New Zealand Treasury says it expects to downgrade its economic and fiscal forecasts relative to Budget 2024 when it provides a half-year update next month, as the recession has been worse than expected.
In a speech on Thursday, chief economic advisor Dominick Stephens said the latest evidence suggested the recession would be deeper and last longer than predicted in May.
The agency had forecast Gross Domestic Product to rise 0.2% in the June quarter but it actually fell by the same amount. Spending on electronic cards in October was 1% lower than a year ago, and activity indicators showed little or no growth in recent months.
Plus, businesses were reporting current trading conditions as being worse than any time since 2009, excluding the depths of the Covid-19 pandemic and its response.
Stephens said an ongoing slowdown in labour productivity had continued and was also likely to contribute to a worse economic outlook than what Budget 2024 was based on.
“Economic growth has proved slower than anticipated. Weaker economic growth means a smaller economy and less tax revenue, increasing the challenge for the Government in balancing its books”.
He said the fiscal impact could be even larger than usual, as tax revenue had also fallen short of expectations — even after accounting for the slowdown.
“Recent monthly data has shown that tax revenue overall has been close to the Treasury’s Budget forecast, but the detail reveals that GST collections have been surprisingly low relative to underlying economic activity. If this trend continues, there could be further downside risks to the Treasury’s revenue forecasts”.
GDP per capita has fallen 4.6% since late 2022 and likely continued to drop throughout the second half of 2024, despite the Treasury predicting a recovery in Budget forecasts.
Productivity hits zero
Stephens said the “deteriorating economic outlook” was not only because of a deeper recession, but also because of a sustained productivity slowdown.
“Labour productivity measures the amount of GDP produced per hour of work, and improving it is key to lifting economic growth and living standards.”
“Productivity growth averaged 1.4% in the 20 years up to 2013 but slowed to zero from 2014 until the end of 2019,” he said.
Oddly, labour productivity surged at the start of the pandemic but it was only a brief interruption to the trend which began in the mid-2010s and has continued.
“As this reality has slowly been revealed by the data over the past two years, the Treasury has lowered trend productivity in successive forecasts,” Stephens said.
This isn’t a problem unique to New Zealand, productivity has been slowing in other countries as well. The Treasury has said causes may include weak capital investment and a reduction in international trade and connections.
“There is scope for policy to help lift productivity growth over time by focusing on key areas such as private investment and capital intensity; internationalisation; innovation and the diffusion of new technology; and regulation and the competitive environment”.
Stephens said each downward revision of economic growth forecasts made it harder for the Government to bring its revenue and expenditure back into balance.
“The only certainty in economic forecasting is uncertainty. The Treasury will continue to update its forecasts, including its productivity forecast, as more information comes to light”.
119 Comments
OCR should’ve been cut back to 3% months ago.
The Governor of the Reserve Bank can be removed by the Governor-General for just cause, based on advice from the Minister of Finance. This process requires consultation with the Attorney-General. Why hasn’t this happened?
For too long NZers have beleived its up to the RBNZ to stimulate the economy with low rates, in reality this does nothing to increase productivity, it simply sets off another speculative over allocation to risk assets, namely housing. At 6% annual increase (needed to double in 10 years) thats now making housing run away from FHBers at about 46k a year, or maybe 70k pre tax... this cannot happen
its now up to NAct to stimulate the economy..... if you do not see this you are not an astute investor.
Some may call me a DGM, but I am a dam rich DGM, and I know when the game has changed!
Awesome post.
Yip the world and nz have changed. A lot of people seem to be under the impression that after a few months it will all revert to how it was .... when interest rates were super low and houses kept rising in price and people spent their equity.
Now we gotta actually be productive and innovative.
"At 6% annual increase (needed to double in 10 years)"
7.2% ... Look up the Rule 72.
Good post. ... But this bit needs work ...
"For too long NZers have beleived its up to the RBNZ to stimulate ..."
Kiwi's also believe governments can work miracles. Worth considering next time someone starts blaming government - of any flavor - for our economic success (or lack thereof). Just sayin'.
This guy still repeating the commonly believed mantra that house prices double every 10 years.
https://youtu.be/MYsyO1ZKkds?t=356
Owner occupier buyers: CAVEAT EMPTOR
3% is the neutral rate
Immaterial, as historically since the OCR was created the average is somewhere around ~4.7%. the issue is the level of debt, not the cost of it. Just like a mortgage at 20% interest and only 3x DTI of a single wage is easier to service than an 10x DTI at 5% interest.
on the good news front slower economy equals lower house prices
unlike fish property bubbles rot from the bottom up, if people want house prices to trend upwards they first must fall to a point people can afford vs leave nz for greener pastures... for long term health we need a short term correction
"slower economy equals lower house prices"
You could be in for quite a surprise ITG. Slower economy means lower interest rates. There are still plenty of people not hurting from the slower economy, but benefitting from the upcoming lower interest rates.
I can see you wonder in 2025, "why have house prices gone up and not down as you expected".
The problem is that the only people benefitting are home owners.
The people that drive the productive economy (and are needed to rent and buy homes) are leaving for Oz in very big numbers.
The new normal is that the higher house prices rise. The more smart kids leave... which in the mid to long term will damage the economy and house prices. Lol.
I don't think home owners are benefiting much at the moment. I pay my rent. The end. Previously it was endless...rates, insurance, repairs and maintenance, upgrades, ..on and on.
Home ownership is very expensive and house prices will come down to offset.
For many a home is now a liability.
https://www.allaboutauctions.co.nz/
https://www.trademe.co.nz/a/marketplace/stores/Skylarc?category=0&sort_…
great time to be in liquidation auctions, some great plumbing bathroom and kitchen stuff up for grabs right now.
The family that moved into the recent-build next door a couple of weeks ago personally negotiated their weekly rent with the landlord.
Back when I was still renting 4-5 years ago in the same area, even the crappiest house attracted 40-plus viewers and there would be a bidding war with each viewer writing an amount on the form.
I am starting to seriously doubt the net migration figures being reported over the last several months by Stats NZ.
Remember there's more coming back to the rental market with interest deductability reinstatement, home owners leaving to Oz and renting their houses out, all adding to the rental pool and creating decent supply where there's, in many places many options to choose form for renters now. Not so much in Nelson as there seems to always be people posting about moving here and struggling to find a rental, but such is a place where many come for lifestyle.
No, it won't. You have to use your own commonsense rather than repeating doctrine.
Businesses won't be able to pass on the higher import prices , because the masses can't afford to pay more.
Wake up folks;
1) The RBNZ can't and won't follow the Fed in raising rates
2) The lower NZD will NOT mean inflation because NZ is in a terrible economic spot
Conclusion, 2025 is going to be very tough for NZ
Exactly.
They won't rise.. but they won't be able to fall as far as markets and people expect.
We also have the problem that if we do drop rates and house prices do start to rise.. the exodus of smart young kiwis will accelerate and that will keep a brake on our entire economy and actually stop house prices and rental prices too.
The only way out is for rbnz to stop dropping rates and point at nats to have to sort it out... through policies that diversify our economy and encourage useful growth
Stagflation ?
Fixed costs march relentlessly up and weaker demand. But im willing to bet fixed costs will continue to climb
You can either put your prices up or go bust
Another two letters over my desk this week with suppliers putting their prices up due to higher cost pressures ....
A weaker NZD will only stoke inflation if demand for those imported products remain the same. Interest rates being higher for too long will more than offset any weak NZD from USA activities, by pushing demand off a cliff. Higher price of goods don’t mean anything when no one is buying.
I’m also not particularly convinced campaign rhetoric by Trump will really result in any real aggressive economic policies. There’s too many things to factor to accurately see if his policies will result in massive inflation, such as not keeping his word about the tariffs, any adjustments/tweaks he may add, exceptions for certain international organisations, etc etc. I personally think his policies could be slightly inflationary at best, and as time goes on people will get used to the new administration, realise their lives hasn’t changed all that much , markets normalising and the 10 year bond yield to start dipping back down within the next 6 months.
Incorrect, our banks' rates are heavily influenced by the OCR for the short term. The perfect example is BNZ's lowering their 6 months rate today, in expectation of an OCR cut next week. Yes, longer rates are indeed governed by international swap rates, but each borrower can choose which duration to borrow for, and they/we will borrow at the lower, shorter rates in 2025, which are decreasing in NZ.
More breaking news Yvil, there are 370 billion of mortgages, there is not enough term deposits at or near OCR to fund everyone moving short....
You must understand the dynamics of funding to understand the risk here.... will anyone buy a new home and fund on 6 month? test rates will be based on 2-3year rates....
The straws you clutch at will not support 370 bil of borrowing, but is providing afternoon amusement for free....
you need to understand the treasury structures better within the big 4 banks
Oddly, labour productivity surged at the start of the pandemic but it was only a brief interruption to the trend which began in the mid-2010s and has continued. This isn’t a problem unique to New Zealand, productivity has been slowing in other countries as well. The Treasury has said causes may include weak capital investment and a reduction in international trade and connections.
I think there are two root causes of the global productivity problems we are seeing....
1) They stem not so much from a decline in investment and trade, but from a decline in motivation through all the ranks of society, there is growing sense of frustration and futility, increasing selfishness and laziness. My feeling is that enthusiasm for work has declined and is being replaced with an increasing sense entitlement, for increased desire for self-gratification and reward for less effort.... We are getting greedier and lazier with time.
2) A shift in the type of employment and investment from primary industry and manufacturing, to the less productive, commerce, banking, standards and compliance enforcement, safety, ... all things that add a level of cost and complexity to productivity without increasing value or productive outcomes.
This is the problem and this is what people don't realise. Our per capita productivity rate is on a structural decline. We will not generate real wealth unless we address this. We can't address this as doing so would require structural reform to the way we manage our economy/society.
1./ Yes absolutely. The ability to get large salary increases due to labour shortages over 2020-2021 has fuelled this in the youth and the current climate is the opposite, with greater labour availability and more competition driving wages down. However, it has also taught many to negotiate contracts better and know their own worth. This is a delicate balance. Either way, this can be seen historically through Ray Dalios changing world order where societies advance, get complacent and lazy with increased comfort, before failing.
2./ Agreed
I'd also add that we have a slow, insipid cultural change with the increase in information available, where highly skilled professions no longer command the respect they used to such as doctors, Lawyers, Engineers. Without applauding, celebrating and heeding credible experts, we will only dwindle as a society.
The stagflation doom loop is now entrenched for the foreseeable future. A weaker NZD will mean the CPI will be increasing as the economy treads water in a sea of sewage. The only ones alive who have experienced the mother of all credit busts that comes next is the silent generation. I hope everyone has planned accordingly.
"I'm stunned, I tell you: Stunned!"
Like I've said, the OCR should have started coming down a year ago ... in November 2023. It would have increased private spending just enough to have offset the government's absurd 'austerity' policies. That being said, private spending would most likely have been on things that didn't help NZ Inc. much.
In a speech on Thursday, chief economic advisor Dominick Stephens said the latest evidence suggested the recession would be deeper and last longer than predicted in May.
No shit Sherlock. This is what austerity looks like. Tried and tested in the UK by Luxon's poster Tory boys. FFS
I work with many mothers with young children who have the ability to earn a half decent salary on the basis that they can work form home several days a week. They are fantastic at what they do, and productivity hasn't changed a bit. I get that some work cannot be done from home. Roads need to be paved, landscaping needs to be done, goods need to be produced and so on, but the country isn't on the downturn because of WFH. We already imported record numbers of people just to try and keep the productivity stats up and that horse has bolted.
I suspect most who are vocal against others working from home harbour some sort of resentment or jealousy of such a perk that they don't get.
Can't speak for the public sector, but if private sector employers choose to allow employees to WFH then I'm sure they're not doing it so their employees can lounge about on the couch and send productivity through the floor. Which further makes comments from people such as lostinawoods fairly out of touch.
“Productivity growth averaged 1.4% in the 20 years up to 2013 but slowed to zero from 2014"
This roughly coincides with the widespread adoption of smart phones!
At the risk of sound like an old dinosaur (which I assure you, I am rapidly becoming) I've had the feeling for quite a while that many of the new careers these days is just fluffery. Videos of pointless things to keep us amused, endless box-ticking and compliance etc etc.
Very few, it seems are engaged in producing anything tangible.
It also coincides with the introduction of the LVR and the ensuing widespread exploitation of renters who were locked out of purchasing their home overnight.
Also immigration on steroids (but don't worry, the reported numbers were revised down ~50% when stats nz shifted models).
When people are forced to save more, they spend less. When there is wildly increasing rents, people spend less. And when those who do have spare money and cash flow choose to 'invest it in non-productive housing, they spend less.
Money is like oil in the economy, and NZ has a giant big glug, where what could be used to enhance productivity is locked away in future liabilities.
"Steel & Tube says it went into an operating loss of $5 million in the first four months of its financial year, with revenue falling sharply over the period due to low demand for steel.
In a trading update, Steel & Tube said the first four months showed the weakness in the New Zealand economic environment seen in the latter half of 2024 had continued to deteriorate and had impacted sales volumes.
“As highlighted by other industry participants, demand for steel has hit recent lows and margin pressure has intensified,” the company said.
“The work we have done over the past two years has created a stronger, streamlined company. Importantly, we have retained sufficient ‘muscle’ in the business to ensure we can move quickly to capture profit expansion opportunities as demand returns.”
https://www.nzherald.co.nz/business/steel-tube-blames-weak-economy-for-…
And if the upswing in demand takes longer than anticipated?
Oddly, labour productivity surged at the start of the pandemic but it was only a brief interruption to the trend which began in the mid-2010s and has continued.
This tells you everything you need to know - Treasury appear to have zero clue about the data they are pondering over.
Stephens recognises that labour productivity is measured by GDP / hours worked. But, he is missing what GDP is measuring! GDP(P) is basically the difference between total operating sales and operating expenditure - the 'surplus'. This 'surplus' is shared between salaries and profits. Rearrange this and you get the basic equation: (wages + profits) / (hours worked) = labour productivity.
So, what happened at the start of the pandemic? Companies made big profits thanks to Govt support and then the big reopening. Profits went up... GDP went up... labour productivity went up (because profits went up by more than hours worked). This is really basic macro folks.
Once you understand this, it is also clear why productivity stagnated after the GFC. The eye-watering increases in private debt from 1990 to 2008 enabled companies to make fat profits. (Wages + profits) / (hours worked) = labour productivity.
I was surprised to find out I had to play an employee 80% of his weekly wage for the first week when an injury happens at work (he slice a knife down his thumb) I would have thought this would have been taken from his 10 days per year sick pay but this is yet another cost as an employer I need to front. It’s honestly so costly to have staff in 2024.
The employer pays sick leave, I’m well aware. My point is an employee gets a full week @ 80% to sit at home for something that was self inflicted PLUS 10 sick days per year PLUS 4 weeks holiday pay PLUS stat days. Hard to make a dollar on staff with all those outgoings. ACC leave is 80% of regular pay. I assume this is because less outgoings when you stay at home (no fuel, ability to cook at home etc)
Geez Wayne, that information is so easy to find.
You do know that in your second year of (profitable) trading you'll be hit with a double whammy tax bill eh? Terminal tax on your first year of trading plus provisional tax paid in advance for your second trading year.
I'd be grateful the employee is not much more seriously injured. Not only for their own well being, but employees being permanently injured or dying at work (regardless who is at fault) is enough to sink plenty of small businesses when Worksafe gets involved.
You make it sound like the employee deliberately cut themselves for some time on the couch.
Entirely predictable as we head down the road of austerity. Remember, you all voted for it as it was very clear this was the path National wanted to go down. So please don't come on here bleating that your kids are leaving due to no jobs or the economy is so bad its affecting your lifestyle if you voted for the party that told you this was what they were going to do.
Weird. I thought the previous government lost its record majority in record time due to their arrogance and tone deafness around excessive COVID measures, unnecessary Auckland lockdowns, economic damage from unprecedented monetary easing/deficit spending, and skyrocketing cost of living. I am so glad that you have now explained to us that Jacinda's electoral collapse was caused by little more than a tax cut grab by the few.
The government have done the right up until now; they helped to bring inflation through more sensible fiscal management. But since the consumer is not about to spend up large any time soon, the government needs to underpin inflation so we don't have the opposite problem to what we had just a couple of years ago.
We were goin to go into a recession regardless and house prices are still too high. No matter hat govt got in, there would have been a brain drain as in every economic downturn. May hung in there after the last govt thinking this lot would make a difference but they, like John Key, got lumped with a leaky ship and it takes time to bail out the water. Sadly they are makin thins worse, I'll grant, but you can't pin 100% on them when lookin objectively.
The last lot would have been better in the current situation, but not by much. At least they wouldn't have cancelled vital infrastructure projects and replaced them with expensive roads that don't have a business case. National is ensuring this recession is long and hard with austerity policies though as well, with Labour it might have been more short lived. But Labour would have screwed up in a dozen other different ways, so both are bad as each other really.
Productivity declines: just look at the Kinleith decision. Cheaper to import paper now. Minimum wage up 40%? in 3 years - same amount of paper being produced. So a multinational makes the commercial decision. Whether or not it's right it's going to continue as so much of our industry is owned by international interests. I would hazard a guess we are way more wracked with compliance, safety and regulation than many countries overseas. All this red tape has turned us into a population of unablers, rather than enablers.
B***y glad work safe were nowhere around when 3 geriatric farmers lifted the concrete deck slabs off a 10m span bridge, replaced and secured the timber beams atop the steel I-beams, and replaced concrete deck slabs. Only about a 3m drop below. No safety nets or fall arrest harnesses. Didn't lose a tool, bolt, nut washer (or person). Took our time, considered, deliberate movements and constant awareness of consequence.
Is it only old codgers that can really think risk and consequence through thoroughly.
GDP per capita has fallen 4.6% since late 2022
Equates to an average 5% drop in living standards for every New Zealander. What a cock up.
Largely the blame goes back to the way covid was handled in NZ by various actors.
Government, RB , lock downs. Our tourism still hasn't recovered. Unbelievable
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