Five economic developments to expect in 2024

Sunday, 7 January 2024

ANALYSIS: The coming year is going to be marked by slow economic growth as the Government and Reserve Bank attempt to bring spending back into line.

That should mean rising unemployment, but with the silver lining of rapidly falling inflation.

As ever, it is surprise developments overseas and natural disasters that could provide the wild card, but these are some of this year’s headlines that are already written in draft.

Treasury delays forecast return to surplus to 2028

The Treasury forecast in December that the Government was likely to post a wafer-thin operating surplus of $140 million in the year to June 2027.

But it appears a fairly safe bet that will be pushed back another year when it releases its updated projections in the May Budget.

The Treasury’s December predictions didn’t take into account a big downward revision in Stats NZ’s estimate of recent economic growth late last year.

Slower growth means less tax revenue and more spending on social welfare, and Stats NZ did not just report a surprisingly steep 0.3% drop in GDP in the September quarter.

Westpac calculated major revisions it made to its GDP estimates as far back as 2021 meant that by September the economy was a whopping 1.8% smaller than the Reserve Bank had thought it would be.

Finance Minister Nicola Willis has acknowledged that delivering a surplus by 2027 — while still the Government’s goal — has “got a whole lot harder”.

A delay in the return to surplus to the year ending June 2028 would be the third time that had been delayed by a year in just 3½ years.

At least one of the major credit-rating agencies downgrades NZ’s sovereign debt

Credit ratings agencies have been fretting over the country’s monster $30 billion current account deficit, which hasn’t dropped as fast as they have been expecting.

Moody’s commented in December that the country’s November export numbers were a sore sight, with the balance of trade improving but still “deep in the red”.

“Low prices for exports and lacklustre demand from China could extend the run of deficits for some time to come. We don’t anticipate a pick up in exports until global appetites return well into 2024,” it warned.

Any delay in the Government’s return to surplus could be expected to compound worries over the imbalance between exports and imports, making a ratings downgrade harder to avoid.

A downgrade would not be catastrophic, but Westpac chief economist Kelly Eckhold cautioned in December it would have real consequences for businesses and consumers in the form of higher interest costs for both their own and government debt.

The Reserve Bank cuts interest rates by the year’s end

The central bank’s forecasts currently imply that the official cash rate won’t fall below 5.5% before around the middle of 2025, with a good chance of a spell at the higher rate of 5.75% for period this year.

However, few economists are fully convinced by its recent hawkish commentary.

Governor Adrian Orr does appear to have significantly toughened his rhetoric on inflation in recent months, in line with the new government’s inclinations.

The bank’s current economic forecasts indicate that, by December, annual inflation will have fallen to 2.5% while unemployment will have just climbed to 5.1%, but despite that, the official cash rate will be 25 basis points higher than it is today at 5.75%.

That would seem to defy common sense, and few economists appear to believe the picture the central bank is painting here.

Annual net immigration quickly levels off, then slowly drops

Annual immigration peaked at a record 128,900 in the year to the end of October according to preliminary estimates released by Stats NZ in December.

But it believes the actual monthly peak in immigration occurred in March, and Stats NZ can be expected to soon report immigration has levelled off, and — in the next few months — that it is on a downward trend.

Immigration Minister Erica Stanford said in December that the Government had been taking a close look at where the numbers were heading and was confident that they were “coming back”.

Because of the way Stats NZ estimates immigration, its preliminary figures are likely to be less reliable around the time that immigration peaks or troughs.

So there is likely to be extra volatility in the numbers early this year, with a decent chance that the past records reported late last year could be materially revised down.

The Government announces a surprise revenue-generating measure

The Government has ambitious plans to slash public expenditure, but they won’t be easy to achieve.

ACT Party public service spokesperson Todd Stephenson, still perhaps in election-campaign mode, went as far as to claim in December that the public service had been “spending your money just because it can”.

But a closer look at the reasons that under-the-gun agencies such as the Ministry of Business, Innovation and Employment and the Ministry of Education have increased in size in recent years suggests an absence of an awful lot of low-hanging fruit.

And if the ferries cost more to upgrade because the wharves in Wellington are seismically-stuffed, that’s not really a problem that can be easily solved in the Beehive.

As well as cutting government programmes, Willis appears to be counting on fewer public servants working harder.

“The exercise that we have been running will show that there are areas of expenditure that are no longer a high priority, that are low value, that don't align with the incoming government's priorities.

“But also there are areas where — just as every New Zealander is doing right now — people can do more with less,” she says.

There may be some truth in that, but if it’s not enough to fund the tax relief it is politically committed to, then the Government will need to get creative.