State of the economy: Good times rolling to a soft landing

Underpinning Michael Cullen's Budget next week will be forecasts that the economy has peaked and growth is heading downhill.

By one measure, the annual rate of growth in gross domestic product, the economy has been slowing since June last year.

But the economic indicators do not all turn simultaneously like synchronised swimmers and there is still plenty of momentum in the internal economy, especially the bits that depend on the housing market.

Last year the economy created 87,000 new jobs, an increase of 4.4 per cent, pulling the unemployment rate down to its lowest level in a generation.

That has been good for consumer confidence, until recently, and combined with higher wages has helped keep retailers' takings growing nicely.

But signs and portents of harder times ahead are not hard to find.

Population growth has been declining since the net inflow of immigrants peaked two years ago. There is still a net inflow but only just, as more Kiwis try their luck overseas.

The world economy is slowing and the kiwi dollar has been above the 70USc level, a traditional rule-of-thumb pain threshold for exporters, for most of this year. Manufacturers and the forestry sector are feeling the squeeze.

Crude oil prices are the highest they have been since the second oil shock 25 years ago.

Household debt levels are high, relative to incomes, and the bite that mortgage interest takes out of household incomes is bigger than it has ever been.

So economists expect economic growth to slow from an estimated 4.3 per cent in the March year just past, to around 2.3 per cent in the year ahead and the year after - a soft landing.

Money has been pouring into the Government's coffers faster than it expected, and pouring out more slowly. How come?

The economy has stayed stronger for longer than the Treasury or private sector forecasters expected.

By the end of March, three-quarters of the way through the Government's financial year, the company tax take, for example, was $1 billion or 18 per cent up on the same period a year earlier, and $143 million or 2.3 per cent ahead of Budget forecasts.

At the same time, the Crown's expenses were running nearly $600 million behind budget, in part due to delays in implementing some health and welfare programmes.

Will the Budget moderate the expected economic slowdown?

It should do and the International Monetary Fund expects so. Its report card on New Zealand, using figures from last December's economic and fiscal update, estimated the net effect of the Government's taxation and spending plans would be to boost economic activity by about 1.5 per cent altogether over the next two years. Much more stimulus than that, it says, would fuel inflation rather than growth.

But the Government has room to spend more if the economy looks like it is heading towards a hard landing.

Will we see petrol below $1 a litre again?

Not likely, and not just because the Budget will bring in a tax on fossil fuels from 2007.

Petrol has gone up more than 10 per cent over the past year and 20 per cent over the past three years, pushed by high world prices and local tax increases. Without the high dollar it would have been higher still.

ANZ National Bank economists believe world oil prices have peaked in the short term and will ease, in line with a slowing world economy, but stay above US$40 a barrel and are liable to jump on any supply scares.

In any case if - or when - the kiwi dollar comes down again it will offset that fall, keeping prices at the pump above $1.10 a litre.

If the world economy slows will we slow too?

We usually do, though we sailed through the last global downturn relatively unscathed.

The key question is whether the high world prices for agricultural exports will decline as the world economy slows.

If they do, the effects will be felt first on the farm and eventually up to two years later in Auckland's cafes.

And there is always the risk of a negative shock, from a bird flu epidemic, say, or a crisis over Taiwan, North Korea, Iran or any number of perilous places.