The long haul back out of the 2000s economic haze

So the “recovery” stalled in the June quarter, the figures said. Or did they? And does it matter, given the half-billion-dollar stimulus coming on Friday via the first part of the tax switch?

First, the figures are not gospel. The underlying economic performance might be a bit higher or lower than Statistics New Zealand’s 0.2 per cent. There are often special factors: Canterbury’s earthquake and Southland’s big freeze will weigh on this quarter’s figure. Drought aftermath hung over the June quarter.

Second, embedded in the June figure was a stall in consumer spending, which seems to be continuing: unless there is a late lunge, people have not splashed out to beat Friday’s big GST rise. That is bad news for retailers more used to flush times. It is good news for the country’s future economic health.

Credit card use plunged through 2008 and 2009. Though electronic card transactions continue to rise in number, their total value has been near flat for three years. People are cannier about what they spend and how much. Of the rising number who default on credit, baby-boomers, who led the charge into debt, figure large.

In economists’ antiseptic language, households are fixing their balance sheets, reducing debt and increasing saving. New Zealanders were the most indebted in the developed world after now-bust Iceland. That debt was lent by foreigners: New Zealand’s country debt to the rest of the world, at 86 per cent of GDP, poses a risk that in another global shock credit lines might be pulled in.

New Zealand got through the 2007-09 financial crisis with relatively light damage. That was thanks to the good shape of the Australian banks, which own nearly all our banking system, and to the soundness of the government’s balance sheet which has allowed deficit budgets since to smooth the impact.

But there is a long way to go. That is the message in the June quarter figures. Per capita GDP in June was 4.2 per cent below the late-2007 peak. If you are feeling squeezed, that’s why.

Debt-ridden northern hemisphere countries have a long way to go, too. The Irish “miracle” has transubstantiated into the ghosts of crashed banks, unemployment and budget cuts. On October 20 British government agencies are supposed to announce how they will cut their budgets (meaning mainly their staff) by a quarter. Spain’s budget last week demanded a one-sixth cut. United States unemployment hovers close to 10 per cent and optimists are ceding ground to realists, even in the central bank, the Federal Reserve, which for much of the 2000s floated in a zone of blithe ethereality. Japan twists and turns on a spit of zero interest rates and zero economic growth, now entering its third decade. France fights over whether to raise the pension qualifying age from 60 to 62.

These huge imbalances will not be fixed in a year or two. Bill English guessed 10 to 20 years in a speech last month. That will weigh down the world. We shouldn’t expect a fast return to the pre-2007 golden haze.

Where are the bright spots? Germany is one in Europe. The budget deficit is small. Confidence is firm. Siemens has agreed its workers can have jobs for life. Exports are up — principally to China, which is the world’s bright spot.

China is critical to funding the United States’ vast budget deficits. It is fuelling our export rise and, by way of Australia’s China-sponsored export boom, our exports to Australia.

Despite our 2000s profligacy, we have a real possibility of a reasonable decade ahead. We may even, with luck, avoid a house price plunge: prices might just go sideways and let inflation engineer the fall of 30 per cent or so in real terms needed to align with fundamentals.

Note: “reasonable”. This decade is payback time. The ups-ups-and-more-ups of the 2000s give way to inch-by-inch-by-inch. We will envy Australia’s boom. Large numbers born here will translate envy into action and go there.

But Australia has a problem, one that will weigh on governments and economic and financial policymakers. Through the 2000s productivity growth nearly stalled, just as here. The rise in income per capita came from the export bonanza.

That has divided Australia in two: the mining states, rich and getter richer; and the rest, which make their living making things and doing services and where the going has been nowhere near as good.

That division was starkly evident in the election: the south stayed left (and went more Green); the north went right. These imbalances will bedevil politics for a time. Innovative policy will be needed to bring the two Australias together. There is zero evidence of such policy so far.

Now add in China’s huge problems: water; widening social and economic divisions; corruption. Assuming unbroken 8 per cent growth is an unsafe foundation for policy here.

So don’t bank on a miracle from outside to fix us up. Fixing us up needs spending restraint, hard work and hard thinking about new ways to work. June’s numbers are a straw in that wind.