We can celebrate that interest rates are coming down.
With almost 50% of borrowers to refix mortgages in the coming six months, monetary policy will be providing an economic injection.
Bad economic news has laid the platform for better times.
The Government is claiming credit but the seeds sown in 2023 and 2024 were the delivery in crushing inflation, though non-tradable (domestic) inflation is still too high and needs watching.
Now the debate needs to start on the quality and durability of that economic improvement we are starting to see. Will it be of quality?
There are numerous issues we need to own up to as well as opportunities.
My biggest concern is division.
This growing divide we have across New Zealand, as illustrated by the recent hīkoi to Wellington, or farmers taking their tractors to Parliament in opposition to the previous Government has been socially and economically corrosive. The political centre (National and Labour) got 65% of the vote at the last election. The periphery got 35%. Extremism is becoming more common.
Consensus policy-making has become more difficult as the periphery grows in influence.
Uncertainty rises with that. Uncertainty carries a risk premium. That makes businesses nervous. They do not invest, or any investment requires a higher risk premium.
Division is a global theme. Populism and short-termism are driving politics more and more.
It is not good for New Zealand or the global economy.
The head of the International Monetary Fund recently noted dissatisfied populations as global growth moderates.
The Government and Prime Minister need to lead. They are not.
They need to find more common ground. Work better to get consensus in areas such as education and infrastructure.
There must surely be common growth when it comes to kids and infrastructure. Education and infrastructure are essential economic enablers.
We urgently need to have a national discussion and hui on productivity.
Without productivity, or doing things better, living standards stagnate. It’s a recipe for an exodus out of the country which we are seeing through the departure of New Zealand citizens.
Productivity drives living standards. It provides the coin that underpins many aspects of wellbeing. It drives the tax coming into the Government’s coffers.
The Treasury’s chief economist has been direct in the past week. There is “accumulating evidence of a sustained productivity slowdown”.
The Reserve Bank also acknowledged in their October Official Cash Rate (OCR) decision that “low productivity growth is also constraining activity”.
Back in May, the Treasury noted that “productivity for the whole economy averaged 1.4% a year between 1993 and 2013 but averaged only 0.2% a year over the last 10 years”.
That is an economy in serious structural trouble.
The finger is consistently being pointed at the Government and what it can do.
Or at a trend decline in global productivity growth – which has not matched New Zealand’s decline.
People need to understand that New Zealand’s economic model is morphing. The days of selling more expensive houses to each other are done. Tourism, China, and migration – previous firepowers of growth – are not there.
Welcome in the new economic drivers. Productivity. Business investment. Natural resources.
Better policy. And businesses lifting their game.
These economic drivers require new discussions and a different policy prescription and acceptance.
The Reserve Bank’s decision, for example, to get banks to hold more capital has been a huge own-goal in encouraging home lending at the expense of real productive lending.
Why are more questions not being asked as to why exports have dropped from 29% to 25% of gross domestic product?
We are starting to see better nuances from Government, though far from complete, in areas such as education. The Government’s aspiration of doubling exports is too much demand (market access) focused and needs more supply focus (how we produce the stuff).
The recent announcement of the fast-tracking of initiatives will help.
New Zealand has a huge natural endowment that needs unlocking to drive growth, but also managing the risks around growth. An example is water and irrigation which could be a huge enabler. Horticulture has huge upside. Security is now a key theme in trade. New Zealand is yet to define its strategy and the opportunity.
The business sector needs to lift its game too if we are going to get out of this hole.
The OECD’s economic assessment for New Zealand in 2022 had some pretty pointed comments to make about management and governance.
“Managerial practices in New Zealand lag behind other advanced OECD economies, holding back the adoption and effective uses of digital technologies.
“Management boards in New Zealand’s firms are often more focused on preserving existing value and regulatory compliance than on growth strategies that involve productivity-enhancing investments and international expansion.”
The NZX 50 Index has not performed well in recent years compared to global peers. Companies were slow to respond to the economic signals in 2023 and cut costs.
New Zealand is at an inflection point. A sugar rush is coming from lower interest rates. We are seeing it initially within housing market activity levels though not in prices so far.
A sugar rush upturn is not what we need though.
We need better foundations. Tough times often deliver better foundations because they make people focus.
I’d favour a bit more economic hurt as the building blocks on a more sustainable economic gain.
The bottom line
New Zealand is at an inflection point. A sugar rush is coming from lower interest rates. We are seeing it initially within housing market activity levels though not in prices so far.
A sugar-rush upturn is not what we need, though.
We need better foundations. Tough times often deliver better foundations because they make people focus.
I’d favour a bit more economic hurt as the building blocks on a more sustainable economic gain.
