John Armstrong: Slowdown in growth big blow for National

Not such a laughing matter. Smoke is clearing from Labour and Act's sideshows, returning focus to the country's crumbling economy. Photo / Mark Mitchell

Brittle, uncertain, and full of surprises. No, that is not an assessment of Chris Carter's current state of mind. It is the Reserve Bank's verdict on the economic recovery - or rather the feeble effort which currently passes for one.

Alan Bollard, the bank's Governor, could not have put things more succinctly. Or more bluntly.

Waiting for the recovery to kick in is proving to be a white-knuckle ride for National. And it may not happen. National instead should be bracing itself for the looming possibility of an election-year recession on its watch.

Stressing the declining positives to obscure the mounting negatives, Bill English's mantra is that the recovery has been delayed by a much-needed "rebalancing" of the economy. He argues the recovery will be stronger for being built on firmer foundations.

The rebalancing is making households ultra-cautious. They are either cutting debt or saving.

No longer are they borrowing against mortgages to indulge in expensive overseas holidays or property speculation.

No one is arguing that this long-delayed change in the economic behaviour of households is neither necessary nor desirable.

The trouble is consumers have zipped up their wallets at a speed and to an extent that the Government never expected. There has been a staggering $12 billion switch by households from borrowing for consumption to savings.

The scale of this "rebalancing" and the associated drop in consumption is negating the impact of the huge fiscal stimulus represented by the $13 billion cash deficit currently being run up by the Government. The result is that growth is stuttering; a nasty economic surprise could easily push the economy back into recession.

The Treasury has had to keep revising downwards its economic growth forecasts and - worryingly for the Government - its tax revenue projections. English warned this week that running large Budget deficits to support New Zealanders through the "adjustment process" could not go on forever. To get back into surplus, the Government would have to tighten its spending. Falling tax revenue will force spending to be tightened even further. Before you can say John Maynard Keynes, the economy is on a downwards spiral.

However, such has been the focus on the ructions within Act, the handling of Paul Henry's faux pas and Carter's kamikaze raids on his old party that the sluggish state of the economy has been forced to take a back seat.

But not for much longer. Labour sees the debate over economic management starting to shift in its favour. While the international economy remains in flux, the time when National could also lay blame for the domestic economic downturn at Labour's door is fast receding.

John Key's prediction that the recovery would be "reasonably aggressive" has backfired. National is starting to look like it does not have the answers. English's talk of "rebalancing" may be sound economic theory. But the average punter has little interest in that. English is consequently sounding out of touch. National is starting to look very vulnerable.

Accordingly, Phil Goff will stress economic matters in his keynote speech to this weekend's Labour Party conference. .

He will blast Key for failing to deliver on the "Brighter Future" promised by National, while accusing him of making no progress in closing the income gap with Australia.

Labour strategists see it as crucial that Goff persuade voters that Key raised their expectations and then failed to meet them.

Rather than indulge in shoddy smear campaigns which either backfire or Key simply ignores, Labour has finally worked out that it might be able to break the Prime Minister's spell on voters by showing his success as a merchant banker has not transferred to his Government's handling of the economy.

Labour believes growing public frustration over the rising cost of living, worries keeping jobs, the perceived unfairness of National's tax cuts and New Zealand's less than stellar economic performance provide the means by which the party can reconnect with voters.

Labour's new policy taking GST off fresh fruit and vegetables is the first such gesture in a deliberate strategy to show Labour cares.

The party is rapidly discarding the shibboleths of purity that argued such a move was economic heresy.

Having stuck a foot back in the waters of economic intervention in the Clark-Cullen years, Labour is now plunging in much deeper and unashamedly in the belief that the secrets of the success of economies like Singapore and South Korea lie in the state taking a far more active role in planning, assisting and co-ordinating industry development in the various sectors of the economy.

Last year's conference drew a line under the past. This year's is being described as "direction-rich", rather than "policy-rich". Goff, however, will give a clear steer on Labour's revised policy on foreign investment. That is likely to result in even tougher conditions on land sales to foreigners than National's revised position, possibly by imposing a ban on sales above a set number of hectares.

Again, Goff, with finance spokesman David Cunliffe, are showing no scruples about breaking from the past and adopting a New Zealand First hard-sell under the patriotic-sounding banner of "owning our future".

All of this happening against the backdrop of the latest Roy Morgan poll which for the first time puts the Opposition parties within reasonable striking distance of National and its allies. More tangible was the near nationwide swing to the left in last week's local government elections. Of particular note was the political rehabilitation of former Labour MPs who were crushed at the ballot box less than two years ago.

Two or three swallows do not exactly make a summer. And who knows what Chris Carter might drop on Labour this weekend. No matter. The conference will take huge heart in being able to believe that Labour seriously has a chance, if still a slim one, of winning next year's election.