The Mythical Link Between Income Inequality and Slow Growth

July 13th, 2015 at 1:00 pm by David Farrar

Matthew Schoenfeld writes at the WSJ:

From 2000-10, many of the 34 OECD countries propped up growth by launching expansive social programs with borrowed money. But not all. The five most “unequal” countries in the OECD report—Israel, the United States, Turkey, Mexico and Chile—largely abstained. They increased sovereign debt by 3% on average compared with a 40% average increase among other OECD members.

When austerity pressures caught up to debt-laden sovereigns in recent years, however, the less leveraged—and not coincidentally, less equal—member countries grew a lot faster than their peers. From 2011-13, according to the World Bank, the five most unequal countries grew nearly five times faster (3.9% cumulative annual average) than the others (0.84%). By using a 2010 cutoff, the OECD has skewed its findings.

Thsi data destroys the argument that an economy grows faster if you tax and redistribute more.

Consider Greece. From 1999-2012, its Gini coefficient “improved” by 6% to .34 from .36—more than any other OECD country. (The Gini coefficient measures income distribution, where 0 represents complete equality and 1 represents a society in which a single person has all the income). Greece’s redistributive social transfer spending also grew most quickly among OECD peers from 2000-12. But Greece’s economy has shrunk by more than 20% since 2010 (World Bank data), and today more than a third of its citizens are considered to be at risk of poverty (Eurostat data).

Equality can mean equality of poverty.

From 1995-2012, OECD member countries that increased government expenditures as a percentage of GDP grew 30% slower than member countries that trimmed government expenditure as a percentage of the economy over that span—average annual growth of 1.9% compared with 2.5%.

This is no surprise.

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The case for economic growth

March 17th, 2015 at 7:03 am by David Farrar

The NZ Initiative has published an essay arguing the case for economic growth. Now you might think there is no need for a case to be made for it – surely everyone favours it. Well in the forward it is pointed out:

In self-proclaimed intellectual circles, it has long been fashionable to belittle the idea of economic growth. “GDP is not the same as happiness”, some critics of growth will explain. Others will warn that excessive growth could destroy the environment and leave our planet uninhabitable. Others still will warn that the finite nature of our resources does not allow continuous growth in any case.

In fact the Green Party used to explicitly campaign against economic growth. Now, they only do it implicitly.

Hartwich points out:

Economic growth is the driver behind all of these developments because at its core, economic growth is not mainly about the production of more but about the discovery of better (though often it is both). Economic growth helps us to find new and improved ways of combining resources. The outcomes could be a new medicine, a faster way of travelling, a healthier way of eating or a better way of learning.

The authors first look back at history:

Current measures of international poverty focus on dollar-a-day or two-dollar per-day thresholds. For all but about 0.02% of history, world per capita GDP was just over 50 cents per day, as shown in the graph above. Real economic growth as we now understand it – regular improvements in each person’s quality of life such that we can all readily see how our lives are better than those of our grandparents and great grandparents – is a recent phenomenon. Economic growth of this sort took off only from about 1820.

In the days before economic growth, everyone was below the poverty line!

While Gross Domestic Product (GDP) is hardly a perfect measure of any of the things we care about, the things we do care about are linked to GDP. Higher per capita GDP is associated with better health, wealth, happiness, opportunity, leisure and luxury. Richer societies are also better able to prepare for unforeseen calamities, from new diseases to natural disasters.

GDP is indeed not a measure of happiness, but richer societies can invest more in what does make them happy.

This first-worse-then-better U-shaped relationship between economic growth and environmental quality is called the Environmental Kuznets Curve. The curve was first described in 1991 by economists Gene Grossman and Alan Krueger, who wanted to test whether free trade between Mexico and the United States was likely to worsen or improve environmental quality in Mexico.46 Trade opponents argued that American industrialists would set up factories in Mexico to take advantage of less restrictive environmental regulations, exporting pollution. Grossman and Krueger argued instead that free trade would increase incomes in Mexico and consequently reduce pollution. Grossman and Krueger found that when per capita GDP reached US$4,000– $5,000 in 1985 dollars, or about US$10,000 today, sulphur dioxide and smoke levels started improving with economic growth rather than worsening. Mexican per capita GDP rose in real terms from about US$4,000 in 1992 to about US$10,000 in 2013. In 2010, a Washington Post headline announced: ‘Mexico City Drastically Reduced Air Pollutants Since 1990s’.47 If anything, Grossman and Krueger were too pessimistic about how long it would take for outcomes to improve.

As countries get wealthier, they can afford to reduce pollution.

In 1972, the Club of Rome predicted that the world would run out of oil by 2003 if oil consumption did not slow down, and by 1992 if consumption continued to grow.

Whoops.

As oil prices rose from the mid-1970s and consumers demanded more fuelefficient cars, substitutes for oil were found and previously uneconomical reserves became worth exploiting. Rising oil prices first encouraged innovation in the Alberta oil sands, then brought us massive amounts of cheap natural gas through hydraulic fracturing. And the rare earths crisis fizzled to nothing as the threat of increased prices both encouraged manufacturers to consider other alternatives and provided incentives for new rare earths mining outside China. If urbanisation ever turned any substantial amount of farmland into subdivisions, the consequent rise in the value of farmland and price of food would both encourage innovation in improving crop yields and in developing denser urban living environments.

The best signal of scarce resources is price. The worst signal is politicians claiming a resource is running out so we must stop using it.

And how to get more economic growth:

All else being equal, a government that makes up 35% of a country’s economic activity rather than 25% is associated with a 0.5 to 1-percentage point reduction in annual economic growth rates.

And over a couple of decades that difference in growth rates has a massive impact on incomes.

And Sweden is relatively open to free trade, which matters as the international literature suggests that a 1-percentage point increase in export growth is associated with a 0.2-percentage point increase in economic growth.

So we should support trade agreements that improve exports.

Income taxes are worse for economic growth than indirect taxes like GST. And while redistributive spending on transfer payments can be harmful for growth, investments in education can improve growth.

So cut income taxes, increase GST and spend more on education where it will do the most good.

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US economy shrinks 2.9%

June 26th, 2014 at 10:00 am by David Farrar

USA Today reports:

The U.S. economy turned in its worst quarter in five years during the first three months of 2014, shrinking more sharply than previously estimated.

The nation’s gross domestic product in the first quarter fell at a 2.9% annual rate vs. the 1% contraction previously believed, the Commerce Department said Wednesday. Economists surveyed by Bloomberg expected a 1.8% drop in output.

The decline was the sharpest since growth tumbled 5.4% in the first quarter of 2009 during the Great Recession. The last time the economy shrank was in the first quarter of 2011, slipping 1.3%.

The more dramatic drop was largely the result of weaker household consumption. Consumer spending increased just 1%, vs. the 3.1% gain previously estimated as health care spending dipped slightly. The government previously said that medical expenditures contributed substantially to growth as the Affordable Care Act began to cover more Americans.

Also, exports declined 8.9%, vs. the 6% drop previously estimated. And businesses replenished their stocks even more slowly than believed after aggressively adding to inventories late last year.

Quite a contrast to the NZ economy, as we have exports booming, and a strongly growing economy. Once upon a time the US economy contracting would seriously damage NZ’s economic growth also. But we’re less tied than we used to be.

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Strong economic growth continues

June 19th, 2014 at 1:00 pm by David Farrar

The Herald reports:

New Zealand’s economy grew at a 3.3 percent annual rate in the first three months of the year, the fastest first-quarter pace in eight years, supporting the central bank’s view that it must press on with interest rate increases to keep inflation at bay.

The economy grew 1 percent pace in the first three months of the year, from an upwardly revised 1 percent gain in the fourth quarter, marking three quarters of growth at 1 percent or above, Statistics New Zealand said. Quarterly growth was below the 1.2 percent expected in a Reuters poll of economists although the annual rate beat the forecast for 3.1 percent.

Three quarters in a row with growth above 1%. If the next quarter is the same, then we’ll be over the 4% growth mark.

 

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Recall Labour saying the regions are missing out on economic growth?

February 28th, 2014 at 7:00 am by David Farrar

Labour really can’t get a break. Almost every economic issue they have targeted, their timing has been woeful.

Their manufactured manufacturing crisis has become a joke, as the sector has record confidence.

Their targeting of the exodus to Australia has seen Australian flocking to New Zealand.

And their claims that the provinces are missing out, with only the three big cities getting economic growth – well, here’s the ANZ measurement of economic growth in the last quarter, in order from largest to smallest.

  1. West Coast 2.4%
  2. Northland 2.4%
  3. Canterbury 2.1%
  4. Waikato 2.0%
  5. Otago 1.9%
  6. Manawatu-Whanganui 1.6%
  7. Bay of Plenty 1.6%
  8. Southland 1.5%
  9. Hawke’s Bay 1.5%
  10. Gisborne 1.1%
  11. Nelson-Marlborough 0.9%
  12. Taranaki 0.7%
  13. Wellington 0.2%
  14. Auckland -0.1%

Maybe Labour could start campaigning on the crime rate, as that would probably see it drop even quicker than it currently is!

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Regional Growth

November 20th, 2013 at 9:00 am by David Farrar

As Labour start claiming an exodus of people from NZ, we get record inflows. Likewise as they claim a crisis in manufacturing, manufacturing indicators reach record highs. The latest Labour claim has been that the regions are being starved, and growth is happening in the major cities only.

So what does the quarterly ANZ Regional Trends report tell us. The six strongest growing regions in the last quarter were:

  1. Taranaki
  2. Gisborne
  3. West Coast
  4. Otago
  5. Northland
  6. Nelson-Marlborough

All have quarterly growth ranging from 1.3% to 2.5%, which is incredibly high.

Of course the Greens want to eliminate most of the industries in Taranaki and the West Coast!

Stuff reports:

Regional economic growth is at its strongest in nine years, with only the Canterbury region recording a slower rate of annual growth for the year to September.

Labour’s track record at picking issues continues to excel.

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Grow baby grow

November 8th, 2013 at 9:00 am by David Farrar

James Weir at Stuff reports:

The economy will grow almost 4 per cent next year, helped along by a strong population gain from surging immigration, according to Westpac Bank’s latest predictions.

The bank has upgraded its forecasts for this year slightly to 2.8 per cent, followed by growth of 3.8 per cent next year.

The economy had moved beyond the recovery phase and into solid expansion this year, despite the brief but intense drought last summer. 

It was set for a big burst in the second half of this year, with a “remarkably swift” turnaround in milk production in the last few months. 

At times like this I recall how the Green Party climate change policy is to shoot around one in five cows. Okay they don’t literally say shoot, but they clearly say they want a reduction in the number of cows.

That meant growth was shaping up to be well above 1 per cent for the September quarter, Westpac says in its latest Economic Overview.

Hiring intentions have also risen as companies become more confident and Westpac is forecasting unemployment to fall to 5 per cent by the end of next year.

That would be great.

Job prospects in New Zealand and Australia are the key driver of migration. As the job market softens in Australia as the mining investment boom passes its peak, more New Zealanders are coming home and fewer are leaving for Australia, Westpac says.

A double win.

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Are we ready for growth?

October 21st, 2013 at 9:00 am by David Farrar

Lian Dann writes in NZ Herald:

New Zealanders need to brace themselves for an economic boom.

It sounds crazy because good growth sure beats a recession, but after five years in the doldrums we may not be prepared for the strength of the rebound that economists are now tipping.

Next year the country will be “firing on all cylinders”, says Paul Bloxham, HSBC’s Sydney-based chief economist for Australia and New Zealand, in his latest report.

Bloxham is confident that we’ll be booming next year with GDP growth headed for 3 per cent and beyond.

His report, titled New Zealand’s boom, sets the tone for the way the rest of the world is starting to look at us.

Last week ANZ economist Cameron Bagrie noted that latest business and consumer confidence surveys were so strong they pointed to economic growth of around 4 per cent by early 2014. 

Bagrie was sceptical about that happening and suggested the economy might “blow a gasket” if it were to accelerate so fast.

But he concluded that New Zealand could be on track for GDP growth above 3 per cent, putting us amongst the strongest performers in the OECD. “It’s been a long time since New Zealand can claim such rock star status,” he said.

Even the IMF expects the growth to pick up to 2.9 per cent next year – ahead of the our Western trading partners (including Australia) and not far behind Asian nations like South Korea and Singapore.

I have to say it would be a nice problem to have! I’d rather have too strong growth than too weak growth!

So why the predictions for strong growth?

The reasons we’re on the up are simple. Dairy prices have stayed at record high through a period of concern about Chinese growth which caused hard commodity prices to fall. Meanwhile, we are on track for record dairy production. That’s a huge boost to an economy that gets about 20 per cent of its income from cows.

Then there is the Christchurch rebuild, which should be kicking into top gear and boosting domestic activity.

I am not sure it is correct to say we get 20% of our income from cows. Dairy does represent around 20% of exports but that is only around 3% of GDP, and I think most people would regard a reference to national income as being GDP not exports.

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What will growth reach?

August 20th, 2013 at 6:29 am by David Farrar

Stuff reports:

New Zealand’s strongest service sector performance since October last year could signal falling unemployment and economic growth of as much as 5 per cent in the next year, according to the latest BNZ-BusinessNZ survey.

The Performance of Services Index (PSI) for July was 58.1, up three points from June and the highest level of activity since October 2012.

A result above 50 indicates services activity is expanding, while an index below 50 is indicative of a contraction.

July’s value was the highest recorded for the month since the survey began in 2007, and the most positive overall since October last year.

New orders in the services sector, a category of the PSI, were particularly strong, increasing 3.2 points from June to 63.1.

This was the highest level since November 2007, and was reinforced by strong activity and sales results, which were up 4.2 points to 61.8.

BNZ economists said the PSI results added to the story of accelerating economic growth.

“Indeed, the chances of getting 5 per cent GDP growth over the coming 12 months cannot be taken lightly,” BNZ said.

 That is probably too optimistic, but it has to be said most of the key indicators are now pointing towards strong growth in the next year or so. If that occurs, then we should see unemployment drop down also.

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The benefits of hands off

February 3rd, 2013 at 8:09 am by David Farrar

Matthew Hooton writes in NBR:

The bigger the lie, the more likely it will be believed.

Today’s left wails that the global financial crisis has undermined the case for so-called neoliberal economics: free and open economies, price stability as the primary goal of monetary policy, freely traded currencies, prudent fiscal policy and private ownership of productive assets.

David Shearer says “the hands-off, leave-it-to-the-market approach has failed all over the world.” Labour/Green will be “hands on.”

Matthew provides a table to compare how well hands-off and hands-on countries are doing:

OpeningSalvoTable2-440x312

 

Hooton notes:

According to the Heritage Foundation’s Index of Economic Freedom, the world’s six freest economies are Hong Kong, Singapore, Australia, New Zealand, Switzerland and Canada (see table).

These six have avoided anything like the deep and prolonged recessions of more interventionist countries.

The IMF continues to forecast higher growth for the six than for countries further down the freedom list.

Even more important, both unemployment and youth unemployment are lower in the more free-market economies.

While I don’t think the labels hands-on and hands-off are particularly meaningful, I absolutely agree with Matthew that the freer the economy the more it tends to grow, and the more jobs are created.

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Strong growth

June 21st, 2012 at 12:16 pm by David Farrar

Stats NZ reports:

Economic activity, as measured by gross domestic product (GDP), grew 1.1 percent in the first three months of 2012, Statistics New Zealand said today. This strong growth follows revised growth of 0.4 percent in each of the previous three quarters.

Compared with the March 2011 quarter, economic activity in the March 2012 quarter was up 2.4 percent. For the year ended March 2012, economic activity was up 1.7 percent compared with the year ended March 2011.

“This quarter we saw growth spread across a number of industries, while in previous quarters the industry picture had been more mixed with growth in some industries offset by falls in others,” national accounts manager Rachael Milicich said.

The main contributors to the increase in economic growth this quarter were, by industry:

  • manufacturing (up 1.8 percent), due to increases in primary food manufacturing and metal product manufacturing
  • business services (up 2.0 percent), which include professional, scientific, technical, administrative, and support services
  • agriculture (up 2.3 percent), mainly driven by an increase in milk production.

The market was expecting growth of 0.5% to 0.6% so this is an excellent result. The annual figure is very respectable also. The Government will be pleased. The challenge is to keep growing, and to have it sustainable.

People may wish to ponder how a significant factor in the growth was an increase in milk production, and the official Green party policy is to kill (or make magically disappear) every fifth cow, which presumably would decrease milk production by 20%.

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NZIER on economic growth

May 30th, 2012 at 1:00 pm by David Farrar

Brian Fallow at NZ Herald reports:

The economic recovery will pick up speed only slowly, the New Zealand Institute of Economic Research says, as households shed debt and the Government withdraws stimulus amid anaemic world growth.

“The economy is stagnant,” says principal economist Shamubeel Eaqub, in the institute’s Quarterly Predictions, released today.

Historically low interest rates are not encouraging new borrowing and investing, as households and businesses focus instead on paying down debt.

Eaqub said periods of deleveraging typically lasted seven years, which would imply we still had the second half of the adjustment to go.

It is a good thing we are paying off debt, and saving more. But it does mean economic growth will remain fairly low for some time – in my opinion. No more debt fuelled growth followed by a crash hopefully.

The economy eked out growth of 1.1 per cent last year and NZIER is forecasting 1.5 per cent this year before it picks up to 2.5 per cent next year.

NZIER is among the more bearish forecasters. The consensus is 2.2 per cent growth this year and 3 per cent next year.

“We are less optimistic than most on the timing of the [Canterbury] rebuild, as we think persistent aftershocks, tougher building codes and insurance issues will slow Canterbury’s recovery,” Eaqub said.

I’m down in Christchurch on Friday, so will be interesting to see how the rebuild is going. I think the really big issues are the cost of the new building code, and the private insurers.

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Clydesdale on growing the economy

August 23rd, 2011 at 12:00 pm by David Farrar

Dr Greg Clydesdale says:

We cannot rely on Auckland to drive the New Zealand economy according to Dr Clydesdale who today releases a discussion paper ‘A middle path for the New Zealand economy’. 

 A key feature of recent economic debate has been the idea that Auckland will be the country’s economic driver.  The argument states that there are economic advantages to having many firms located close together.  However, Auckland’s industries have low rates of innovation and exports: key drivers of economic growth.  The city lacks the capabilities to deliver desired growth rates.

 Auckland’s location does present many economic advantages, but to expect it to drive growth is going too far.  Recent policy was inspired by recent literature from economic geography, diversity and immigration.  Dr Clydesdale states it is time to end the myths and alchemy that has influenced the New Zealand economy for so long.  It is time to get back to basics. …

Definite food for thought. The full paper is embedded below.

Conference Fashionable Policy With Super Font

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Almost the double dip

December 24th, 2010 at 7:51 am by David Farrar

The Herald reports:

New Zealand’s economy contracted in the third quarter and growth in the second quarter was revised down to a wafer-thin 0.1 per cent, showing the nation came close to a double-dip recession this year.

Gross domestic product shrank 0.2 per cent in the three months ended September 30, according to Statistics New Zealand, compared to the 0.2 per cent growth predicted in a Reuters survey of economists and the 0.3 per cent forecast from the Reserve Bank. Growth in the second quarter was revised down from 0.2 per cent.

I guess we can all agree now the Reserve Bank hiking interest rates was rather premature!

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I’m with the Governor

February 8th, 2010 at 8:48 am by David Farrar

The Herald reports:

Prime Minister John Key has vowed to stick with his goal of closing the income gap with Australia, despite an embarrassing dismissal by the Reserve Bank Governor who said there was no chance of it happening.

Speaking on TVNZ’s Q+A programme yesterday, Alan Bollard said Australia had been “blessed by God sprinkling minerals” and had handled its economy well. He said New Zealand would do better to make the most of the “crumbs that come off the Australian table”.

He said it was up to the Government what its own goals were, but he did not believe catching up with Australia was possible.

However, Australia’s success was good news for New Zealand and the real challenge was in working out how to capitalise on it.

The Governor is quite right that it is not practical to think we can close the gap with Australia by 2025 – quite simply the gap is just far too large.

However I think we can aspire to something more ambitious than making the most of the crumbs that come our way from Australia.

Even if the gap is not closed by 2025, we do want a very strong focus on higher levels of economic growth so the gap gets smaller, or at least doesn’t grow as quickly.

There are effectively six scenarios going forward, from worst to best:

  1. NZ growth rate in next 15 years is even lower than for last 15 years, meaning gap between Australia grows even faster than previously.
  2. NZ growth rate in next 15 years is the same as last 15 years, so the gap grows as fast as previously.
  3. NZ growth rate in next 15 years is higher than the last 15 years, but still not as fast as Australia, so the gap continues to grow – but slower than before.
  4. NZ growth rate rate in next 15 years matches that of Australia, so the gap remains relatively constant.
  5. NZ growth rate in next 15 years is higher than that of Australia, but not high enough to close the gap by 2025, so the gap closes but is not gone by 2025.
  6. NZ growth rate in next 15 years is so much higher than Australia’s that the gap is closed by 2025.

Now like the Governor, I don’t think No 6 is realistic. We are starting too far behind. But personally I’d be pretty delighted with either No 5 or No 4 – both would be absolutely major achievements. Even No 3 would be better than the status quo.

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Goff complains about unemployment

January 16th, 2010 at 4:16 pm by David Farrar

NZPA reports:

Closing the gap with Australia and stemming the trans-Tasman brain drain is one of the Government’s main long-term aims but Labour leader Phil Goff said the reverse was happening.

“Australian employment figures have soared for the fourth straight month and the jobless rate has fallen to 5.5 percent, a full percentage below New Zealand’s unemployment,” he said.

“For the first time in more than a decade, Australian unemployment levels over the past six months are lower than New Zealand, with Treasury forecasts that New Zealand’s unemployment will continue to grow.”

Now it is true that unemployment is now higher in New Zealand than Australia, and this is not good. Unemployment is a lose-lose. Having able bodied people not working means we don’t achieve as high economic growth as we could, and it is bad fiscally as it means less tax paid, and higher welfare payments.

But unemployment tends to rise when economic growth falls away. Not straight away but normally with a lag of six to 12 months or so. So let us look at economic growth between NZ and Australia.

So why does Australia now have lower unemployment? Because New Zealand went into recession, and Australia did not. And no this was not a post credit crisis recession. New Zealand’s economy started shrinking in the first quarter of 2008, and kept shrinking until the second quarter of 2009.

Now people may be wondering who was responsible for the economy in the first quarter of 2008. Well a Phil Goff was an Associate Minister of Finance. So when Phil wonders why Australia now has lower unemployment than NZ, he doesn’t have to go far to ask how come.

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Where the economic growth has been

January 1st, 2010 at 8:58 am by David Farrar

This graph from interest.co.nz (originally Treasury) shows the price we paid for the third term of Labour.

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A goal for 2025

November 5th, 2008 at 5:31 pm by David Farrar

Lloyd Morrison has proposed a goal for New Zealand – to be in the top ten countries in the world by 2025 for GDP per capita. He writes:

New Zealand lacks a common purpose. No one knows exactly what we want. We hanker for a return to the times when we were one of the wealthiest countries in the world. We want everyone to be better off, knowing that individual wealth does not result in freedom from crime and the social fallout of excessive disparity. However, there is no clearly articulated goal we are pursuing and no solid plan of how we can get there.

As a result, there is no definition or accountability for policies or policy-makers. Policies are often clothed with loose positive objectives and ultimately ineffective aims. There is no co-ordinated accountability for these policies (or politicians) in terms of their ability to contribute towards a common measurable outcome. Consequently, we continue our steady decline. As the attached analysis shows, current forecasts have our GDP per capita slipping below Kazakhstan and Botswana by 2025.

I’ve been discussing this with colleagues and friends, and we believe that NZ needs to embrace a common objective that will provide the means to deliver what we are seeking as a nation.

Whatever the objective chosen, it needs to be simple, clear, measureable, understandable, aspirational and, most importantly, catalytic in terms of driving positive change that makes the outcome achievable.

We’d like to stimulate a broader discussion over what that goal should be for NZ. To kick-off the debate, here’s our starter for ten: NZ should aim to be back in the top 10 countries in the world based on GDP per capita by 2025. Not just the OECD, the world. Unachievable? No way. Ireland, Korea, Singapore and Taiwan all achieved the required level of growth over the last twenty years. It will take real collective commitment and more creative thinking about our economy – but that’s exactly what an ambitious goal will generate.

I’m hoping you’ll participate in a broader discussion about an aspirational, measurable goal for New Zealand. Please read the attached document. Pass it on to your friends. Participate in the debate by emailing measurablegoal@hrlmorrison.com or contributing to the forum on www.blog.nzx.com. If you agree with what we’re proposing, show your support. If you don’t, please share your ideas for a national goal. Together, let’s take the first step in defining and delivering a better future for New Zealand.

Lloyd has out together this (a-measurable-goal-for-nz-short-2) presentation that is worth reading and also an FAQ – a-measurable-goal-for-new-zealand-_2_.

If you don’t like Lloyd’s goal, then suggest one of your own.

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NZIER calls stagflation

July 8th, 2008 at 11:57 am by David Farrar

Stagflation is the nightmare of the 70s – high inflation and negative economic growth.

NZIER has just put out its quarterly survey of business opinion.

Statistics New Zealand recently reported that real Gross Domestic Product (GDP) fell by 0.3% in the March 2008 quarter. Indicators of domestic trading activity from the latest QSBO suggest economic activity declined further in the June quarter and is likely to decline again in the September quarter which will make it three quarters of negative economic growth in a row.

That takes it beyond a technical recession to a full recession. They says firms are more negative abotu their own activity and their trading activity since 1998 and 1982 respectively.

Now what about inflation:

The net balance of firms intending to increase selling prices in the next three months has increased. The balance was 45% in the March survey and 49% in the June survey. The 49% figure is the highest since March 1987. The net balance expecting an increase in costs has increased from 62% in March to 71% in June. The 71% figure is the highest since December 1986.

This is why their press release refers to stagflation.

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Halfway to a recession?

June 18th, 2008 at 2:43 pm by David Farrar

Dr Cullen has told the Finance and Expenditure that he beleives the economy shrank in the first quarter of 2008. NZPA reports:

Dr Cullen told the finance select committee today that economic data since the May budget was far more gloomy than Treasury predicted.

“It is now quite clear that the quarterly GDP figure for the first quarter (of the 2008 year) almost seems inevitably to be negative,” Dr Cullen said.

A recession is negative growth over two quarters, so if this is true then the June 2008 GDP figures may put NZ into recession. The March 08 figures are out on 27 June so the June 08 figures should be out at the end of September – likely to be the beginning of the election campaign.

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2% growth

March 7th, 2008 at 2:11 pm by David Farrar

The Dom Post reports that there it is forecast that there will be 2% annual growth over the next three years. This is labelled as good news.  It isn’t.

To start closing the gap with Australia we really need to put in place policies which will get a 4% average growth rate. A 2% growth rate will see fall further in relative terms.

People don’t get very excited about 2% vs 4% so what does that mean in real dollars.

GDP as at September 2007 was $171 billion.  At 2% growth it would be $181 billion in three years. If 2% growth continued for say nine years (three terms) then GDP would hit $204 billion.

And what if one managed 4% growth.  Well in three years  GDP would hit $192 billion. And in nine years it would be $243 billion.

So NZ would be $10.9 billion better off in three years if it could get 4% growth instead of 2%. And over nine years it would be $39 billion wealthier if it could make 4% instead of 2%.

And what does that mean for the average family? Well while GDP growth doesn’t automatically translate into cash in the hand, the extra national wealth per household (just under 1.5 million in the last census) would be $7,300 after three years and $26,000 after nine years.

Now even if one says hey we can never make and maintain 4%, even the gap between our usual 3% and 2% is significant.  An average $3,600 per household after three years and $12,500 after nine years.

So the only person who should be saying

There was some good news – the economy is expected to keep growing by around 2 per cent a year for the next three years.

Should be the Australian Minister of Immigration as he welcomes people in.

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