The sun rises over Auckland City on a beautiful spring morning. Will New Zealand's economy also look shinier soon? Photo / Brett Phibbs
So how bad has the economy been? Did growth really stall in the first quarter of the year? We get some answers next week with the release of GDP figures for the first three months of the year.
We’ll publish a full preview on Monday, but there have been some early indications that growth might not be as bad as first thought.
BNZ economists are picking a lift in GDP of 0.7% for the quarter (the same as the last quarter of 2024).
They’ve lifted that from an earlier forecast of 0.4%, based on some solid partial indicators they’ve seen in recent weeks.
“We expect next Thursday’s Q1 GDP data to confirm further economic recovery,” writes BNZ senior economist Doug Steel.
“The output gap still appears wide and there is much uncertainty around the path ahead, but recovery looks as though it continued in the first quarter of the year.”
We’re hearing a lot about that output gap right now, so it might be worth recapping what that actually means.
One of the important ways that economists like to describe the performance of an economy is in terms of whether it is running above or below capacity.
Basically, they have models that describe the potential growth for an economy, given the level of real productivity and constraints on things like labour supply and the amount of capital that is available.
Then they assess how far below or above capacity they think the economy is running.
That’s called the output gap.
If the economy is struggling and running below its full potential, as it is now, this is called a negative output gap. Sometimes an economy like this will be described as having “spare capacity”.
In other words, there is capital and labour sitting on the sidelines and not being deployed because of a lack of confidence in the outlook.
Conversely, if an economy is running above capacity, there is a positive output gap.
This is what we saw in 2021 and 2022 when we had labour shortages and the economy was full of money because of the Covid stimulus.
The trouble with an economy running above capacity is that we start to see activity that is not backed by creation of real value and that causes inflation.
While it’s not great that our economy is running below its potential, it is reassuring the Reserve Bank that inflation won’t be a problem in the near future.
Ideally, we want to run the economy as close to full capacity as possible without causing inflation.
It has been pointed out by many economists, including Treasury and the Reserve Bank (RBNZ), that New Zealand’s economic capacity is not great.
In fact, Treasury has suggested we can’t really grow at much more than 2.2% a year without exceeding capacity and running into inflation problems.
That’s not a rate that is going to transform New Zealand to a much wealthier nation and solve our fiscal problems.
Ultimately, we need to increase the underlying capacity of the economy.
That’s harder than just boosting short-term growth. It requires real progress on our productivity rates, more availability of capital, more investment in business and a larger, more highly skilled workforce.
The Government says it’s working on this, which is good.
Although in my experience, every Government for the past 25 years has said that. So we’ll see.
Looking at what we’ll likely see in next Thursday’s GDP numbers, there will at least be plenty of room for more improvement before we hit capacity.
That sounds a bit like the sort of thing a football coach says when they are losing.
In a similar vein, I think we’ll be looking for any signs of improvement in the data.
With the shock to the global economy from US tariff policy delivered at the end of the quarter in April, I agree with BNZ that things will be looking a bit brighter.
On Monday, we saw some surprisingly upbeat results in the Business Financial Data report released by Stats NZ.
ASB economists noted that the data in this release, for the first quarter, provide some insight into what to expect, as they represent approximately 70% of GDP.
“The release was strong, characterised by sales growth in 13 of the 14 surveyed industries,” ASB said.
“The results suggest a bit more resilience in the aggregate economy than we previously assumed.”
“[US President Donald] Trump can still throw a haymaker to activity over 2025 by way of a hit to uncertainty or higher endpoint tariffs, but the starting point for the NZ economy is likely a bit higher, underscoring some resilience in primary and manufacturing.”
ASB and ANZ are both also picking a 0.7% quarterly rise for GDP in next week’s release. That’s ahead of the RBNZ forecast for 0.4%.
ASB economist Wesley Tanuvasa notes that annual per capita growth “is expected to remain negative, underscoring the view that many New Zealanders are still surviving, not thriving”.
We’ll get some more clues to the state of the recovery this week – although they’ll be indicators for GDP in the (current) second quarter of the year.
Tourism and immigration numbers are released later today.
Tomorrow, we’ll see the latest data for electronic card transactions.
I reckon that’s a big one for the recovery. We know the export sector is booming and rural economies are already looking stronger, but the big cities are struggling.
Consumer confidence and retail spending seem to be the missing pieces of the puzzle this year. It will be fascinating to see if spending has picked up.
The threat of a trade war upending global growth and stalling our recovery remains very real, sadly.
As I write this, talks are under way again between China and the US. But such is the state of the news cycle this year, by the time you read this, we may have already seen a major breakdown or a major resolution. There’s no picking it.
But news on Monday confirmed that the US tariff policy is already having a serious impact on China’s economy.
Official data show Chinese exports to the US have slumped 34.5% from a year ago. This was the biggest fall they’ve seen since Covid hit in February 2020.
CNBC reports that this was offset by exports to the Southeast Asian bloc, which jumped nearly 15% from a year ago, and those to European Union countries and Africa, which rose 12% and over 33%, respectively.
China’s total trade surplus still increased 25% from a year earlier to $103.2 billion in May.
The latest economic data also showed China is starting to experience some significant deflation in its economy.
The Consumers Price Index showed prices down 0.1% for the month – the fourth monthly decrease in a row.
Meanwhile, the Producers Price Index showed a decrease of 3.3% in May from a year earlier, worse than a 2.7% decline in April and the deepest contraction in 22 months.
This raises concerns about China’s domestic economic growth as consumer confidence dwindles. It has many economists and commentators predicting that Beijing will have to unveil new stimulatory measures.
So far, demand for New Zealand’s food exports has stayed strong but it increases the risk of prices falling.
The upside, though, is that China may export some of that deflation as prices for its goods fall. In other words, we might see cheaper cars and TVs and other consumer goods coming our way.
Turns out we’re already seeing a surge in electric vehicle (EV) sales.
Figures out last week showed that cheaper Chinese models have lifted demand for EVs after it had slumped in 2024 when the coalition Government removed Labour’s subsidies.
Overall EV sales year-to-date now stand at 2592, according to Motor Industry Association (MIA) data – a 52% increase on the year-to-date sales at this point last year.
Fully electric vehicles now account for 5.5% of total New Zealand new vehicle sales.
That’s a material gain over 2024’s 3.6%, if still well behind the 2023 heyday of 13% – when the subsidy was driving demand.
Last week, Inside Economics ran a question about whether wealthy people over 65 should opt out of receiving superannuation payments.
Boy, did it get a strong reaction! The article got nearly 500 comments – and the response was extremely divided.
Many saw the universal super as a right that has been earned by paying taxes over the years.
Others felt it was the worst kind of welfare – channelling state funds to people who don’t really need it.
It’s safe to say that the debate won’t be going anywhere any time soon.
Basically, this is because as the population ages, it is going to become increasingly unsustainable.
National has reiterated it will look at raising the New Zealand Superannuation age in its next term, albeit gradually. Its policy in 2023 was a commitment to keep the age at 65 until 2044, when it will be gradually lifted to 67. So the change wouldn’t affect anyone born before 1979.
New Census data out this week added some weight to the case for lifting the age, showing Kiwis are increasingly working past 65 already.
Employment among those aged 65 to 69 rose to 44% in 2023, up from 42.2% in both 2013 and 2018.
The percentage of those aged 70 to 74 who were employed in 2023 was 24.7%, up from 23% in 2018 and 21.9% in 2013.
For those 75 years and older, employment rose to 9.9%, compared with 8% in 2018 and 7.4% in 2013.
The stats didn’t break down how many people are working to the age of 67 already. But it strikes me that could be relevant data, given the plans to lift the age.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Westpac announced changes to its six-month and one-year rates today.