Everybody take a deep breath: Print 21 magazine article

Finally, it looks as if New Zealand shoppers have run out of puff. But if you think that means a downturn is just around the corner, think again. Now is the time to catch your breath, says Tony Alexander.

Times have toughened up for New Zealand retailers with the value of retail spending in the December quarter last year up by 6.1 percent from a year ago. That sounds like a reasonable increase but we have to remember that inflation is running at around about 3 percent so the underlying increase is relatively low. More than that, if we strip out the automobile categories then the nominal increase was 4 percent so the underlying real volume increase only about 1 percent. In fact, the ex-auto increase for the December quarter in inflation and seasonally-adjusted terms was only a miserable 0.05 percent.

In other words growth has stopped. The question now is whether this ending of growth in consumer spending leads to more or less advertising. It's fascinating talking with people in the advertising business because one tends to get both opinions. From an economist's point of view, however, it seems reasonable to assume that as with most other areas of spending in the economy advertising is likely to decline.

The question, of course, is how long will weak consumer spending and advertising spending conditions persist?

Australia looks nice
As we head into winter and interest rates remain at high levels while house prices continue to fall and the weather gets bad while people worry about electricity availability, a great number of people are going to start thinking in terms of recession in the New Zealand economy and no upturn for a long time. In fact we are likely to get back into one of those periods when people start talking about going across to Australia and driving a huge truck in a mine earning big dollars.

But what we need to remember is that while it is easy to focus on the negative factors in play, it is also easy to forget the underlying factors which will comfortably prevent a recession and deliver acceptable growth over the next two or three years. For instance, one thing we know is that, going into this year's general election, the government is going to ease fiscal policy. There will be more spending along with tax cuts. These things will tend to underpin growth. In addition, the country is embarking upon a multi-year period of increased infrastructure spending, especially in the areas of roads and electricity.

There is also a large backlog of orders to be satisfied in the non-residential construction sector and, as house construction falls away, people will become available to put up factories and warehouses instead. There is also a large boom under way in the dairy industry and, although drought conditions in some parts of the country will take off over $0.5 billion from dairy incomes, this still means the boost to incomes may be $2.5 billion rather than over $3 billion. That is still a lot of extra money. And on top of that there is a lot of money being spent on conversions from sheep and beef farms around the country along with the movement into the dairy support industry.

Use the pause
It is also important to remember that there are some key differences between this slow growth period and ones in the past. For instance, farm land prices are not falling, therefore pressure on farmers to slash expenditure and leave their property is minimal, if present at all, from banks. In addition, the labour market is very tight and delivering the best job security in over three decades. This will limit, though not prevent, a pullback in retail spending and housing demand.

The tight labour market will also deliver continuing good wages growth closer to 5 percent than 2 percent and because businesses are still not going to find the people they want, there is likely to be good investment in productivity enhancing activities. For some businesses this will mean a new information technology system, for others a new building, and for others new machinery.

It's best to think of what is happening in the economy at the moment as a growth pause which, hopefully, will allow some of our capacity constraints to ease slightly and make running one's business easier in a couple of years time than it is at the moment. So maybe a good idea would be to take advantage of the weakness and in fact agree with other business people when they say the economy looks like it's in recession. Then when they lay some staff off, go and hire them because you will be needing them down the track.