The economic lead/lag effect

Just as there are leads and lags in the economy, so there are in politics. They can decide elections.

Economic forecasters pore over leading indicators that might harbour prophecies of turning points. One is business confidence. There is a useful correlation between rises and falls in confidence and subsequent rises and falls in output.

And the economy itself is a leading indicator of politics — electoral politics, that is.

The buoyant economy of 2001 was a good pointer to Labour’s re-election in 2002. The drought-strapped and Asian-crisis-hit economy of 1998 nailed the coffin shut on National in 1999.

Yet in early 2002 the economy was showing signs of slowing (though it later picked up). And through 1999 the economy was picking up. In each case the economic reverse came too late to reverse voter opinion.

This is not an exact science, of course. But the experiences of 1999 and 2002 — and other earlier examples — suggest the lag between a change in the economy and a change in voter opinion may be somewhere about a year.

So if the economy is slowing appreciably midyear this year, that may well spell trouble for the Clark government in any election mid-2005, even if the economy is picking up again by early 2005.

Well, after several false alarms in the past couple of years, there is good reason to expect the economy to be slowing appreciably by mid-2004.

Immigration is falling. This will reduce house buying pressure and sales of durable items with which to furnish houses.

Slower house sales will halt the rise in house prices and maybe even reverse them. At the least, credit issued on the back of house valuations will not expand as it has over the past couple of years. At the worst, it could prod households out of spending into saving. Either way, consumer demand should fall and retail sales slow.

Regardless of migration, house prices must at least halt their upward climb simply because prices have considerably outstripped rental returns over the past year or so and that imbalance can’t last very long.

Moreover, the rising exchange rate has cut returns to farmers and other exporters and will bite harder as currency hedges come off. That will cut purchasing power both directly and indirectly through a slowing job market.

None of this is comfort for a government facing an election by mid-September 2005. In 2002 the rosy economy pulled a hazy veil over other issues. In 2005 the economy cannot be counted on to obscure other issues, especially since one of them, race, has been ramped up by the National party.

What can the government do about this predicament?

It can call an early election to get to the polls before the lag expires between economic slowdown and voter response to it. An early election is, however, only possible if Labour can build up a convincing lead first. That is not entirely in its hands.

More in its control is the Budget in May.

Already, a substantial increase in spending is committed. Much of that will go into social services, in health mainly, which boosts numbers and wages in those services.

More important, $500 million or so will be in tax credits and other help for low-income people, particularly working families, and for lower-middle-income large families.

Such people don’t have much spare cash. So they will spend nearly all the credits and handouts. That will be a large boost to consumer demand, mainly for non-durables.

So the export-led contraction of consumer spending will be at least partly offset by this big Budget injection.

But what if the government wants to over-egg the cake and spend a bit more to woo voters? After its fright in the February polls it may be tempted to do just that, to keep the economy cooking, or at least simmering, through the lag zone into election year.

Michael Cullen has piled up big surpluses on which he could perhaps justify higher spending now. But since he called National irresponsible for proposing to finance tax cuts from the surpluses, Cullen could hardly pull the same trick on the spending side.

A stronger argument is that if the economy is slowing, that warrants an offsetting — countercyclical — fiscal boost.

Risky, of course — and might be undone by tighter monetary policy from the Reserve Bank. But No 1 priority — bar none — is to get re-elected. What’s a bit of fiscal looseness in the face of that?