Andrew Gawith: Big year for economy on and off the field

The Rugby World Cup could add $500 million to New Zealand's GDP. Photo / Supplied

In our corner of the world 2011 will be dominated by the Rugby World Cup - the biggest event New Zealand is ever likely to host.

Consultants hired by the Ministry of Economic Development three years ago estimated that the Cup would add about $500 million to gross domestic product (or roughly 0.25 per cent).

In 2008, Deloitte was hired by the IRB to look at the value to a country of hosting the Rugby World Cup.

They concluded that hosting the Cup is worth more than £2 billion ($4.1 billion). If that were so we are talking a 2 per cent boost to GDP. Whichever way you look at it the Cup will be a boon for the economy.

The other big event in 2011 will be the election, almost certainly after the World Cup.

National looks set for a second term despite failing to deliver on its pledge to achieve faster economic growth - it's doubtful whether the economy will be much bigger by the end of 2011 than it was at the end of 2007.

To be fair that covers the period of the Great Recession.

Nonetheless, National has been timid when it comes to resetting the economic course. The 2010 tax shuffle was a rearrangement rather than a significant move to streamline a tax regime that has become increasingly cumbersome and the interface with the benefit system quite dysfunctional.

The economy remains sluggish - the growth that emerged over the first half of 2010 now looks to have petered out in the second half thanks mainly to drought affecting farm and electricity production and unnaturally frugal households.

The Reserve Bank is certainly in no hurry to lift interest rates with such tentative growth domestically and still plenty to worry about globally.

Government budget deficits and sovereign debt are the hot economic topics internationally and while New Zealand's ratios are not alarming by the standards of Europe or the US, they have deteriorated.

The budget deficit for 2010-11 has increased from a predicted 4.2 per cent at the time of the May Budget to an estimated 5.5 per cent. That compares to a budget deficit for the OECD as a whole of 7.5 per cent last year and an expected improvement over 2011 to about 6 per cent this year.

New Zealand's public debt to GDP ratio is forecast to climb to just below 30 per cent this year from just 17.7 per cent as at June 2008.

The problem the Government faces is that without economic growth and a lift in the tax take the deficit will remain uncomfortably high.

That would cramp the Government's ability to pursue exciting policy initiatives, and it makes it almost certain that a second term National government will sell down some state assets.

A number of social problems will continue to dog the Government over 2011. National's resistance to any increase in the price of alcohol to discourage teenagers getting dangerously drunk and too often clogging emergency services looks almost negligent.

The Rugby World Cup is likely to accentuate the problem and potentially give it international exposure. National has categorically ruled out any change to the age of super entitlement - the rapidly rising cost of supporting baby boomers in retirement will need to be addressed by a more courageous government than this.

Having the highest rate of youth suicide in the developed world and a high rate of violent death for under fives are shocking indictments of the effectiveness of both state agencies and communities in looking after our young people.

While we have our problems, so does the rest of the world. Recovery from the Great Recession is definitely under way, but so it should given the amount of money that has been conjured up by governments to stimulate their economies.

US households and business are back spending again and the sharemarket has rallied impressively (the S&P 500 is up 16 per cent over the last 6 months).

But there will surely be a day of reckoning - the money has to be paid back sometime, by somebody.

European governments are at least trying to address the underlying problem of excessive government spending and sovereign debt that markets have become increasingly loath to fund.

Fiscal austerity is the order of the day but it will take several years, and reduced living standards, for it to deliver a more sustainable government sector in many of these economies.

The US is taking a different tack - spending its way to economic growth and hoping like hell that growth is sufficiently robust to generate the tax revenues to service the debt and bring down the budget deficit over time.

If it doesn't pull this trick off then the US could well be the source of Recession Mark II.

The third elephant in the room is China - a key economy for New Zealand and Australia, let alone the rest of the world.

China's challenge this year is to engineer a smooth slowdown to take some heat out of the property market in particular, but also consumer prices generally. It also needs to shift the balance of economic growth from exports to domestic consumption to avoid trade confrontations with Uncle Sam.

Overdo the slowdown and a major source of world growth wilts. Any slowdown in China threatens commodity prices, so we have a keen interest in China getting its economic management right. If they can then commodity prices are likely to remain high and with it New Zealand's terms of trade and probably the currency.

Win the World Cup and our problems will seem trivial, at least for a month or so.

* Andrew Gawith is a director of Gareth Morgan Investments.