made about 37,000 more people unemployed in the September quarter.

And that doesn’t include those who have lost work but don’t qualify as officially unemployed for a variety of statistical reasons.

But relatively speaking, 5.3 per cent unemployment is not bad, either.

In April, for example, Treasury forecast that unemployment would hit 9.8 per cent in the September quarter.

In the early 1990s it was close to 11 per cent.

If we were able to send this week’s data back to our panicked selves of seven month ago – we would breath a sigh of relief.

The forecasts of bank economists have also proved overly pessimistic.

That’s not to be critical.

The pandemic was unprecedented and assumptions about the economic damage it would do were made on historic expectations.

On that basis let’s look at the forecasts from Westpac- one of our most upbeat economic forecasters.

Westpac chief economist Dominick Stephens has been pushing back against the gloomiest scenarios since the pandemic began.

And on that he has been proved right.

But things have gone even better than he imagined back in April and May.

Westpac picked unemployment to be 8.8 per cent in the September quarter.

It picked second quarter GDP to fall by 16 per cent – it fell by 12.2 per cent.

It picked a slump in export returns and a negative trade balance.

It picked a 5 per cent fall in houses prices.

Again, Westpac’s picks were among the most optimistic.

So what went wrong? Or rather, what went unexpectedly right?

We don’t usually run inquests into why things have gone better than expected.

They are usually about why a rugby team lost or why a political party saw its vote slump.

But I think it’s important to consider the “better than expected” narrative.

It has framed the way we look at the pandemic in this country, I think it has had political implications.

And I think it’s starting to raise issues about the way we look at recovery over the next few years.

We temper every new story about the surprising strength of the economywith the proviso that it can’t last, that next year we’ll feel the real slump.

That may still be true.

But we are approaching a crunch point for this view.

The wage subsidies are finished and we are about to feel the absence of international tourists more acutely as we reach the traditional peak of the season.

But if anything, the risk of that narrative proving incorrect appears weighted to the upside.

In other words, the bigger risk is that things keep going better than expected.

Perhaps our economy was just more robust than we thought.

Let’s start with the obvious area of strength – exports.

Headlined “Against the Odds”, ANZ’s latest commodity price index shows it gained 1.9 per cent in October. Dairy – our largest commodity export was up 3.6 per cent.

Overall the index (in NZ dollar terms) is only off 5 per cent from where it sat a year ago.

It is 3.5 per cent ahead of where it was two years ago.

Demand for our exports has held firm

One striking thing about the pandemic is the asymmetrical nature of its impact around the world.

If you look at a map of the areas being hit hardest it shows the virus out of control in North and South America, and Europe.

That map of countries handling the virus well overlaps very nicely with a map of NewZealand’s major export markets.

Overall something like 75 per cent of our exports by value are now to the Asia Pacific.

China’s success in controlling Covid-19 and keeping its economy rolling has been enormously important to our fortunes.

But so to is relative success in Australia, Japan, Thailand, Indonesia and many other markets through the region.

Even in the US and UK, where things are not good, we’ve seen weird twists – like people reaching for our sauvignon blanc in lockdown.

New Zealand wines are considered ones to drink at home,more so than at bars, according to an industry analysis by Rabobank.

It found we were the only wine-exporting nation to see the value of exports climb in the past year.

There are other surprising trends.

Far more Kiwis than expected are coming home, filling a gap that was expected to be left by the slump in immigrants arrivals.

That’s contributed to the (now well documented) housing boom.

And that’s helped prop up consumer confidence and retail spending.

People and businesses have also been highly adaptable, perhaps more so than was expected – although this is very hard to measure.

But the more time that passes with a serious economic slump, the more opportunity there is for people to adapt.

It is a virtuous circle.

There is no doubt that economic conditions will keep deteriorating over the next six months.

There is no doubt that there will be more job losses.

There is no doubt that there wil be more business failures.

But the evidence so far suggests there is reason for some doubt that it will be as bad as we had thought.

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