Peter Nicholl
Two important pieces of economic data came out last week: the gross domestic product (GDP) figure for the March quarter 2023 and the balance of payments data for the same period.
GDP fell 0.1 per cent in the March quarter. This followed a fall of 0.7 per cent in the December quarter 2022. It has become an economist’s mantra that if a country’s GDP falls in two consecutive quarters, the country is in recession. Sure enough, the newspapers here and even in some countries overseas had stories of New Zealand falling into recession.
The headlines often sounded dramatic. It was usually much later in the story that it was revealed that the drop in GDP that technically pushed New Zealand into recession was 0.1 per cent. Given the lack of precision of most economic data, that figure should not be given much attention.
The March quarter also included the impact on economic activity of not just one cyclone but two. The statistics department regularly seasonally-adjusts economic data. Maybe they need to cyclone-adjust it too. The GDP figures are also always adjusted during the next quarter as further data becomes available. So we could find in the next few months that the recession didn’t actually occur.
Despite the incredibly low number and the doubts about it, stories about New Zealand being in recession were everywhere.
A day or two earlier it was reported that New Zealand had a current account deficit of $31 billion which is 8.5 per cent of GDP. This is an enormous figure. In a table of 38 countries I looked at, only Greece and the Slovak Republic had worse figures.
Australia and Ireland had surpluses and Canada, the UK and the USA had deficits of between 1 and 3 per cent.
NZ has actually had a current account deficit every year this century. But most of them have been less than 3 per cent of GDP. A figure of – 8.5% is an outlier. It is a real problem. We don’t seem to realise just how badly the external sector of our economy is performing.
The economy is flat. New Zealand’s international terms of trade are currently at a comfortable level. The exchange rate is a little lower than it has been on average over the last few years. Tourist arrivals have picked up strongly. All these things should be favourable for our current account position. If we are running such a huge deficit in these favourable circumstances, what is going to happen when the economy recovers?
But this issue got almost no attention in the media or in the current political debate.
Agricultural exports are still at the heart of our balance of payments performance. Talk to most farmers and they will tell you what the problem is. Despite favourable overseas prices and exchange rate, many of them are struggling to break even. Those with high debt levels will have been hit by rising interest rates.
But all of them have been hit by enormous compliance costs. The aims of the compliance issues are valid and important. But they have costs and the impact hasn’t been thought through.
We are seeing the impacts in our dreadful current account deficit.
