Reserve Bank Governor announced ... plus was GDP really that bad? – Inside Economics

Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, 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.

Swedish Reserve Bank Governor announced

Today’s the day. After nearly seven months, we have a replacement for Adrian Orr.

All the smart money in Wellington had been on Bank of England (BoE) Deputy Governor Sarah Breeden.

Breeden had already been tipped as one of the frontrunners when Bloomberg News yesterday reported an unnamed inside source saying New Zealand would get its first female Reserve Bank Governor.

Well, we have our first female Governor, but she is Dr Anna Breman, the First Deputy Governor of Sweden’s central bank, the Riksbank.

Breman has beaten out all the local contenders – ex-Treasury chief economist Dominick Stephens, former Reserve Bank (RBNZ) chief economist John McDermott, Monetary Policy Committee member Prasanna Gai, and incumbent Acting Governor Christian Hawkesby.

An international option looks like a good call because it offers a clean slate after the political infighting that has surrounded the RBNZ’s Covid stimulus policies, Orr’s colourful tenure and his acrimonious departure.

Anna Breman takes up the role on December 1.

That means the current team will likely stay in place to see us through the remainder of the easing cycle – cutting the Official Cash Rate (OCR) by a further 50 or 75 basis points (depending on how grim the economic data gets from here).

That should hopefully leave a clear runway for the new Governor to settle in before the next financial crisis throws the economy into turmoil.

It is disappointing to see Hawkesby leaving. He has been an island of calm and stability in an otherwise tumultuous period for the RBNZ.

But it is understandable.

The appointment, and Finance Minister Nicola Willis’ framing of it, makes it clear that she is looking for a new era.

“[We’re] opening a new chapter for New Zealand history and a new chapter for the Reserve Banks.”

Economists have been quick to point out that the appointment shouldn’t affect interest rates.

ANZ’s Sharon Zollner noted that the Monetary Policy Committee structure means the Governor only votes on OCR calls when a clear decision can’t be reached.

Financial markets were calm after the announcement.

Westpac chief economist Kelly Eckhold said Breman looked “well qualified for the role, especially in economics and monetary policy”.

“I am sure New Zealand will be well served,” he said.

According to Wikipedia, Breman began her career at the World Bank.

After completing her PhD studies, she joined the Swedish Ministry of Finance, then moved to Swedbank as a senior economist in the research department in 2013.

She was named group chief economist in 2015 and later also became head of macro research in 2018.

In November 2019, after the departure of Kerstin af Jochnick in September of that year, Breman was appointed Deputy Governor of the Riksbank for a six-year term.

She started her term on December 1, 2019.

Reserve Bank’s defence

Speaking of economic turmoil, after last week’s shocker of a gross domestic product (GDP) number (-0.9%), there’s been no shortage of criticism levelled at the current RBNZ team for failing to cut rates faster.

The RBNZ team’s forecast was for a second-quarter decline of just 0.3%, although it wasn’t much further out than most bank economists (predicting -0.4% or -0.5%).

It was notable then to see economic think tank the New Zealand Initiative coming to the RBNZ’s defence this week.

The NZ Initiative was a staunch critic of the RBNZ during the Orr era.

It traditionally takes a hawkish line on inflation and a monetarist approach to policy.

In other words, it adheres to Milton Friedman’s famous line: “Inflation is always and everywhere a monetary phenomenon.“

The NZ Initiative was very much at odds with the RBNZ during the loose, stimulatory years of low interest rates ... which did lead to high inflation.

But sticking to its principles, the NZ Initiative team defended the RBNZ against critics who say that interest rates have been too high for too long.

The research note, Monetary Policy Without Mates, argues that while the RBNZ fought to tame inflation that peaked at nearly 8%, the Government’s fiscal policy worked against these efforts – forcing interest rates to stay higher for longer.

“The Reserve Bank of New Zealand has been unfairly scapegoated for the current recession when it was simply doing its job of bringing inflation under control,” NZ Initiative chief executive Oliver Hartwich said.

The New Zealand Initiative and its executive director Dr Oliver Hartwich were very much at odds with the RBNZ during the loose, stimulatory years of low interest rates.

“The real story here is not Reserve Bank failure but policy conflict,” Hartwich said.

“While the RBNZ was hitting the brakes, the Government’s tax cuts were adding fuel to the fire. That timing mismatch meant monetary policy had to work harder and stay tighter for longer.”

It’s worth remembering that with food prices running at an annual inflation rate of 5%, the overall Consumer Price Index (CPI) is threatening to bump up against the RBNZ-mandated upper threshold of 3%.

“Central bank independence exists for a reason,” said NZ Initiative senior fellow Dr Bryce Wilkinson.

“When politicians attack the Reserve Bank for doing exactly what they instructed it to do – maintain price stability – they undermine the very credibility needed to keep inflation expectations anchored.”

You might disagree with the NZ Initiative and argue that the Reserve Bank ought to take a wider view of the economy and pay attention to the pain that many businesses and workers are feeling.

But that is quite specifically not in its mandate.

The current coalition Government killed the dual mandate, which included a requirement to consider unemployment when it took office.

It has reverted to a single mandate that targets inflation alone.

So who is to blame?

Who – or what – is responsible for New Zealand’s terrible second-quarter GDP result, then?

The Government has been quick to blame the global financial turmoil caused by the United States’ tariff policies.

It’s true that US President Donald Trump’s “Liberation Day” tariffs rocked the global economy right at the start of the second quarter.

But the Trump tariff shock, globally significant as it is, has largely been psychological in New Zealand.

The reality is that New Zealand’s largest export sectors have sailed on through the turmoil.

Dairy, beef, lamb and kiwifruit have all had bumper seasons.

In that context, the state of the domestic economy looks even worse.

The big downturns have been in manufacturing, construction and retailing.

That, to me, looks like a symptom of falling net migration (with record Kiwi departures) and a general lack of confidence, or mojo.

A renewed sense of mojo was, of course, exactly what Christopher Luxon promised to bring back when he was on the campaign trail.

GDP was bad, but let’s not lose hope

There’s no pretending that the economy didn’t slump badly in the second quarter.

All the anecdotal evidence pointed to an ugly period for GDP growth.

But a 0.9% contraction was still a shock. It effectively wiped out the entire first-quarter recovery.

No wonder the initial reaction was a round of very gloomy finger-pointing – most of it aimed at the Prime Minister and the Finance Minister.

We were promised a year of economic recovery and growth. Something has gone terribly wrong.

There is a risk, though, that we put too much weight on a backwards-looking and notoriously unreliable piece of economic data.

Regardless of who is to blame for the stalled recovery, that won’t help get us back on track.

To that end, several economists have attempted to put the ugly GDP data into a broader context this week.

HSBC Australia New Zealand chief economist Paul Bloxham questioned whether the -0.9% figure overstated the scale of the downturn.

“The fall in [second-quarter] GDP would suggest that the ‘tough times’ New Zealand was facing in 2024 have continued, with the recovery in [the fourth quarter of] 2024 and [the first quarter of] 2025 seemingly completely unwound,” Bloxham said.

“However, this reading may be a little too downbeat.”

Some of the weaknesses in second-quarter GDP figures could be put down to statistical issues, Bloxham said.

“Statistics New Zealand has had difficulty measuring the economy in recent times. Recall the very large revisions made to GDP in December 2024, where two recessions became just one large one that began in Q2 2024.”

Last week’s figures also had big statistical quirks, Bloxham said.

HSBC Australia New Zealand chief economist Paul Bloxham. Photo / HSBC

“The numbers showed that the top-down GDP estimate does not match the bottom-up sum, and the gap – a ‘balancing item’ – has been notably volatile and seasonal.”

It made a very large negative contribution to the second-quarter GDP of around -0.6 percentage points, he said.

Bloxham also noted that global trade developments and heightened uncertainty may have contributed to firms delaying investment decisions.

This is the issue on which the Government placed most of the blame.

“Temporary local factors, such as energy restrictions on [the] Tiwai Point aluminium smelter and volatility in the timing of food manufacturing, also weighed on output in the quarter,” Bloxham said.

In other words, there was no shortage of items that a listed company might declare “unusual” and exclude from its bottom-line result.

In an op-ed for the Herald, Salt Funds Management economist Bevan Graham made a similar point.

“I think the upwardly revised +0.9% growth recorded in the three months to March probably overstated that quarter, while the -0.9% for June probably overstates the weakness now,” Graham said.

“There are several reasons why I think the Reserve Bank won’t be panicking. Firstly, nearly half the June-quarter decline was attributed to the ‘balancing item’.

“Without going into a technical description of this component, suffice it to say we expect this will reverse out by the end of 2025.”

Graham and Bloxham both remind us that the second-quarter GDP figure is now ancient history (however the final number lands).

We are only a week away from being in the fourth quarter (Christmas, here we come).

That makes it less prominent, but the more timely economic data we’ll get in the coming weeks will be much more significant, really.

Graham wrote that “the good news is that as the second half-year data start to come in, green shoots are emerging. Despite the overall weakness in the June quarter, retail sales in that quarter came in stronger than expected.”

Even BNZ economists – who had been pretty downbeat on the economy through the second quarter – are talking up the prospects for the third quarter.

“Friday’s trade data for August again highlighted the sheer magnitude of export income flowing into the country,” writes BNZ senior economist Doug Steel.

“Exports in the month were up 22.8% y/y [year on year], driven by fruit, dairy and meat. The export growth was stronger than that implied by high commodity prices, indicating a lift in export volumes that will support a bounce in [third-quarter] GDP.

That and several upbeat secondary data reports such as Seek Job ads, vehicle registrations, and consumer spending have prompted BNZ to leave its OCR forecast unchanged – picking 25 basis points (bps) in October and another 25bps in November (to take the rate to 2.5%).

Other local bank economists have taken a gloomier view.

ASB and KiwiBank now expect a 50bps cut in October, followed by 25bps in November (for a low of 2.25%).

Artificial intelligence gets it wrong

BNZ’s Steel mentions in his research note that the RBNZ’s KiwiGDP nowcaster has already made an upbeat first prediction for the third quarter (+0.6%).

KiwiGDP is one of an increasing number of artificial intelligence-driven economic models that aim to forecast GDP in real time.

It’s worth noting that they were also all caught out by the GDP number last week.

KiwiGDP’s last second-quarter forecast before the release was for a contraction of just 0.27%.

Massey University Business School’s GDPLive model has been forecasting in real time since 2018.

Its last prediction for the second-quarter GDP was for an increase of 0.29%.

That suggests that either these artificial intelligence (AI) models aren’t all they’ve been talked up to be, or we’re going to see some serious revision of the final number.

Perhaps it will be a combination of both.

Professor Christoph Schumacher from Massey University’s School of Economics and Finance offers some context for AI’s big miss on second-quarter GDP.

“We have been quite good with our predictions and generally don’t get the direction of the change wrong,” Schumacher said.

“Our daily data inputs are predominantly consumption-based, but what we have seen is a big drop in the manufacturing sector, from +2.4% in Q1 to -3.4% in Q2.

“This drop took almost $200 million out of the economy in one quarter. Our input data possibly didn’t capture this.”

Modelling prosperity

Schumacher and the Massey Business School have actually just expanded their AI modelling.

They have just launched New Zealand Prosperity Live, “a first-of-its-kind prosperity tracker that provides an up-to-date snapshot of national wellbeing and business health daily”, Schumacher said.

“GDPLive tracks New Zealand’s GDP, measuring the consumption and production that drive our economy.

“Prosperity Live, by contrast, is not about how the economy performs in aggregate but about how prosperous people and businesses in New Zealand actually are.

“GDP, for example, tells us nothing about how many hours people must work, what their working conditions are, whether social security is adequate, how connected people feel to their communities or whether they enjoy a healthy work–life balance.”

New Zealand Prosperity Live, perhaps unsurprisingly, currently has the nation’s overall prosperity down 0.1% in the past year.

Income is down 0.9% and employment is down a worrying 6.3%. On the plus side, safety and housing indicators are both up, 6.7% and 7.1% respectively.

It will be interesting to watch how the index tracks over time.

Schumacher has been in Germany this week, presenting both models to the European Central Bank.

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.