10 reasons not to despair over state of the economy — and one word of warning

Saturday, 11 January 2025

For every dark cloud there is a silver-living

ANALYSIS: There was a series of red flags that the economy was not heading in a great direction last year.

One harbinger of the trouble ahead was a research paper published by the Treasury in May that warned productivity growth here and overseas had flat-lined with no quick fix on the horizon.

The Government’s monthly accounts began to move further and further off-track from Budget forecasts, with a higher deficit and more debt due mainly to disappointing tax revenues.

Nicola Willis notes in Parliament that misses have become the norm.

By mid-November, Finance Minister Nicola Willis was ringing the alarm bells in Parliament over the fiscal outlook.

Sooner after, BusinessNZ described the economy as being in a holding pattern with “only modest growth on the cards” this year.

Fears crystallised in the Half Year Economic and Fiscal Update (Hyefu), released by the Treasury just before Christmas, with forecasts for economic growth and tax revenues slashed.

That pushed back its expected return to an “Obegal” operating surplus by at least two years and implied the need for an extra $20 billion of borrowing over above previous expectations over the next four years.

To cap it off, Stats NZ reported economic activity dropped 2.2% in the six months to the end of September.

But for every dark cloud there is a silver-living.

1. NZ is still a comparatively wealthy country

Although New Zealand has been slipping down the global table of GDP per capita, it is still a wealthy nation.

UBS’ Global Wealth Report ranked New Zealand seventh in the world in terms of average wealth per capita in 2023 (helped by high house prices, of course), with an average wealth of US$408,231 per adult.

It could be a lot worse.

2. Productivity: we are no longer living deep in denial

The productivity slump that hit the headlines last year isn’t new.

According to the Treasury, productivity growth slowed to about zero between 2014 and 2019 and fell back to that level over the past couple of years after a Covid blip, and its a global phenomenon.

After years of overly-optimistic forecasts, more economists are confronting the issue.

Reserve Bank chief economist Paul Conway told The Post last month that New Zealand “doesn’t have to just muddle along”.

“I do like the way people are talking about productivity — it's a really good thing.”

3. Work is being done under the bonnet

Not everyone may be convinced that cutting regulation, giving near carte blanche to foreign miners, or spending tens of billions of dollars on a few hundred kilometres of new roads is going to turn the country’s fortunes around.

But some worthy work is being done under the bonnet of the economy.

The Government is following the OECD’s advice by beefing up competition laws and tweaking capital market rules, for example by making it easier for KiwiSaver funds to invest in unlisted young firms.

Commerce Minister Andrew Bayly has been driving some of the more nitty-gritty reforms

We’re not powerless.

4. The drop in the NZ dollar is improving our trade balance

With our current account with the rest of the world still deep in deficit, stimulating consumer demand to spark the economy may not be a good option.

But the country is gradually clawing its way back to paying its way, aided by a 6% drop in the trade-weighted value of the New Zealand dollar last year.

The New Zealand dollar has been losing value after a couple of years of relative stability.

The Treasury forecasts the current account deficit will roughly halve from 6.7% of GDP last year to 3.4% by 2029, though it should be noted it is not specifically factoring-in any impact from Trump trade tariffs.

That movement in the right direction would provide more options.

5. The debate over tax is maturing

Much like the conversation over productivity, the era of denial over the need for some type of tax reform appears to be finally drawing to a close.

ANZ chief executive Antonia Watson and Chartered Accountants Australia and New Zealand tax leader John Cuthbertson are among those paving the way for a rethink on a capital gains tax.

That is now back on the Labour Party’s agenda, while Government is looking at more “user-pays” options to fund infrastructure investment while softening its stance on other additional revenue moves around the edges.

Neither may have the entire or best solution, but policy-makers are no longer burying their heads in the sand.

6. Immigration is no longer greatly fuelling the infrastructure deficit

The country may have staved-off previous downturns by seeking a sugar-hit from immigration.

But that can just exacerbate the infrastructure deficit.

New Zealand is coming down from such an extreme “high” and sobering up.

Stats NZ estimates we had an annual net migration gain of 38,800 in the year to the end of October (despite an exodus of young Kiwis), compared to a gain of 136,000 the previous year.

Of course that was going to hurt, but it is more sustainable.

7. Real interest rates are only just coming off their high

Sure, the Reserve Bank began slashing the official cash rate from its peak of 5.5% in August, but it does take time for that to feed through into mortgage rates and the broader economy.

Also, annual inflation has been falling faster, meaning that in inflation-adjusted terms, interest rates may still look daunting for businesses.

Reserve Bank governor Adrian Orr has often stressed how long it takes interest rates to turn the ship.

The Treasury reported in the Hyefu that businesses were reporting “little interest in investing” as they remained cautious about the economy and increasingly uncertain about the global environment.

But it does expect a pick-up from July.

Despite cutting its short-term and longer-term growth forecasts, it is expecting 3.3% GDP growth in the year starting then.

8. Most businesses are keeping the faith

In the coalition government that is.

Businesses always tend to be more upbeat when National is in power, regardless of the actual state of the economy.

Unfair, perhaps, but handy from the point of view of getting out of the current doldrums.

The Auckland Business Chamber reported last month that a net 51% of businesses expected New Zealand’s economic performance would improve over the next 12 months, an increase from a net 43% in August.

It falls short of a self-fulfilling prophecy, but it helps.

9. The Hyefu is only a forecast

The latest treasury reports don't make for great reading for a government that has promised a return to surplus.

There’s no downplaying rising government debt.

The Treasury is forecasting net core Crown debt will climb to $234 billion by June 2029 and peak at 46.5% of GDP in June 2027.

That is just 3.5 percentage points below the point at which the Treasury assesses the country could have difficulty repaying the extra debt it might need to take on following a calamity such as a major natural disaster.

But the forecasts are just its best guess based on the current outlook and policies, not something set in stone.

If we can find ways to grow the economy faster or if the Government can find further savings in the public sector, we might not need to sail so close to the wind.

10. Inflation is back in the box for now

Last, and perhaps least, quarterly inflation has been hovering at between 0.4% and 0.6% a quarter since the last election.

The relationship between inflation and economic growth isn’t straightforward, but stable inflation is undoubtedly a good thing, so that has to count as a silver-lining regardless.

A word of caution though, if there is one new spanner that could come from left field this year, it might be an unexpected revival in inflation fuelled by external events and the depreciation of the New Zealand dollar.

Some silver-linings also have a cloud attached, after all.