This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
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.
*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
31 Comments
Make NZ Great Again? Car assembly factory for Thames anyone? Tariffs seemed to work for 1920,s Egypt, so we built our fortress economy behind walls that are unimaginable in this connected age. One difference from that time was political leadership articulated a vision for a better world. Relatively NZ was rich at that time…income per person 20 X that of Singapore.
Sadly nostalgia doesn’t buy lunch.
Innovation is painful, but if we insist on walking backwards to the future, we will miss some delightful vistas.
We can see the ill effects of indecision in the ferry debacle. Managers seldom decide without endless dithering. And it is always easier to defer. So we have few “triers “, experimenting is not possible in systems that concentrate power and then fight to preserve the annuity created. Does the RBNZ help or hinder? For me, I have been waiting since South Canty Finance for some glimmer that our best and brightest have a clue…not seeing it yet 😁
Our economy grew in our 'high growth years' thanks to an explosion in private debt from the mid-80s to 2008 (see graph here). The share market, dairy farming, and property were vehicles for that credit growth - with property dominant in the last 20 years. What economists often miss is that increasing private debt pumps new money into the economy. That money gets spent and collected up as operating surplus + mixed income + wages (aka GDP). So, the more private debt is pumped into the economy, the more we can buy and consume, and the higher profits and wages can be paid. When profits and wages are high, we measure that as increased productivity, growth etc.
In a closed economy, that 'growth' would hit up against productive capacity constraints, but, well... China, OPEC, US shale, tech etc.
Private debt maxed out in 2008 as higher interest rates and banking controls put an end to the party. Since then, we have been able to keep enough credit flowing into the economy by easing interest rates down - reducing the cost of credit so that kiwis could take on big enough mortgages to keep the private sector balance sheet expanding (squeezing the last bit of juice out of the ever-higher private debt growth model). But, with private debt as % of GDP not increasing, growth has been almost solely dependent on adding more kiwis.
Interestingly, in the mid-20th century we grew the economy, built loads of stuff, had genuinely full employment, and actually reduced public and private debt levels. But. hey ho.
I would say those dairy farms in the South Island were too big. They are more appropriately named "Industrial Farms" rather than mega farms.
But these farmers were given a nasty shock when Mycoplasma Bovis was discovered in some of those large herds in 2017; if I remember some of those farms were quarantined. The rumour at the time was that the owners of those farms, in both South Canterbury and Southland, were dairy farmers from Europe (Netherlands rings a bell?) who had bought the NZ farms with the huge subsidies they had received from the Economic Union. Another rumour was that the disease was introduced by contaminated breeding substances imported from overseas. But these may just have been sour grape stories concocted by some NZ dairy farmers who could never have afforded themselves to create one huge farm from an amalgamation of multiple smaller farms.
I would put the blame with the agricultural media that the full story was never told. It just seemed to disappear when the disease was successfully dealt with by the authorities.
Perhaps Keith Woodford may know the inside story.
"when the disease was successfully dealt with by the authorities."??? Brutally slaughtering thousands of healthy cattle? I do not know the cost to the taxpayer but it must be enormous. And its not like its been eradicated. Chasing down a virus (unsuccessfully) using unscientific methods + military grade propaganda = sound familiar?
Hey thanks for the insights, regarding the following:
Interestingly, in the mid-20th century we grew the economy, built loads of stuff, had genuinely full employment, and actually reduced public and private debt levels
What were the main determinants of the growth back then? Was it due to actual increases in productivity through technological development, government policies along the lines of "middle out" rather than the trickle down neoliberal rubbish, or something else?
I would love to know why it was possible to build so much of our country then, but now it is not even possible to maintain what we have
they had almost 10% of the vote, and in their term with labour the last 6 years did a lot of damage to agriculture and energy production.
Its hard to maintain cheap power when you outlaw cheap fuel, its hard to maintain cost effective farming when you put restrictions on where you can farm, how you can farm, tax the farmers.
Post WWII, through loss, the country banded together for a better future. The nuclear family prevailed, parents wanted better for their kids, and the top tax bracket was 66%, yet it didn't stop many from succeeding in study and work in STEM areas regardless of this. More resources were available locally to harness such as native hardwood timber, coal etc and easier to access. Since then, via deregulation, lowering of taxes on income at the top tier and tax incentive to invest in assets such as housing since the late 1980's, we do not have the collective mentality anymore to want better for others and as a country. We lack leadership willing to make hard decisions that financially hurt the few to help the many, and politics seems to be used as a career catapult instead of a platform to stand on and offer solutions for the betterment of the country.
Much of that growth was using assets here unexploited.....sadly many of those assets no longer remain, or remain in insufficient quantities/demand (or are environmentally constrained) for the 'growth' required.
Add in the fact that energy (oil in the main) was on a growth curve during that period and you have the conditions to support that increasing output...now we import most of what we need and energy is flat to declining....I would suggest that fundamentally that is what has changed.
Increasing population will only make matters worse.
I am curious about the impact of offshore money flows beyond the obvious cost of imports.
Profits from companies like Bunnings and Woolworths heading across to Australia.
Foreign workers sending money back to their home countries.
Chinese construction firms, who knows what they get up to.
It would seem, especially in the case of supermarkets, that a good portion of the governments welfare spend would eventually head offshore after circulating in the local economy a bit. So the economy is facing a constant uphill battle against the flow of funds offshore.
Is this captured in any of the common measures?
yes, here you go.
Those are 2 great graphs. Over the whole period the investment inflow has been lower than the capital/dividend outflow telling me that the overseas investments has yielded very well. Something I can understand because over the observed period the value/price of New Zealand assets have increased more relative to comparable assets in the rest of the world.
Nowadays New Zealand assets are still relative cheap so I expect there will be a continuing overseas interest in buying those to relieve our current account deficit. Only Winston is standing in the way.
Good work Brian.
Yes, construction is central to the economic boom and bust we have seen. I for one have been a broken record on this.
with the big pull back on Kainga Ora builds, and private construction anemic, this will continue to be a big economic headwind over the next couple of years
"With a tax system that rewards buying existing assets and renting them out" - how on earth do you reach this conclusion>? Landlording is the worst business in NZ to run for tax and must be one of the worst for regulatory compliance. BTW I'm not a landlord but I am an accountant & entreprenuer and do understand how tax and business work.
how on earth do you reach this conclusion>?
In NZ, by observing the last 2 if not 3 decades of rising inequality and what the haves did differently from the have nots (hint - owned land which wasn't taxed). We've both been accountants, so that's not relevant given I think Chris is bang on with his comment.
Interestingly, in the mid-20th century we grew the economy, built loads of stuff, had genuinely full employment, and actually reduced public and private debt levels. But. hey ho.
In the mid C20th we had the returning soldiers/baby boomers hitting their peak income/spending growth, with balloted sections and State Advances loans, PLUS a booming economy as we supplied war materials, (bully beef, and wool for uniforms) to the Korean War, PLUS high manual labour requirements due to a largely unautomated workplace (thousands working on the wharves unloading ships before containerisation), PLUS high labour requirements in large State owned enterprises, the Post Office, MOW etc. This list could go on and on, BUT THOSE DAYS ARE GONE.
What can we do in the C21st to find a whole new momentum for growth? (PDK please do not reply).
I am not sentimental about the past nor advocating for a return to previous policies, but the thing that made the biggest difference in the mid-20th century was Keynesianism - we used policies and taxes to keep demand and productive capacity onshore. That meant we could build stuff, have full employment, and expand our economy without blowing our current account deficit. We also used aggressive taxation to prevent inequality spinning out.
Probably worth mentioning though that all that ‘stuff’ we built came at a cost - so did the SOE’s that employed everyone and the domestic policy that kept manufacturing onshore.
It all fell to bits when we ran out of rope in the early 80’s and as a result we have national scale intergenerational PTSD about repeating the exercise. Hence our preoccupation with prudence and surpluses (previous and current govnt excluded).
We are simply too sanctimonious to do the dirty work that made us wealthy once- and we don’t take enough risks to be the innovators we once were. We got comfy I guess. Nothing like a bit of poverty to change that.
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