Liam Dann: Christopher Luxon's biggest problem isn't gaffes or rogue MPs

National leader Christopher Luxon during his standup over the Sam Uffindell saga. Photo / Mark Mitchell

OPINION:

It was a big week in politics ... apparently.

I'll concede the drama of parliamentary soap opera has put the debate about the economy in the shade.

But I think the controversies, however serious they might be for the personalities involved, are side-shows.

They won't decide the next election.

It will be the economy, as it always is, that determines who forms the next Government.

And that could still go either way.

The latest opinion polls show National and Act sitting high in the polls.

That's not surprising given that inflation is making many Kiwis feel poorer right now.

There's no doubt that the cost of living has put the Government on the back foot.

In fact, it has incumbent governments on the backfoot everywhere in the world, regardless of their political stripes.

In reality, most Kiwis aren't actually poorer than they were pre-pandemic. The numbers are very clear.

We have more savings in the bank.

Our houses are still worth more, job security is better than ever.

We've paid down our credit card debt and, for now, we're still spending.

But in pure cashflow terms, we have been losing ground on our weekly expenses - at the petrol pump and supermarket tills.

For those with no savings and no discretionary income, this is genuinely tough.

For many middle-class Kiwis, it is more about sentiment. There is genuine cause for concern about how long inflation with stay elevated, how high interest rates will rise.

Inflation does start to erode the value of savings. Our house prices are falling.

Meanwhile, talk has turned to economic slowdown and recession as the next step in the post-Covid recovery.

None of it sounds heartening in the near term.

So the political polls aren't in the least bit surprising.

I doubt the controversy around Tauranga MP Sam Uffindell - or whatever gaffe Christopher Luxon is considered to have made next - will have much impact on the numbers.

Right now people feel grumpy about the economy and the election is there for National and Luxon to lose.

But Luxon's big advantage could yet turn into his biggest problem - the economy may actually come right in the next 12 months.

National strategists would be ill-advised to put too much store in the doom-laden predictions of some media commentators.

They are largely out of sync with the consensus of economic opinion.

Despite all the recession talk, most economists still think we'll avoid one.

ANZ made that call last week in its latest quarterly outlook report - the first of several coming from major banks in the next few weeks.

The ANZ team - lead by chief economist Sharon Zollner - has never suffered from accusations of undue-optimism.

Their outlook sees the economy skating close to a technical recession but avoiding it.

It's a view backed by Goldman Sachs, which sees both Australia and New Zealand skipping recession as its central case.

Goldman rates Australia at a 25 per cent chance of recession, and New Zealand a 30-35 per cent chance.

Even falling technically into recession is unlikely to translate to a hard landing for most people, with ANZ tipping unemployment to rise only to a historically modest level of 4.5 per cent in 2023.

Meanwhile, it sees annual inflation falling to 2.5 per cent for 2023 and wage growth playing catch-up at 3.8 per cent.

Sydney-based Capital Economics sees the cycle turning even faster than that. It forecasts the Reserve Bank will only need to lift the Official Cash Rate to 3.5 per cent and will then need to cut the rate three times in 2023.

ANZ sees the OCR needing to peak at 4 per cent and warns of the risk it could need to go higher.

The economic narrative is far from clear-cut.

Migration data shows Kiwis are leaving New Zealand. Photo / Dean Purcell

Consider net migration. Data last week confirmed we're still losing population.

Is that deflationary or inflationary?

We need more workers coming in to ease pressure on the labour market and head-off a wage-price spiral.

But fewer people in the country means less spending, less economic activity and puts downward pressure on the housing market - which will see inflation in that sector fall.

The trend is deflationary and inflationary at the same time.

What will the net impact be?

Who could know? We've never closed the borders and then opened them before.

There are still pandemic variables in the economic equations that make forecasting hard.

The only way we'll properly understand this economy is in hindsight.

But economists currently see enough positives to put odds in favour of the economy looking better - not worse - by the time the election rolls around.

And because the trend is so important to sentiment, it won't have to be much better for people to feel more upbeat.

Either way, it would seem foolhardy for National to bet all it has on the economy continuing to deteriorate into late 2023.

The temptation is there to get quick wins attributing blame to domestic policy.

That's not unreasonable opposition politics by any stretch. The Labour party is doing the same thing in the UK, for example.

But in doing so they risk flattering the Government if and when things start to improve.

If the economy follows forecasts to a more positive trajectory in 2023 then hopefully the political debate will shift to loftier, longer-term economic policy.

The next Prime Minister, whoever they may be, should be elected for vision and ideas about how we make New Zealand thrive beyond the ups and downs of economic cycles.