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The New Zealand economy, explained

Saturday, 15 February 2025

Times are tight.
Times are tight.

With the Government “laser-focused” on “unleashing economic growth” with a new growth hub, Explainer Editor Lloyd Burr gives a snapshot of New Zealand’s economy, what it’s made up of, and how it needs to change in order to “power up”.

Macroeconomics, fiscal stimulus, stability, productivity, bonds, gearing, monetary policy, hedging, regulatory capital settings, equity, liquidity, quantitative easing, and yields.

There’s not much that numbs your mind more than jargon like that when wading through economic reports from Treasury, the Reserve Bank, and Stats NZ.

It’s not just sleep-inducing, but it makes a vital cog of our lives pretty inaccessible to those who aren’t economic boffins.

But given the economy is everything and affects everyone, it’s important we know how it works and what state it’s in. When the economy thrives, the country thrives. So where are we at? Here’s a 101.

Meet the teachers

You’ll hear from three experts, who not only live and breathe this stuff, but can explain it in simple terms:

Stephen Hickson, economics lecturer and director of the Business Taught Masters Programmes at the University of Canterbury.

Shamubeel Eaqub, independent economist who’s all about making economics easy.

Professor Robert MacCulloch from the University of Auckland’s business school.

What is ‘the economy’?

New Zealand’s economy is still technically in recession, meaning GDP has shrunk by 1% over the course of the six months to December 2024.
New Zealand’s economy is still technically in recession, meaning GDP has shrunk by 1% over the course of the six months to December 2024.

Simply, it is the marketplace of our lives.

“The economy is just made up of people going about their daily lives,” Hickson says. “Going to work, going to the supermarket, buying and selling things, interacting with each other.

“It's all of those things added up together, the decisions that businesses make, that workers make, that government makes, and how they all interact with each other,” he says.

MacCulloch describes it well too: the ecosystem of production, consumption, and trade of goods and services.

“It's all the things that we do,” Eaqub says. “It’s the sum total of interactions between all of us. You and me buying things from each other, doing things for each other,” he says.

How do you measure the size of the economy

The most widely-used measure of an economy’s size is GDP, which stands for Gross Domestic Product. There are many other ways to measure it, but the main one that’s used to measure growth and to compare economies around the world is GDP.

New Zealand’s GDP is $420b.

The ‘G’ is pretty self-explanatory - it means the overall total.

The ‘D’ is important because it only includes things that are produced domestically - imports are not included in it. Exports are, because they are made domestically.

The ‘P’ is also important because it refers to production rather than consumption. So the stuff we buy is included, just not us buying the stuff.

“It's the aggregate value of production of what's being sold in the country,” MacCulloch says.

Economist Shamubeel Eaqub.
Economist Shamubeel Eaqub.

“Think about GDP as just a measure of the final goods and services that we produce,” says Hickson. “It’s a pretty good measure of how well the economy's doing”.

“The higher your GDP, the better you tend to be on other measures as well. So higher GDP countries have better child health, tend to have longer life expectancy and have better education systems,” he says.

However, GDP isn’t perfect and Eaqub calls it a “consistent but imperfect measure of the economy”. He offers some other ways to measure the size of the economy:

  1. Wages (How much people earn and how much businesses earn)

  2. What we spend money on/invest in (as households, businesses, and government)

  3. By industry (how much is each industry earning and paying out as wages)

He says there are unmeasured parts of the economy too, like volunteer work and parenting which provide value but aren't measured as part of an economy’s success. Similarly, the impact from natural disasters aren’t measured, yet the benefits of the rebuilds are.

“The other thing that trips up measures like GDP is that it doesn’t take into account things like pollution and bad things that sometimes happen,” he says.

“Let's say we're doing lots of economic growth, but it's coming with lots of pollution, terrible air, terrible water, land contamination - is that really good growth or bad growth?”

University of Auckland economics professor Robert MacCulloch.
University of Auckland economics professor Robert MacCulloch.

What’s the current state of NZ’s economy?

The Covid-19 pandemic sent the global economy into an unpredictable and volatile period of turbulence which is still being felt in New Zealand.

The recovery from this is much slower than expected and New Zealand’s economy is still technically in recession, meaning GDP has shrunk by 1% over the course of the six months to December 2024. A shrinking economy is not good for businesses, employment, or growth.

The shrinking economy has been due to a number of factors - many of them external and uncontrollable because of New Zealand being at the mercy of global markets.

Inflation (the increase in the cost of goods and services) is one of the main factors and while it’s starting to come under control, it’s more stubborn than predicted. This is a simplified explanation but in order to stop inflation, the Reserve Bank increases what’s called the Official Cash Rate, which in turn makes banks increase interest rates.

The aim of this is to put pain on those with loans so they spend more on paying the interest on their loans, and less on goods and services - which eases inflation given the drop in demand for goods and services.

Another indicator of economic pain is the unemployment rate. Tougher economic conditions for businesses means they lay staff off or implement hiring freezes. New Zealand’s unemployment rate is currently 5.1%, which is roughly 156,000 people.

This means fewer people paying income tax to the Government, and the Government having to pay more in unemployment benefits.

The Government doesn’t want to spend more money on this - or many other things, hence big culls in public sector workforce numbers - because its financial position is pretty dire itself, with debt of $175b. This is around 42% of GDP, which isn’t massively high compared to some other countries, but much higher than the Government likes it to be.

This is why the current Government has launched its ‘growth’ drive.

What does the economy consist of?

There are so many ways to slice up the economy and see how big parts of it are. Let’s start by looking at GDP by each industry.

The problem with this is that many of these categories overlap. For example, health and education are largely funded by the Government, yet they aren’t included under central government.

There’s also tourism. It’s a huge part of the economy but where is it on that graph? It would cut across many of them like transport, accommodation, and rental and hiring.

The size of agriculture’s slice is also surprising given how it’s often referred to as the backbone of the economy.

Then there’s the one that’s come out as the largest: Professional, scientific, and technical services, which MacCulloch rolls his eyes at.

“That just means they bought all these different services and they put it all under one heading. It’s thousands of different businesses all producing different things and they’ve been thrown together in one category,” he says.

We can simplify that graph down further, which shows nearly two-thirds of the economy produces services rather than goods - and the primary industries sector (agri-, horti-, aqua-culture and mining) is around 7%. Hardly the backbone, right?

Professor MacCulloch says looking at it like this is problematic because there’s a large grey area between what can be considered a product and a service. It’s so grey, he says it’s “almost meaningless”.

“It's almost impossible to distinguish what's a service and what is manufacturing a good,” he says. “You’re a journalist and you write articles - is that manufacturing a good or is that providing a service to the public?”

“In a restaurant, a large part of the restaurant experiences a service, being waited on. But then part of it is producing the meal and that would be classified as manufacturing,” he says.

GDP can be broken down into other segments as well - including by exports. And that’s when you see why the primary industries sector is seen as the backbone.

“Nobody should look at one metric as the be all and end all,” says Eaqub. “The economy is not restricted by how we measure it. The economy does, in concept, mean something bigger and it is in fact very values laden,” he says.

Is our economy a bit basic?

At first glance, it’s easy to say our economy is pretty basic and based on farming, tourism, and investment housing. But that would be an incorrect assumption. And you know what they say about assumptions.

“We're an advanced, developed economy and we're formally classified as that by the IMF and OECD,” MacCulloch says. The IMF (International Monetary Fund) is a global economic organisation with 191 member countries. It provides policy advice, analytics, and financial assistance. The OECD (Organisation for Economic Co-operation and Development) is similar, with a focus on analysing economies around the world, and helping shape public policy.

“We have a reasonably diversified economy for our size,” says Hickson. “We are never going to be able to have the range of industries that an economy like the US has, right? It’s 25% of the world's economy, believe it or not and if Texas and California were individual countries, they would be in the top 10,” he says.

Is housing a growth solution or is it holding us back? MacCulloch tires of this argument.

“People all around the world want to own their own homes. Housing is huge in construction in nearly every country. So I don't think we're that unusual in that sense of people wanting to invest in their own home and make money out of it. I’m not willing to just blame our problems on the housing market,” MacCulloch says.

Pros of NZ’s economy

Cons of NZ’s economy

How does NZ compare?

The economies of Ireland and Singapore are often used as a benchmark against New Zealand’s given similar landmass sizes or populations.

“I don’t like the comparison with Ireland and Singapore. Singapore is on the biggest shipping route in the world and Ireland’s in Europe and positioned itself in the EU as a full member and has given attractive corporate taxation deals to the world’s tech giants,” MacCulloch says.

“What is stark is that if you look at Ireland, their exports as a percentage of GDP are like 90-110% of GDP. They're like massively more than ours and Singapore’s.

“Our exports for a small open country like New Zealand… are relatively small compared with other small, small countries,” he says.

Can the Government ‘unleash growth’?

If you’ve watched any of Prime Minister Christopher Luxon’s speeches or media conferences, you’d have heard his new favourite buzz word: “growth”.

Here are a few snippets from this week alone: “Growth trumps everything”, “unlock growth”, “go for growth”, “growth takes flight”, “power up growth”, “unleash economic growth”, and “we are saying yes to economic growth”.

So what do our experts think of this? And how does a government go about unleashing growth?

“It's my belief the Government doesn't know how to do that. They're very unsure how to do that,” says MacCulloch. He says the Key government relied on immigration, a construction boom, and tourism to grow the economy - but warns that same plan isn’t working now.

“Immigration is sort of wobbling, the property market is kind of flat, construction's not doing that well, and tourism is not doing that great,” he says.

But Hickson questions the ability of any government to supercharge growth.

“The Government is less influential on economic growth than most people think,” he says. “They're not sitting there with a lever, which is ‘more growth’ and ‘less growth’. But they do make a big difference when they're setting the environment for growth,” he says.

“A center right government like National will have much more emphasis on growing the size of the pie whereas Labour will have much more emphasis on how you distribute that pie and less emphasis on growing it,” Hickson says.

He says government can grow the economy by:

  1. Immigration. This means more workers, which typically comes from higher immigration. While it grows the economy, it doesn’t mean you’re better off on a per-capita basis.

  2. Increasing productivity. This is making it more efficient to produce goods and services by having better regulation, better technology, better transport, better capital, a better workforce, and better infrastructure.

Eaqub more or less agrees with those two points and says the Government needs to decide what kind of growth it wants.

“I think they're genuine in that they think they want to have growth, but it's not clear to me the intervention logic is there.

“If your strategy for growing the economy is simply by having more people here but making New Zealanders on average not much better off, that's a fool's errand,” he says.

Growth is reliant on four things, Eaqub adds:

  1. Geography - proximity to markets, having trade partners, capital partners, free trade agreements, and effective domestic transport connections.

  2. Culture - a can-do culture or a ‘no’ culture affects growth. If there’s a culture of laziness, growth is hard. It’s hard to influence culture.

  3. Institutions - good rule of law and justice system, public trust in leaders and police, and effective rules and regulations. Consistency across governments helps too.

  4. Luck - a lot of success is due to serendipity.

Prognosis

“I'm very optimistic about 2025,” says Eaqub. “The reduction in interest rates means that we are gonna get a lot of relief, we're starting to see businesses starting to get ready to hire, and ready to invest in their businesses - that’s good stuff.”

“My expectation is by the middle of this year, we'll start to see some pretty good improvement in terms of people's ability to get jobs,” he says.

Hickson shares his sentiment.

“I'm cautiously optimistic that we've turned that corner, that we have got inflation under control and we should start to see unemployment come down,” he says.

“If the Government gets what it wants and does the things that it might need to do then that should also help. So most people are pretty cautiously optimistic that we're not in a bad place,” Hickson says.