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    Sep 2003
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    Default Blaming the easy targets

    Blaming the easy targets
    02 March 2006

    Along many corridors and in letters to the editor in newspapers there is a growing theme that people are talking the economy into recession with help from us economists.

    The complaint is that if we only talked with a more positive tone the economy would be stronger. For some this may sound like trying to strike up the orchestra when the Titanic is sinking but we wouldn't go that far.

    Instead let's have a look at the issue of whether we economists are causing this weakness in the economy. We know things are weakening off because the official data show a growth rate now at about 2.5 per cent from 4.5 per cent 18 months ago, the housing market is flattening out, farmers are spending less on tractors, businesses are pulling back on their capital spending plans, and many export industries are suffering from the still high exchange rate.

    But to the best of my knowledge, no economist is actually forecasting a recession. We predict growth in the economy near 1.5 per cent this year and over 2007 recovering to just over two per cent in 2008. The Reserve Bank is forecasting growth between 1.5 and two per cent in the next few years. So if we economists are not talking about recession, who is?

    Apart from the Leader of the Opposition, in all probability it is businesses themselves. The New Zealand Institute of Economic Research's quarterly survey showed that during the December quarter a seasonally adjusted net 71 per cent of businesses expected the economy to deteriorate over the next three months. This is the worst such reading since 1977 and not consistent with our view on the economy.

    However, it is worth considering that over the past six years when growth in the economy has averaged 3.7 per cent per annum on average, business sentiment has been a net 12 per cent pessimistic. Over the previous six-year period, when growth averaged 3.4 per cent per annum, business sentiment was a net nine per cent positive. And in the six years before that, from 1987 to 1993 when growth averaged just 0.6 per cent per annum, sentiment averaged positive eight per cent. That shows us there is probably a downward bias in business sentiment perhaps because of discontent with the leanings of the Government.

    The evidence of a disparity between the mild view we economists are presenting and the terrible pessimism in the business sector backs up what we have already learned from the housing market. Back in 2004 most of us were predicting that the housing market would flatten out and prices would fall on average between five per cent and perhaps 10 per cent over 2005. If we economists really had a major influence on people's thinking and behaviour then this would have happened. Instead house prices over 2005 rose on average by 13 per cent.

    What is happening at the moment is probably two things. One, those people who are experiencing falling profits for their company or worries about their employment are looking for a scapegoat. Second, those who are still doing all right probably can't understand why there is so much negative talk. They feel it is misplaced, based on their own experience, and simply see no need for it.

    Having been in this business for two decades now I've seen this sort of thing before. The best thing to do is not shade what one says in terms of what people want to hear but to keep giving an honestly held view on where the risks lie for the economy, the exchange rate, interest rates, the labour market, retailing, tourism and so on. For the moment most of those risks are bad.

    Tony Alexander is the BNZ's chief economist

    TonyAlexander bnz.co.nz

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


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