Prime Minister Christopher Luxon has staked his reputation on turning the economy around.
THE FACTS
It’s spring. Which is a relief. It felt like a long, wet winter.
Some positive economic news should also start to flow in the next few weeks.
Not technically because the weather has improved, although it always seems to help.
I can’t be certain that the economic news will improve. But I am certain it should.
Two of the three biggest forces in the New Zealand economy – interest rates and commodity prices – have been pushing in the right direction for some time.
Something has to give, and when it finally does, we should see a shift.
Dairy and meat prices have been breaking all kinds of records for the past year. That money is flowing to farmers now and boosting confidence in rural regions.
More significant for the bulk of New Zealand’s city-dwelling population is the flow through from interest rate cuts.
The Reserve Bank (RBNZ) has delivered 250 basis points of cuts to the Official Cash Rate (OCR) since August last year.
That’s a lot, but we know it takes time to flow through to boost spending and confidence.
Kiwis famously fix their rates for one or two years. The RBNZ has produced research suggesting that a lag of between six and 18 months is typical for each rate cut to flow through the economy fully.
That has been exacerbated in this economic cycle because savvy mortgage holders, anticipating further rate cuts, have moved on to higher floating rates or short terms in the hope of refixing when rates do hit their lowest point.
In their Economic Overview last month, the Westpac economics team estimated that almost half of the expected impact of the past year’s OCR easing was yet to pass through to households.
“Around half of all mortgages will come up for repricing over the next six months, and borrowers could see large reductions in their borrowing costs,” chief economist Kelly Eckhold said.
We are heading into the zone where monetary policy starts to work its magic, and the real benefits of lower borrowing costs should start to show up.
That doesn’t mean we’ll necessarily see the labour market improve, real wages rise, or the number of business liquidations fall.
These things are typically the last to turn in any recovery – economists call them lagging indicators.
But we should start to see the good news coming through in the kinds of data which typically move at the front end of a recovery.
Economists call them leading indicators, and they include things like retail sales, building permits, consumer and business confidence and other key surveys like the Performance of Manufacturing and Performance of Services Indexes.
I think the lag effect has been worse than usual in this cycle.
People have been surprised by the lack of recovery signs so far this year.
Things have been compounded by low confidence levels and high levels of job insecurity.
Many people are saving the initial interest rate gains they get or using them to pay down the mortgage.
Likewise, many farmers have used the first blush of payout money to pay down debt.
Ultimately, that’s not a bad thing for the economy.
It goes with the territory that once you have lower debt levels, you start to feel more economically secure.
It puts you in a position to start investing and spending again. That’s what we should start to see happening.
If things don’t start to improve in the next few weeks, then I think we have a more serious problem.
When I say “we”, that might depend on how secure your job is or whether you run a small business in retail or hospitality.
It also depends on whether you are the leader of a first-term coalition Government expecting to get re-elected next year.
The runway for the recovery to gather enough momentum for voters to actually feel better off is getting precariously short.
Prime Minister Christopher Luxon and Finance Minister Nicola Willis have staked their reputations on turning this economy around. They’ve had a sizeable window in which to blame the last Government.
I think voters understood the inevitability of the deep recession in 2024. But as we head towards 2026, things are coming to the crunch.
There has been talk of Luxon facing an imminent challenge to his leadership.
I think if I were a National MP worried about the next election, I’d be inclined to wait and see if the economy starts turning as it is forecast to – in the next three months.
But this is a crucial window, and it is a tight one.
It’s not enough just to see the leading indicators turn positive.
We saw that with the United States elections last year. Members of the public are not impressed by economists telling them that things are improving.
People have to feel it for themselves – either directly in their wallets or indirectly through a significant nationwide shift in the vibe.
To get to that point before next year’s election campaign, we’ll need to see improvement in leading indicators before Christmas.
I still think we might.
The latest data has been mixed. It included some signs of positivity.
June quarter retail data surprised on the upside, coming in up 0.5% when most economists expected it to have fallen.
And last week’s ANZ card spending data was up 0.4% in August. Spending was up ... 3% compared with the same time last year.
That’s a start.
We’ll get a fuller look at spending trends with electronic card spending data from Stats NZ next week.
But consumers aren’t feeling any better about the economic outlook yet.
Another ANZ release, the Consumer Confidence report for August, showed confidence has fallen again.
It’s now at its lowest level in 10 months.
The Government might well claim that it has made sound progress in setting the economy up for recovery. The economists might well say that things are about to pick up.
But the public, it seems, has lost faith.
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.
Sign up to Herald Premium Editor’s Picks, delivered straight to your inbox every Friday. Editor-in-chief Murray Kirkness picks the week’s best features, interviews and investigations. Sign up for Herald Premium here.