Treasury’s Half Year Economic Update or Hyefu (colloquially pronounced hi-ee-fu) is expected to show a significant deterioration in the accounts relative to forecasts.
It will mean the Government has to borrow more, push out its plans for a return to surplus and stay focused on cost-cutting for another year.
Westpac senior economist Darren Gibbs is expecting, based on comments already made by the Treasury, that a forecast return to an operating surplus will likely be deferred until 2028/29.
He expects the bond programme for the four years to 2027/28 to be lifted by around $6 billion and anticipates a $20b programme to be forecast in 2028/29.
That deterioration is largely due to a lower tax take, with economic growth being weaker than previously forecast.
GDP data on Thursday is expected to show we are back in recession. Economists are picking that the economy shrank by about 0.4% in the third quarter, following a 0.2% contraction in the second quarter.
Optimists will point out this is historical and hopefully, the worst is behind us now. Pessimists will want to add that we have been in a “GDP per capita” recession for about two years and probably will remain so until our rapidly falling net migration rate puts paid to that.
Either way, it still adds up to a fresh “recession” headline, reminding us how grim 2024 has been – as if we need it.
Squeezed in between, on Tuesday, we’ll get the Balance of Payments, including an update on the size of the current account deficit.
The deficit is expected to have come down fractionally – perhaps from about 6.7% of GDP to 6.35% But, as ANZ economist Henry Russell says, that’s still far too large to be sustainable.
There’s a bit of jargon around the current account’s components ... and its place as a component of New Zealand’s total balance of payments.
The easiest bit to understand is the inflow of foreign exchange we earn from exports and the outflow we spend on imports. This is a component of the current account that is also described as the trade balance.
That’s going to start to show some benefits from the good dairy export season we are having, although we don’t see the bulk of that until the fourth quarter.
However, we are still suffering from a tourism rebound that is largely missing in action. Data on Friday showed another increase in annual visitor numbers for the year to October – but only taking the industry back to about 2015 or 2016 levels. In short, the economy is still missing billions of dollars of export earnings from tourism.
The current account also includes things like business profits and investments flowing in and out of the country. So, for example, the fact that the banks in New Zealand are largely foreign-owned means their multibillion-dollar profits represent a big drain on our current account.
It’s one of the reasons New Zealand is always on the back foot when it comes to trying to run current account surpluses (ie take in more money than we spend).
The grim reality is we are usually in deficit – at least since we opened the economy in the 1980s. We recorded a big surplus (the largest since 1971) in June 2020 – but that was just a weird symptom of closing the borders and locking everyone down at home. We didn’t buy any petrol and overall imports dived.
So that is the trifecta of bad news that nobody is really looking forward to before we get away for a much-needed summer break.
There’ll still be time for the season to get silly, I hope. I’ll write something more suitably festive and reflective next week.
But the data coming through isn’t easily ignored and ought to be food for thought for policymakers, economists and commentators as they contemplate how to turn this economy around from the beaches and baches around the country.
Finally, I think it’s worth acknowledging that, in the past week, the Government made some significant policy moves that could potentially unlock real value in troublesome areas like banking and infrastructure.
Plans to raise $500 million of private capital to power up Kiwibank and a policy move that should allow KiwiSaver funds to invest in big infrastructure projects look to provide a sensible, locally focused pathway to more “public-private partnership” in the years head.
We can’t keep going to the well of government debt but we need to get on and build a more productive economy.
I hope there is more of this kind of thing coming in the new year.
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.
