A softening of the housing market, falling dairy prices and potential weakening of the Chinese economy do not bode well for New Zealand

There were knowing smiles among economists when earlier this year John Key set the election date a couple of months early. He told us it was because there were various international gatherings that the prime minister had to attend. But it also seemed possible that economy growth would be weakening at the end of 2014. The main forecasts – the ones reported – did not show it, but the downside of a weaker economy was more likely than the expansionary upside. Better, a political strategist would advise, to go early.

And, yes, economic growth is slowing down. Whether that will be evident in the statistics by the end of the year is not certain, although some people are already feeling it. One spluttering driver is that of the softening housing market; a reminder of just how dependent we have been on it for domestic economic stimulation.

Perhaps even more depressing is the falling dairy prices. Accountant Pita Alexander has published estimates of the resulting change in dairy farmer incomes. If they cannot increase production he suggests that farmers would have to cut their consumption by a quarter together with reducing working expenses and investment, and yet they would still be borrowing. Their reductions flow into the whole economy.

The downsides which economists had been thinking about earlier in the year included a weaker Chinese economy. There is no sign of a financial crash there but lower dairy and timber prices and less speculative house purchases may well arise from an economic weakening there. We can overlook how dependent New Zealand has become on the Chinese economy and the surrounding Asian economies. That Chinese economy remained strong during the world recession that followed the Global Financial Crisis protected us from the recession’s worst effects.

But there was a second reason for our relative success – Michael Cullen’s earlier stewardship as Minister of Finance, especially his paying off government debt. That gave the Key-English government the room to cut income taxes, thereby sustaining economic demand and employment through the world downturn. Unfortunately there was only so much in the kitty, and it has all gone. During the election campaign, Key was desperate to promise further income tax cuts, but Bill English must have told him they were not affordable; Key ended up with a mealy-mouthed conditional promise.

English must have been very aware that while the government's accounts are near the point where there will be no net new borrowing, the current statement of financial position (what we used to call ‘the balance sheet’) of the government is not as strong as it was when he took over. A comprehensive comparison is a report in itself but a simple one is that Net Core Government Debt was near $13.7b in September 2008 and is expected to be about $62.1b now (only some of which is due to the Canterbury Earthquakes). There is no expectation of significant improvement as far out as the Treasury can see.

It matters for two reasons. First, even when government debt is not increasing, each year a chunk has to be rolled-over (i.e. re-paid and re-borrowed). While our debt ratios are not high compared to those of some economies, overseas lenders are likely to look askance and raise our interest rates (including on private borrowings) if there is not some expectation of long-term improvement. Second, if the world economy staggers again – or ours does – we will have less room to borrow after six years of the Key-English government – in contrast with nine years of the Clark-Cullen one. As the latter demonstrated, prudence has its merits. True, its political enemies were the beneficiaries but so were the people of New Zealand.

One cannot be sure how great the growth slowdown will be. I know of no economist expecting stagnation – not in their main forecasts anyway. But they must still think the downside risks are greater than the upside ones. Despite an election campaign predicated – by all parties – on the economy doing well, economic management is not going to get any easier.