GDP and Inflation

GDP and external accounts data confirm export sector in strife

Monday June 26, 2017

The good news from the GDP data for the March 2017 quarter was of continued growth, with expansion of 3.1% for the year confirmed.  However, the good news hid the rather sobering news of the export sector contracting for the third consecutive quarter.  Consequently, exports for the March year reportedly grew by a meagre 1.2%, as meat, textiles, and metal and machinery products all slumped with sizable negative growth recorded.


This is reflected in the performance of the broader tradable sector, which encompasses all firms that are competing against foreign firms and products both domestically and abroad.  The latest year saw the tradable sector expand by a mere 0.4%, while the non-tradable sector (i.e. domestic business and organisations in sectors that do not compete with foreign entities) was the source of the economy’s expansion – growing by close to 4% over the year.


graph gdp 01


Of ongoing concern, is the lack of any significant long-lasting change in the structure of the New Zealand economic growth story.  Non-tradable sector activity (closely associated with domestic spending) have driven the growth experience over more than a couple of decades.


Consequently, the much-vaunted rebalancing of New Zealand’s economy towards the internationally-competitive businesses and enterprises in the tradable sector has gone backwards in the past quarter of a century.  The tradable sector has grown by an average of 2.1% annually over the past 25 years, while the non-tradable sector has averaged over 3.2% annual growth.  As a result, the tradable sector now accounts for less than 28% of the nation’s total GDP, substantially down from nearly 34% a quarter of a century ago.


A similar story is depicted by the nation’s external accounts data.  The picture, illustrating the difference between the nation’s revenue from and payments (including interest on previous borrowings) to the rest of the world.  The struggling export sector performance has translated into little change in the fundamental imbalance shown.


graph account balance 01


The latest year saw a deficit of over $8bn being recorded.  While an improvement on the bleak deficits experienced in the immediate aftermath of the Global Financial Crisis, the persistence of this deficit remains the Achilles Heel of the New Zealand economic picture.  However, the composition of the balance has changed.  In particular, the past year has seen the balance in goods trade deteriorate by $400m, to be now in deficit by more than $3bn.  In contrast, the services trade balance has remained stable at a surplus of about $4.3bn.  Similarly, the investment income balance (the net of interest, profits, dividends, and transfers paid abroad) has stayed close to an annual deficit of $9.5bn.


In a nutshell, our trade in goods (dairy, meat, etc.) has been in significant deficit for some time.  This has been partially offset by services trade (tourism and education), which have restored some semblance of order to the post-GFC external accounts.  Looking ahead, the focus on numerous consecutive governments on the health of the export sector continues to be warranted given the nation’s fundamental imbalance in its external accounts.  However, any significant change will require a fundamental change in the fortunes of the tradable sector vis-à-vis the non-tradable sector. But such a change is difficult to see as imminent, noting that much forecast growth is principally predicated on strong lifts in domestic consumer spending.