Confidence puts question on durability

By Brian Fallow

WELLINGTON - The strength of business and consumer confidence suggests economic growth this year may exceed economists' expectations, says Bankers Trust chief economist David Plank.

The consensus among economic forecasters is that growth will be only moderate over the next two years (3 per cent for the current March year and 3.6 per cent next year), and not a repeat of the sky-rocketing growth that occurred coming out of the 1991 recession.

Historically business and consumer confidence have provided a generally reliable guide to growth outlook, Mr Plank said, but they are not infallible.

Business confidence pointed to a surge in growth in 1989-90, which did not eventuate.

This time round the fact that the rise in confidence is evident in both business and consumer confidence provides a stronger signal of accelerating GDP growth, Mr Plank said.

"There must be a risk business and consumers are correctly forecasting a sharp rebound in activity that economists just can't see."

But the same fact - that consumer confidence is rising just as fast as business confidence - raises questions about the durability of the recovery.

"In order for the recovery to gather pace and be sustainable a pick-up in manufacturing and exports is required."

Confidence levels are stronger than actual economic activity data, for example, there has been no clear improvement yet in net exports, Mr Plank said.

"This suggests a reasonably sharp recovery in GDP is possible, but it may not be sustained if business conditions do not catch up with consumers' willingness to spend."

As well as predicting turning points, the confidence surveys have done a fair job at predicting the magnitude of economic cycles, Mr Plank said.

Business confidence as measured by the the Institute of Economic Research's quarterly survey of business opinion is consistent with growth accelerating to perhaps 6 per cent by the end of the year, while consumer confidence surveys were consistent with 4 per cent.

"We are are not arguing for growth to accelerate towards 4-6 per cent this year, but we suggest there is enough evidence to point to more rapid growth than the current consensus expectations."