BPS & HYEFU Released - But Are We In Recession?

Tuesday, 14 December 2010, 1:15 pm
Column: C.D. Sludge

Click for big version Finance Minister Bill English at the HYEFU Lockup Today. See more images below

No Surprises

The Budget Policy Statement BPS and Half Yearly Economic and Fiscal Update HYEFU are the opportunity for Treasury and Govt. to map out their economic plans for the coming 12 years.

On the one hand the HYEFU documents contain the latest detailed forecasts (growth, inflation, interest rates & employment) for the economy, and the Government's fiscal expectations for revenue and expenditure over a medium and long term horizon.

On the other the BPS contains a statement of Government intentions in terms of the framework it will place around the election year budget which will likely be announced in May 2011.

The numbers have been widely flagged to be worse than forecast in the 2010 Budget, partly due to the Earthquake and other unexpected issues, and partly due to a flagging recovery.

• Scoop Audio (42 Minutes): Audio on Demand of NZ Finance Minister Bill English's press conference today to announce the release of the HYEFU and the Budget Policy Statement. The Minister's presentation was accompanied by a power point presentation you can View Here as a .pdf file. He then answered questions from the media - many which focused around the issue of asset sales

However the numbers are not that much worse than projected and ratings agencies should be happy with the forecast for Government debt still peaking in 2015 which is roughly where it did under the last budget.

The most startling numbers in the forecast is the collapse in credit growth in the agriculture, household and business sectors. Business credit growth is at a remarkably low -5% and the other two sectors are hovering just over 0%. Historically all three were hovering around 15% from 2005 through 2009.

Finance Minister Bill English said that the likely impact of this would be to reduce growth in the immediate future, however it was also a good sign that we had moved beyond an economy based on debt driven consumption.

This is notwithstanding expectations that interest rates are now expected to stay a lot lower than they were previously forecast to be heading.

In terms of the Govt's plans outlined in the BPS these too are no surprise. The National/Act/Maori Party govt is not planning on spending up in election year.

There is no indication in the document that there will be any more tax cuts or rises and the Government's fiscal plans are roughly the same as they were in the last two budgets.

The Govt plans to re-prioritise a further $2 billion in Govt. spending, increasing efficiency, and their new expenditure pool has been capped at 1.12 billion for operating expenditure and 1.39 billion for capital items.

The BPS does contain some statements which are likely to cause alarm - specifically a reference to the Welfare Working Group (i.e. benefit cuts) and a "review of spending on policy advice" (i.e. more bureaucrat job losses - although Mr English says that the main response to this review so far has been to reclassify public servants away from being engaged in policy advice.).

Finally this HYEFU also included an initial "Investment Statement of the Govt of NZ" which is a more complete Balance Sheet for the government than we have previously seen. Announcing the release of this Finance Minister Bill English talked up the opportunities to make parts of this Balance Sheet more efficient, a discussion which seems likely to presage a debate over Government Asset sales in election year. The Government has ruled out asset sales in its current term of Government. However even this is pretty much as expected.

However for this writer the key question that is begged in the context of this particular BPS and HYEFU is - are the underlying numbers overly rosy?

The growth numbers looking forward are critical to whether these forecasts ultimately prove to be accurate - and to where surprises may lie in 2011.

GDP Forecasts By The Numbers

In 2010 so far we have had 0.5% growth in Q1 followed by 0.2% in Q2. These figures compare with Budget 2010 forecasts of 0.8% for each quarter.

GDP for the 3rd Quarter is due to be announced shortly (it is forecast by treasury at a modest 0.4%) and thanks to the pre-GST spend-up may even exceed this.

But where the question arises is what state is the economy in right now - and what will happen in early 2011, and in particular could we be back in recession now? (The technical definition of a recession is two quarters of negative growth.)

Certainly there have been some negative views expressed lately by commentators in the media - notably from BERL's Ganesh Nana. These are significant in part because they impact on consumer confidence and spending.

The global economic situation is similarly turning negative, and news of these events too can be expected to have an impact on business and consumer confidence. News of austerity measures in the UK, Ireland and other parts of the Eurozone in particular can put quite a dent in consumer confidence and encourage savings.

Another key driver to household behavior has been a steady increase in the price of petrol during 2010. Retail petrol prices at around $2 a litre are now approaching where they were just before the GFC (Global Financial Crisis) struck.

In terms of how the economy reacts - petrol price increases are relatively similar in their impact to interest rate rises - only they impact immediately not in a delayed fashion. This is because household demand for petrol is considered to be relatively in-elastic - i.e. it is hard for households to reduce petrol expenditure, partly because for commuters public transport is not necessarily cheaper. And when they do do so by not going on holidays, or not shopping, they impact on other parts of the economy.

Meanwhile there are also some obvious negative signs showing from the real economy since October 1.

The property market seems to have stalled and mortgagee sales remain at high levels.

There is a perception that Christmas will be failed by Retailers are complaining that consumers are keeping their hands in their pockets in the lead up to Christmas. As a consequence the papers are full of retail sales advertising, but the impact of Christmas and these sales will end in January.

On the other hand consumer and business confidence and expectations remain relatively high so far. And according to both the PM and the Finance Minister unemployment claims are falling on an ongoing basis.

According to the forecasts announced today the Q 4 2010 (October - December) will see growth jump back to 0.9% and then to 1% January- March 2011.

These projections may turn out to be somewhat heroic. Asked whether he thinks they are overly optimistic Bill Englsh responded:

"The growth forecasts I would describe as moderate, we are in world where we are subject to uncertainties, but on the basis of these forecasts we think we are still on track."

We shall see. In the meantime it looks like it will be a tough few months for bureaucrats saving $2 billion in existing spending, increasing efficiency and possibly facing additional job losses at the same time.

• Scoop Image:More images from today's Finance Minister's press conference.

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Alastair Thompson

Scoop Publisher

Alastair Thompson is the co-founder of Scoop. He is of Scottish and Irish extraction and from Wellington, New Zealand. Alastair has 24 years experience in the media, at the Dominion, National Business Review, North & South magazine, Straight Furrow newspaper and online since 1997. He is the winner of several journalism awards for business and investigative work.

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