With the Prime Minister having declared that this would be a week focusing on business, the Reserve Bank produced both good and bad news for her with its Monetary Policy Statement yesterday.
As expected it contained lower growth forecasts.
But Finance Minister Grant Robertson got a lucky break when Opposition Finance spokesperson Amy Adams yesterday made a basic economics error during Question Time in Parliament when she questioned him about them.
Adams asked him what effect the Bank’s GDP growth forecasts for the coming year showing a fall of 0.5 per cent would have on Government revenue.
But she had the wrong figures.
Robertson said she had included figures from the June 2018 quarter, which was in the past—not the coming year—and added quarterly forecasts in a linear manner, rather than taking into the account the need to be cumulative.
In fact, the Bank believes growth is currently at 2.5% and forecasts it to rise to 3.3% by this time next year. That forecast hasn’t changed.
Where things have changed is that the Bank is forecasting lower quarterly growth rates until the third quarter and the 3.3% next year.
Robertson has been beating the drum for business all week.
His fundamental point is that all the macro indicators are good which contradicts the gloomy business confidence forecasts emerging from the trading banks and economic forecasters.
The Bank offered both bad and then good news.
It said economic growth has slowed recently.
“Annual GDP growth was 2.7 per cent in the March 2018 quarter, down from over 4 per cent in mid-2016 (figure 2.1).
“Business surveys also show that firms have experienced less growth in activity.”
But (in contrast to Adams) it is forecasting growth to pick up next year, in part because of higher Government spending.
From the Bank’s figures, it appears the slowdown started at the beginning of last year will start to turn upwards in the first quarter next year.
In short, the worst may soon be over.
Reserve Bank Governor Adrian Orr said he expectedne export growth to be much stronger because of the terms of trade, the exchange rate level and given where world growth was holding up.
“For business investment; the great unknown, given the capacity constraints that are out there in the economy, given the tightness in the labour market and given that global demand all signals green for business investment.”
But the elephant in the room is still the business confidence surveys.
Privately the Beehive tried to explain these away as traditionally hostile to Labour and focused too much on small business.
Orr wasn’t taking them too seriously either.
“What we see with business surveys is at best they are coincident,” Bank Governor Adrian Orr said yesterday.
“In other words, you are looking out the window at what we seetodfay, and that’s how I feel.
“And that is why we are not surprised to see some decline in business own activity indicators.
“We don’t have reasons for the absolute business confidence decline that we have seen.
“That is in the minds and the hands of the people who fill the surveys in.”
Orr said none of the surveys was very good at forward-looking beyond the here and now.
ASB Chief Economist Nick Tuffley said he saw growth as being stronger than the bank did.
“We also have a stronger growth outlook over the next year,” he said.
“However, that period has – at present – a greater degree of uncertainty than usual given the persistent weakness in business confidence to date.
“We do see a lot more cost pressure building in the economy than the RBNZ does, though the RBNZ does acknowledge that risk.
“But a clear risk to our decent economic outlook is a more pronounced impact from weak business confidence or trade tensions.”
Westpac economists Dominick Stephens and Michael Gordon thought the bank had over-reacted on growth and pulled its near-term forecasts back too far.
“While we agree that growth has passed its peak, we think that the RBNZ has actually overplayed the near-term softness angle,” they said.
“ The RBNZ is expecting a 0.5% rise in June quarter GDP; our indicators put it closer to 1%, though with some likely one-off factors that will overstate the degree of rebound.
“ If we’re right, the RBNZ may find that some of the downside risks to growth have dissipated by the time it comes to its next MPS.”
Like the ANZ, Westpac, also believes that business confidence is a risk factor.
“Weak business confidence could weigh on hiring and investment in the near term, and the subdued housing market is likely to suppress household spending growth,” they said.
The fall in business confidence poses a real political challenge for the Beehive.
In many ways, the Labour wing of the Government has spent its eight months in power pitching to its base.
There will be another example of that today with the proposal to look at banning single trip plastic bags.
But just as Helen Clark and Michael Cullen found in 2000, there comes a time when a Labour Government has to go out and try to talk to business people who probably didn’t vote for them.
It will be more difficult for Jacinda Ardern and Grant Robertson because of the fact that Labour is not entirely in control of this Government.
Big issues outside the formal agreements with NZ First and the Greens have to be negotiated by all three parties.
That adds in a layer of uncertainty which may be being reflected in the business confidence surveys.
In the meantime, both the Prime Minister and Robertson can be expected to repeat the kind of data the Reserve Bank produced yesterday.