Treasury’s latest Monthly Economic Indicators conclude that the “domestic economy is looking in relatively good shape”, while acknowledging that “the global outlook worsened further in July, with downside risks increasing”. It sees “a pick up in coming quarters” that will see inflation accelerate and spare capacity be absorbed (by growth).
We think the risks weighed in Treasury’s first hand, plus a few others, will squeeze the positives on the other. And we see some other pointers that support this view.
Inflation statistics released in mid-July put the inflation rate for the year to June 2012 at 0.95 percent. This was quite a margin less than Treasury’s forecast of 1.21 percent released at the end of June in the BEFU. This unexpectedly low level reflects falling prices for exported tradable goods due to the global slowdown, a high exchange rate driving down the prices of imported goods, and “spare capacity” - i.e. un- or under-employment of people and assets – which hold back increases in wages and interest rates.
Credit – a key ingredient for growth - is tight for businesses, despite low interest rates. RBNZ credit supply statistics show that there was a substantial contraction in the supply of credit to businesses between 2009 and 2011 (and latterly for the agriculture sector also). The supply of credit only began to grow in a meaningful way part way through 2011. But the recent positive changes, relative to the level of credit by sector a year ago, shown in the Figure were still small.
Growth – particularly when measured as a percentage change - on the back of a contraction is not necessarily a sign of restored health, but can just reflect a period of consolidation. The latest statistics show that the apparent lift in business credit in the month of May dropped back in June. Taking a longer view, despite a growing economy, the volume of credit to businesses has not climbed back to the pre-GFC levels over four years ago.
So what is going on with credit supply? Nervous banks are in the process of rebuilding their reserves, which have fallen below the benchmark levels set by the RBNZ and international banking conventions (namely, the Basel III Accord). So, those businesses who want credit – and while it is cheap – are forced to wait it out. Although there may be spare capacity somewhere in the economy, it could be in the wrong place for growth. So the battered banks are not in a position at present to help businesses to blow the furtive sparks of growth into a fitful flame.
This not to say that businesses are not doing the best they can, given the conditions and constraints they face. GDP growth statistics can be delayed by quite a stretch, but the government’s tax statistics provide us with a lead indicator. Corporate taxes have been growing more strongly than forecast. In the latest monthly fiscal accounts for the 11 months to May 2012 (released in July), total corporate tax was $7.6 billion. This was 5.2 percent ahead of forecast, and well on the way to the target for the fiscal financial year (to 30 June 2012). Unfortunately, the next set of monthly statistics will be rolled into the annual accounts, and these are not generally available until October.
On balance, the (somewhat) hidden credit constraint on businesses is an anchor holding back growth. While the global economy has been stung by too much use of bad credit, the hangover is that we now have too little good credit. But credit needs to flow to businesses that need it to invest in the workforce, equipment, products and markets. Give credit where credit is due.
Funding businesses to grow will also help banks to restore the health of their balance sheets. A growing economy, with rising employment, will put money in people’s pockets. This can lift consumer confidence as well as boosting saving, which will help banks to restore their reserves to prudential levels.