The economic challenge for Labour’s campaign

Economies don’t work quite the way they used to. Will Labour convincingly address that at its official campaign launch on Sunday?

A clue to this change is in differing messages from Steven Joyce, Finance Minister and National campaign chair, and Graeme Wheeler, soon-to-depart Reserve Bank governor.

Joyce says our economy is one of the rich world’s healthiest and a fourth term for National would vaccinate it against a Labour-Green economic-winter flu.

He and Wheeler both tout strong growth in output (GDP) now and over the next while. Wheeler, in his last quarterly monetary policy statement on Thursday, projected GDP growth of 3.1% in the 12 months to March 2018 and 3.6% and 2.9% in the next two March years.

He also projected employment growth of 2.4%, 1.8% and 1.5% and labour cost rises of 2.5%, 2.2% and 2.3%.

For voters, who measure the economy by the state and direction of their household finances, those numbers sound comforting.

Actually, they are less comforting than they sound.

GDP per person fell in the December and March quarters.

The gross numbers that make Joyce’s economy look healthy have been
driven to a considerable extent by his immigration flood.

This flood is like a party pill. When an immigration surge wears off, economists say (and these are not leftwing economists), it leaves little if any positive durable effect on per capita GDP or wellbeing.

Its value is to plug short-term gaps. But it can also be damaging as with the Indian export education sector scams.

So if the flood subsides, Joyce’s boom will subside, offset partly by construction, rampant tourism and high dairy prices which, if they continue, will prevent a stall or crash.

Now listen to Wheeler’s other message, his “accommodative” — in plainspeak “very loose” — monetary policy.

That is expressed through a very low 1.75% official cash rate (OCR) which he projected on Thursday to last “for a considerable period”.

Low interest rates aim to stimulate GDP growth and so are usually applied when GDP isn’t going well. What’s going on?

After the 2011 Christchurch earthquake Wheeler’s predecessor, Alan Bollard, slashed the OCR to an emergency level of 2.50% to keep business from taking fright and stalling the economy.

Wheeler’s even lower 1.75% is a record low since modern monetary policy was legislated in 1989. He did raise the OCR to 3.5% in 2014 but climbed back down in 2015-16.

Actually, Wheeler’s 1.75% is roughly where Bollard’s 2.5% was in relation to the Bank’s estimate of the “neutral rate” — the rate at which the OCR would be thought to be neither stimulating (“accommodative”) nor constraining the economy — which has also fallen between 2011 and now.

But that still puts the OCR at a level which implies crisis.

Wheeler’s bogey is inflation — or lack of it, as measured by traditional methods.

He sees his job as getting Statistics New Zealand’s measure of consumer price inflation (CPI) up to 2%, though actually he pays more attention to the Bank’s calculation of “core” inflation. In the year to June the CPI was 1.7% and Wheeler reckons it is heading down to 0.7% by March.

That is mainly because prices of imports are flat or falling. Since the global financial crisis (GFC) started in mid-2007 our trading partners haven’t got back on a consistent, firm growth path, as measured by traditional GDP methods. And the Kiwi dollar is relentlessly high, thanks partly to Joyce’s boom.

Domestic inflation, the bit Wheeler can influence with his OCR, has been well above 2% for a year now. That includes things like food and rent and, recently, rising mortgage interest rates, which the household budget cannot leave out.

How come one Wheeler says with Joyce economic growth is strong while another Wheeler keeps his OCR rate so low as to imply crisis?

A clue to this paradox of plenty and peril is that the world has changed since the 1989 legislation, change the GFC crystallised.

Whoever is Finance Minister after the election will at some point need to get to grips with this change.

For Jacinda Ardern that is an especially heavy question. Her focus in the first days of her leadership has been on social and environmental matters. But household finances matter, too, including to those issues.

Asked on Thursday about Wheeler’s OCR decision, she said she had not yet been briefed — an understandable response in the first flush of leadership but potentially a match point in a live televised leaders debate.

A savvy, experienced leader would have got herself pre-briefed on monetary policy generally and its role in economic policy and on the specifics leading up to Thursday’s decision.

So Ardern has some cramming to do — first before Sunday’s campaign launch where logically she needs to give an indication of innovative policy responses to the changing economy, then more broadly so she can take on Bill English.

And, since the Greens’ factional mess requires Labour to get more votes to be in government, her need to know the economy has got more critical.