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Opinion by Liam Dann
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.
Many of us – including PrimeMinister Christopher Luxon – are frustrated about the timing of Act’s doomed Treaty Principles Bill, which has taken political focus away from the economy at what is a crucial time for the country.
Now the economy is coming back into focus and the Prime Minister might be wishing it wasn’t.
Prime Minister Christopher Luxon and Finance Minister Nicola Willis claim to be working on policies to address the slowdown in productivity rates. Photo / Mark Mitchell
The recovery we’ve waited so long for is forecast to be much shallower than previously hoped. Treasury has warned that the Crown accounts are likely to be worse than expected. A return to surplus will probably need to be delayed.
And on the international front, New Zealand’s export-dependent economy looks highly vulnerable to a brewing trade war.
Donald Trump’s proposed tariffs threaten to end the era of free-trade and globalisation that has underpinned the country’s economic success for three decades.
Luxon and Finance Minister Nicola Willis held an unexpected press conference on Wednesday, straight after the Official Cash Rate (OCR) announcement and prior to the Reserve Bank’s regular Monetary Policy Statement (MPS) media briefing.
Presumably, the idea was to catch some of the warm glow from the news that interest rates are coming down.
But Wednesday’s Monetary Policy Statement didn’t contain much good news at all. We got the well-signalled 50-basis-point rate cut.
“The latest drop in the Official Cash Rate will mean more relief for Kiwis’ back pockets,” Willis said.
Sadly, I think most Kiwi mortgage holders have been left with a sense of disappointment.
Fixed rates have hardly moved. At the time of writing just 20 basis points had come off the one-year fixed rate. And that might be as good as it gets this year.
Financial markets had largely priced the cut in and concerns about Trump’s inflationary policies have pushed international borrowing rates up.
We had a warning from Governor Adrian Orr that we shouldn’t necessarily expect fixed mortgage rates to fall much further even though the Reserve Bank (RBNZ) forecasts the OCR to fall another 125 basis points (to a low of 3% min-2025).
The RBNZ only expects the average interest rate banks receive for all their mortgages on issue to fall from 6.4% to 5.8% in a year.
As the Governor said: “It’s not a big decline.”
Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Worse than that though, the RBNZ reduced its longer-term economic forecasts and told us that productivity was lower than anticipated.
Yes, we return to growth. But looking out to 2026 and 2027 the RBNZ now sees growth of just 2% and 2.2% respectively.
That’s going to feel better than the recession we’ve just been through but it is not a booming economy by any stretch.
In fact, what the RBNZ is suggesting is that this economy doesn’t have the structural capacity to handle an economic boom without becoming inflationary again.
That’s a depressing thought.
The RBNZ’s warning echoed a grim speech earlier in the month by Treasury chief economist Dominick Stephens.
Stephens’ speech was basically warning that the sluggish economy was translating to a lower tax take and the Crown accounts are likely to look ugly when they are released on December 17.
It was “not simply the case of a deeper economic slowdown, although this appears likely”, he said.
“The Treasury has been revising down its assessment of future economic activity at successive economic and fiscal updates. This has led to successive downgrades to our forecasts for government revenue, independent of government policy. A key reason for the Treasury’s weaker economic forecasts has been accumulating evidence of a sustained productivity slowdown.”
Labour productivity measures the amount of GDP produced per hour of work, and improving it is key to lifting economic growth and living standards, Stephens said, echoing the sentiment of many economic commentators, across many years.
Normally, productivity should trend higher over time as technology and ways of working improve, he pointed out.
New Zealand has always had a mysterious productivity deficit compared to other countries. Unfortunately, not only do we not look like solving that, there is “accumulating evidence that the trend rate of growth in productivity has slowed”, Stephens said.
Productivity growth averaged 1.4% in the 20 years up to 2013 but slowed to zero from 2014 until the end of 2019.
Many of us have been saying for some time that the economy is facing a structural challenge that goes beyond the post-Covid cycle we’ve been grappling with.
We need to recognise that a good old-fashioned Kiwi recovery with solid dairy export prices and a housing market boom won’t be enough to deliver a “rock star economy” this time around. In fact, based on Treasury’s productivity growth numbers, it was a mirage the last time around.
So what do we do about it?
As Stephens said, there is scope for policy to help lift productivity growth over time by focusing on key areas such as private investment and capital intensity; internationalisation; innovation and the diffusion of new technology; and regulation and the competitive environment.
Luxon and Willis understand this too and they claim to be working on policies to address the issue.
But the RBNZ’s lower forecasts suggest little faith that policies we’ve seen so far can do anything to turn productivity rates around.
I’m sure Luxon and Willis would say the RBNZ and Treasury are too gloomy. They must have faith that their policies will make a difference.
They are trapped, though, in a coalition with an old-school nationalist party on their left and a neo-liberal party on their right that seems to be less interested in economic reform and more interested in anti-woke populism these days.
It limits their ability to present a bold and clear policy pathway.
Reserve Bank chief economist Paul Conway was blunt when asked (at the post-MPS select committee meeting) whether his forecasts were too gloomy.
“We would delighted to be surprised to the upside,” he said, before adding one final comment for his political leadership to consider.
“The best way to forecast the future is to create it.”
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.
