Magazine article New Zealand Management

POLITICS : If the Economy Slides So Do Labour's Prospects

Magazine article New Zealand Management

POLITICS : If the Economy Slides So Do Labour's Prospects

Article excerpt

Byline: Colin James

We used to talk about "managing" the economy, as if it was a project. Then we talked about the economy as organic, self-balancing and free as the breeze. But managed or free, the economy is a core focus of government - and critical to its electoral health.

In 1999 the economy was picking up after a low patch - but too late to save the Shipley government from third-term blues.

In 2002 and 2005 the economy was humming. Though real wages weren't rising in synch, property prices were and jobs were increasingly plentiful. The Clark Labour party scooted back into office in 2002 then added another 97,000 votes and two percentage points in 2005 (even though only squeezing back).

In 2008 the economy is not likely to be so friendly to Labour.

At some point the serious imbalances will unwind: the dangerously high balance of payments current account deficit; the unaffordably high house prices; household debt at more than one-and-a-half times household disposable income; a dollar overpriced by between 20 and 50 percent, according to Morgan Stanley; a mountain of Uridashi and Eurokiwi bonds, now equal to a third of GDP and likely to evaporate if the currency slides.

This unwinding can be in one of two ways.

It can be sudden - which means recession and much pain to those who are seriously indebted, a drop in house prices, falling retail sales, slumping business profits and probably a jump in unemployment.

Or the unwinding can come slowly over a number of years - which means flat house prices, sluggish retail sales, lower profits and slow overall growth but not disaster for households. Japan's long rebalancing after its 1980s' bubble collapsed is a pointer.

Moreover there is an offset to help us through a long rebalancing: the terms of trade have turned for the better over the past decade or so after a century of decline. The expanding middle classes in Asia are generating demand for high-quality food at the same time as Asian producers have cut the prices of manufactured goods and some services and also lifted demand, and prices, for aluminium and wood.

This has been most visible in a spike in world dairy prices, which is the result of several special factors. …

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