The state of the current economy may be similar to when National left office in 2017.
In December, a couple of days after the Treasury released its 2024 Half Year Economic and Fiscal Update (HEYFU24), Statistics New Zealand reported its estimate for volume GDP for the previous September 24 quarter. Instead of the expected trivial fall of 0.1 percent on June, the economy appears to have contracted 1.0 percent. There was much consternation because the discrepancy was too big to be explained by noise/measurement error. The outturn was also much weaker than the private sector forecasters anticipated.
The issue is not the single quarter decline. The New Zealand economy has been in contraction since late 2022. (I am using per capita GDP, to reduce the effect of immigration.) That is eight quarters, with a total fall of about 5 percent per person so we are back to about where we were six years ago.* The consensus among forecasters had been that the contraction would bottom out about now. I imagine they now think the upswing will be a bit later – the gloomy may say ‘much later’.
As a consequence, unemployment – which lags the bottom of the production cycle – will be higher. HYEFU24 forecast unemployment peaking at 5.4 percent of the labour force in June 2025. (It was 4.8 percent, September 2024.)
And, of course, the government’s current account is going to show a greater deficit, because the government’s revenue will be below what HYEFU24 anticipated. There will be a need for more borrowing – to be discussed in a later column.
What has caused this contraction? Many people will jump to the conclusion that it is the fault of one politician or another, the choice depending on their political prejudices. I do not want to discount that there has been some poor fiscal management – probably by both parties – but that disguises what may be an underlying structural problem.
I won’t bore you with the details, but the economy seems to have been performing poorly over the last twelve years. It was pedestrian under the Key-English Government. Labour tried to lift its growth by expanding the public sector, but the private sector remained near static. In particular, there was little growth relative to the population in the tradeable sector, which generates and conserves foreign exchange.
There were three main exceptions. The Information, Media and Telecommunications sector boomed. Presumably that was from the broadband rollout. But even it peaked in 2021 and is now stagnating.
There was some growth in consumer spending but that appears to have mainly sourced from products produced offshore. (Retailing contributes to economic activity by paying workers and rents and making profits.) In fact, retailing was sluggish like the rest of the economy until 2019, and then took off, interrupted by the lockdown. It is still humming away (but not everywhere).
The third driver has ben the construction and real estate sectors. Construction grew rapidly after the turn down following the GFC. It peaked in late 2021 and has contracted by about 10 percent since, back to about where it was in 2017. The pattern for the real estate sector (which is very heterogenous including rental and hiring) is a little different. It fluctuated around a rising trend a lot; it still appears to be rising even if estate agent activity is not.
So we have had a weak economy for some time. Labour was trying to stimulate it via the government’s spending, which the Coalition Government is cutting back. There is no part of the private sector which is significantly expanding. Its expansion peaked three years ago; today the construction sector is producing absolutely less than it did then.
It is easy then, and correct, to say that at the heart of the current economic contraction is the construction sector. Its contraction was caused by the Reserve Bank hiking interest rates. OCR went from 0.5% p.a. in August 2021 to 5.5% p.a. in June 2023 – it is currently 4.25% p.a.)
The minutes of the RBNZ Monetary Policy Committee are not published, so we cannot be sure exactly what it was thinking. In November 2022 a select committee of Parliament asked the RBNZ Governor whether the central bank was engineering a recession to combat inflation. He replied, ‘I think that is correct. We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth.’
In August 2021 consumer prices (CPI) had increased 5.9% on a year earlier. The rate rose to 7.3% shortly after and has since sunk back to 2.2% today. I leave to another venue whether this inflation reduction is a consequence of RBNZ action or whether it would have largely happened anyway as world inflation eased.
So a major cause of the two-year-plus contraction has been the actions of the Reserve Bank. But it happened in a decade-long weak economy.
Because we hardly focus on the existence and causes of the weakness, the government is hardly addressing it – continuing the Key-English approach. The one exception is Shane Jones and his ‘think big’. You may not like what he is proposing – and it will take some time to be effective – but at least it grasps the nub of trying to deal with the weak tradeable sector.
In summary the state of the current economy as similar to when National left office in 2017. As it promised in its election campaign, we are back on its track.
* This column looks through the strong fluctuation associated with the Covid crisis.