Beehive must be nervous as economy continues to flounder – Heather du Plessis-Allan

Finance Minister Nicola Willis and Prime Minister Christopher Luxon during their media standup in response to the Reserve Bank’s OCR announcement this week. Photo / Mark Mitchell

THE FACTS

• The economy’s recovery is slower than expected, with predictions now extending to early 2027.
• Caution among consumers is prolonging the recovery, impacting spending and economic growth.
• The slow recovery poses challenges for the Government, affecting its financial plans and election prospects.

The Beehive must be feeling nervous about how the economy is tracking for next year’s election. So far, every prediction of better times has been a false dawn. It was “survive to ’25” until Q2 of ’25 arrived. Then it became “no fix till ’26”. Now the boss of Fletcher Building reckons it might not be early 2027 before we actually feel like things are improving.

Maybe he’s a little gloomier because he’s in construction and that sector has been badly smashed by this recession. Or maybe he’s right. His guess is as good as anyone’s. And that includes the Reserve Bank.

If there’s anything to take away from this week’s Official Cash Rate (OCR) and accompanying comments, it’s that even the central bank is surprised at how long this recovery is taking. So far, the 250 basis points it has cut out of the OCR hasn’t jazzed up the economy like it expected.

The farmers are earning mega bucks off their exports, but they’re not spending their money. They’re using it to pay down debt. Mortgage rates have fallen a fair way, but homeowners aren’t locking in the best rates on offer. They’re opting for more expensive floating rates, or six-month rates, so they can get even lower rates soon.

The economy's slow recovery is causing concern ahead of next year's election, with predictions now extending to 2027. Photo / Michael Craig

And even though homeowners undoubtedly have more spare cash, that’s being sucked up by higher rates and power bills. And then on top of all of that – and possibly more importantly – people are clearly worried. They’re holding on to what pennies they have.

Maybe they’re trying to pay down mortgages faster, maybe they’re saving a bit of cash for a rainy day. They’re cautious. Which makes sense. Given the number of false dawns, what’s to say the next prediction isn’t a false dawn too?

That caution isn’t helping, though. It’s dragging out the recovery so far that it’s now taking it uncomfortably close to the election. It’s almost certain (short of something horrible happening) that things will be better by next spring. But because the recovery is now so delayed, even though we will be feeling better, it may not be by much.

Between now and then we may still have higher rates, higher power bills and higher food prices coming at us. The other problem the Government has is the impact this slow recovery has on its books. This is a bigger problem for the National Party than its coalition partners, given the Finance Minister – with the ultimate say on budgets – is one of theirs.

Homeowners and farmers are cautious, paying down debt and opting for short-term mortgage rates. Photo / Fiona Goodall

It seems the Nats had hoped the economic recovery would grow them out of the debt and deficit problem they inherited without their actually having to take really hard decisions that could see them punished at the ballot box by centre voters. Instead, they might get punished instead by right-leaning voters for not taking the difficult decisions.

A case in point is the gutting of the public service. It turns out it was less of a gutting and more of a gentle pruning. Instead of the promised 15,000 public servants being cut, it’s fewer than 1000.

Chances are, the coalition Government most likely will still be re-elected given the unpalatable alternatives on offer. But because they’re the ones who talked up their economic credentials and because they’re the ones ultimately in charge of the purse strings, National’s risk is that it returns with fewer of them and more of their coalition parties.

They still have the Budget up their sleeve. But then they have a winter afterwards. And a worried public whose financial behaviour is hard to predict.