Finance Minister Grant Robertson has plenty to worry about

The GDP figures published yesterday showed an unexpected bounce in economic growth but at the same time confirmed how ordinary wage earners are now starting to fall behind.

It would seem that higher mortgage interest rates are eating into household expenditure while, at the same time, overall inflation is reducing what have been quite big pay increases.

The result is that wage earners are starting to slow their retail spending.

Life in the economy is coming from overseas tourists.

But Finance Minister Grant Robertson has unveiled a post-Covid economic plan specifically to address the kind of slowdown suggested in yesterday’s figures  with a hint that the Government might be ready to spend to “take the p[ressure off and support households.”

Kiwibank economist Jarrod Kerr yesterday said that following a contraction during the Omicron-dominated March quarter, the economy bounced back strongly.

Overall, economic output went up 1.7 per cent in the three months to June 30 to give a 12-month rate of 4.9 per cent.

That is the highest we’ve seen since Labour won power in 2017.

Finance Minister Grant Robertson probably felt entitled to gloat.

“This is a positive result and underlines the resilience of the economy. Our strong growth in the June quarter comes at a time the IMF estimated that global output shrank,” he said.

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But diving into the GDP figures, several trends will worry the Minister.

Above all, the quarterly growth figure appears to be the product of the opening of the borders and the return of tourists.

If the figures are expressed in 2009/10 values (and thus account for inflation), then transport over the past quarter was up a massive 19.7 per cent, and retail trade and accommodation was up 5.9 per cent.

And there is an indication that the “retail trade” component of that was negligible.

The figures show that expenditure in 2009/10 prices) on durable goods was down 8.6 per cent and non-durable goods down by 2.3 per cent.

Robertson acknowledged that much of the growth came from tourism.

“The services sector, which makes up two-thirds of the economy, rose 2.7 per cent as New Zealanders and returning overseas visitors spent more on transport, accommodation, eating out and sports and recreational activities,” he said.

Other business sectors showed only weak growth.

Agriculture was up 1.1 per cent but down 3.2 per cent on an annual basis, and manufacturing was down 5.9 per cent and 4.4 per cent on an annual basis.

The overall picture then was one of concern. That was underlined by the figures from the last GDP release in March, which showed the annual GDP growth rate than at 4.9 per cent, but that had dropped to one per cent.

CTU Economist Craig Renney said, “while this data demonstrated the strength of the economy currently, there was a weakening trend of growth.

“The risk of recession in this data has been averted, but annual average growth has fallen from four point nine per cent to one per cent in just three months,” he said.   

Renney said since the beginning of Covid, the economy had grown by nearly 5% in real terms. Exports of goods and services rose 11.3% last year, and annual GDP per capita continued to increase. Together with low unemployment, this is a positive sign of the continuing resilience of the New Zealand economy”. 

“However, growth was quite frothy, being driven by strong growth in travel and tourism, accommodation, and hospitality. Manufacturing and construction both saw falls, as did agriculture. There is a need to make sure that all areas of the economy are growing so that we can build a balanced recovery from the effects of COVID”.

Kiwibank’s Kerr described the outlook as “awkward”.

The other warning in the figures is household consumption expenditure which, after rocking along at plus 6.7 per cent for the December quarter and plus 6.6 per cent for the March quarter, has fallen to negative 1.9 per cent for the June quarter.

ANZ economist, Miles Workman, suggested that one of the reasons for this was softening domestic momentum on the back of rising interest rates.

But National was quick to blame the Government for the consumption expenditure drops.

“The economy is not growing enough to boost household incomes,” said National finance spokesperson Nicola Willis.

“Real wages have fallen by 3.7 per cent in the past year, meaning most Kiwis are going backwards as their wages struggle to keep up with rising prices.”

 The problem with Willis’ argument is that whilst it is strictly speaking correct, it doesn’t actually tell the story.

StatsNZ uses two different measures to explain how wages are moving.

One, the Labour Cost Index, is a purist measure that is based on the actual rates employers have set for specific jobs.

The other, average hourly earnings, is based on what employers are actually paying their workers.

There is often a difference between the two measures, particularly when Labour is tight. Thus individual workers can demand wages higher than the industry norm or when they work overtime. In those cases, their pay goes up, but the pay set for the job they are doing has not moved. Thus another worker doing that job could be just the assigned rate.

Nevertheless, despite weekly earnings rising strongly from the middle of last year,  for the June quarter, all the measures were behind inflation.

Average hourly earnings rose 5.7 per cent on the March quarter, but the Consumers Price Index went up 7.3 per cent over the same period.

That put a public sector worker on an annual pay of $88,643 and a private sector worker on an annual pay of $71,259.

The politicians and lobbyists then appear to play “pick your index.”

Willis’s figure of a 3.7 per cent annual fall appears to be based on the Labour Cost Index, which shows lower wage increases and therefore accentuates the negative impact inflation is having.

However, CTU economist Craig Renney argues that if the figures are looked at over a longer time frame, average weekly earnings have risen by $177.85 or 16.4 per cent over the past two years, according to the Quarterly Employment Survey.

Consumer Price Index inflation rose 10.9 per cent. That’s 5.5 per cent real wage growth – or 2.75 per cent a year.

But that was the past two years — there is widespread concern in Wellington about what might happen next.

To deal with that, Robertson has had Treasury working on a post-Covid economic plan, and now that all restrictions have been lifted, he outlined its basics yesterday.

“The work we have done on our Economic Plan during COVID means we’re able to hit the ground running following on from the Prime Minister’s announcement on Monday,” he said.

He said it would be built around unleashing business potential, strengthening International connections, increasing capabilities and opportunities, supporting Maori and pacific  aspirations, and strengthening our foundations (by which he meant infrastructure.)

And he hinted that the Government might be willing o spend over the short term to achieve these goals.

“We will need to face what the global economy is about to throw at us,’ he said.

“We will be targeting our investments to where they will pay the greatest dividends.

“That means investing to take the pressure off and supporting households – by taking the pressure off and supporting businesses to grow jobs and lift wages.

“Because we know from Covid that these are the types of investments that work.”