Brian Fallow: Feel the G forces? Thought not

Finance Minister Bill English. Photo / Mark Mitchell

If the Government's books were opened to a song, it would have been one from The King and I.

"Whenever I feel afraid, I hold my head erect and whistle a happy tune, so no one will suspect I'm afraid."

Economic activity grew 1.5 per cent in the year to June. But the Treasury's latest forecasts have it growing 3.2 per cent over the year to September next year. That is down from the 4 per cent it was forecasting in May but it still represents quite an acceleration.

Feel those G-forces? Thought not.

The Treasury has every confidence that Asia and Australia will grow enough to underpin our recovery - despite having had to take a machete to its forecasts of growth among New Zealand's trading partners this year and for the following two years as well.

And it is despite the fact that export commodity prices have been falling, export volumes are growing only slowly by historical standards and farmers have not lost sight of the need to reduce their debt, which quadrupled over the past 10 years.

Domestically the flipside of a $5 billion upward revision in the estimated damage of the Christchurch earthquakes is that when rebuilding eventually begins in earnest it will provide a larger boost to economic activity. But offsetting that there has been a shift, which Finance Minister Bill English at least expects to be enduring, in households' behaviour. We are saving more and borrowing and spending less.

And the Government is "very committed" to returning to surplus by 2014/15, which means the stimulus from deficit spending will disappear.

Already, indicators of domestic activity like net migration flows, turnover in the housing market and spending charged to plastic cards all show an economy losing momentum.

The Treasury, to be fair, acknowledges its forecasts are more likely to be too optimistic.

It sketches a "downside scenario"in which Europe fails to sort out its sovereign debt woes and a global recession ensues as in 2008, but more protracted because governments and central banks (including ours) would have a lot less scope for stimulus.

And it adds the bleak rider that its past forecasting performance suggests "there is at least a one-in-five chance of an outcome worse than that captured in the downside scenario".