Why the economy might be OK

Dairy products comprise 25 per cent of exports of goods and services - but that means the country earns three-quarters of its living as a trading nation in other ways. Illustration / Anna Crichton

A key industry is suffering, but other economic signs paint a happier picture.

Sometimes - even if only because of the law of averages - the Government is right.

Just now it is right to warn against the danger of talking ourselves into more of an economic downturn than we need to have.

The economic news of late has by no means been all bad.

It is, of course, unambiguously bad that we keep waiting for a bungy cord to arrest plunging dairy prices and it keeps not happening.

Such are the uncertainties around the outlook for dairy prices, that BNZ economists can envisage scenarios with a 2015-16 payout ranging from $2.40 to $5 a kilogram of milk solids. Even the top end of that range is a far cry from last year's $8.40.

Faced with a multibillion-dollar hole in farmers', and national, income, it is a bit fatuous for the Finance Minister to say, in the rhetorical ruck of parliamentary question time, that, oh well, dairying is only 5 per cent of gross domestic product.

That ignores the impact on wholesale and retail trade, for example, when farmers shut their chequebooks - there are important multipliers involved.

Dairy products comprise 25 per cent of exports of goods and services.

But that means the country earns three-quarters of its living as a trading nation in other ways.

And that has got easier.

It is not as though nothing has changed in response to the collapse in dairy prices. Serious monetary easing is under way, led by the exchange rate. It is a buffer the weaker members of the eurozone might well envy.

From its peak a year ago, when the terms of trade were at the most favourable level for 40 years, the Kiwi dollar has fallen by a quarter against the US dollar and by more than 14 per cent on a trade-weighted basis.

ANZ's commodity price index shows meat, forest products, fruit and seafood all higher than a year ago in New Zealand dollar terms.

Manufacturers are upbeat about their export prospects in NZIER's latest quarterly survey of business opinion.

On the import side, the nuclear agreement between the great powers and Iran, all else being equal, should keep oil prices lower for longer.

The official cash rate, meanwhile, is heading back to the level that delivered the lowest retail interest rates for 50 years, as the Reserve Bank reverses what in hindsight was a premature tightening last year.

The inflation rate is just 0.3 per cent.

Annual wage growth, as measured by the quarterly survey of employers, slowed to 2.1 per cent in the March quarter, or 2.4 per cent for the private sector. But with inflation so low, that is still an appreciable pay rise in real terms.

Employment growth in the year to March was 3.2 per cent, which represents 74,000 more people in work.

The indicators of employment growth ahead have softened. But while both NZIER's and ANZ's business confidence surveys recorded some easing in hiring intentions, they remain at levels described as relatively solid and respectable. Job advertisements are trending down.

Meanwhile, it looks as though the Canterbury rebuild, which has been a major driver of growth, is at or near its peak.

But there is another way of looking at that: the rebuild will not be pulling in resources from the wider economy at the rate it has been. Given the backlog of building to be done in Auckland, that may be no bad thing.

Migration is a tailwind. The net inflow of permanent and long-term migrants was a record 58,300 in the year ended June, equivalent to 1.3 per cent of the population, boosting both the demand and supply sides of the economy.

Within that, the net loss of New Zealanders at 5600 over the past year was little more than a fifth of the average rate over the previous 10 years. So to the extent Kiwis are voting with their feet, it is a vote of (relative) confidence.

The survey indicators of consumer and business confidence have weakened, to multi-year lows.

It is worth noting, though, that in the details of these surveys respondents have tended to be more downbeat about the outlook for the economy than their own family's or firm's prospects, about which they are more authoritative.

It is worth remembering, moreover, that there is a base effect in the surveys. The starting point matters. People are asked if they expect things to get better or worse. If they are pretty good to start with, they may well think worse is more likely than better.

The BNZ-Business New Zealand performance of manufacturing index (PMI) is comfortably in expansion territory and rising. The equivalent survey for services (the lion's share of the economy) is even stronger.

There is, of course, the ever-present risk that the other 99.8 per cent of the world economy will sideswipe us with some shock.

China, in particular, faces some challenges as it seeks to rebalance its economy from investment- to consumption-led growth. But the Asian giant's direction of travel is fundamentally positive for an exporter of protein like New Zealand.

And if there are some grounds for concern about the world's second largest economy, then the largest, the US, is looking better than it has for years. The kiwi dollar's decline against the greenback is not just a reflection of weakening terms of trade on our part, but about an appreciating US dollar given the prospect the Federal Reserve will embark on the process of normalising US interest rates before the year is out.