The coming rate cut won’t be cause for celebration – it will be a symptom of deeper malaise, writes Nick Stewart.
Nick Stewart is a financial adviser and CEO at Stewart Group
Next Wednesday’s anticipated 25 basis point cut to 3% represents more than monetary policy adjustment – it’s an admission of New Zealand’s economic fragility, yet likely inadequate given our challenges.
While markets celebrate cheaper money, this modest response highlights policy inertia.
The Reserve Bank’s hand has been forced by unemployment climbing to 5.2% – the highest since 2016 – and wage growth softening to its slowest pace in years. Private sector wages have decelerated to just 2.2% annually, while underutilisation has surged to 12.8%. Yet the expected quarter-point response appears tepid when economic data screams for decisive action.
As former Finance Minister Ruth Richardson commented, Treasury’s warnings about New Zealand’s fiscal sustainability aren’t mere technical observations – they’re alarm bells signalling “greater pressure on the fiscal position than we have in the last 20 years”.
Higher starting debt, unfavourable interest rates, adverse growth trends and long-term pressures from aging and climate change are converging into a perfect storm. Despite claims of $44 billion in savings, the Government has reallocated spending rather than shrinking it.
It’s hard for hope not to fade when our government appears to lack the mettle to take the bull by the horns. The “price of butter” facade may have fooled some, but not many. Butter is a product that hasn’t changed in eons – full cream milk, add salt and churn. No smoke and mirrors or PR spin, just butter. Yet politicians obsess over its retail pricing while avoiding hard decisions on fiscal consolidation that might actually address underlying inflation pressures.
The great capital migration
Capital flows as freely as people in an interconnected world. Just as 230,000 Kiwis have voted with their feet over two years seeking better opportunities offshore, smart money increasingly looks beyond our borders for superior returns.
The recent emigration shows a damning verdict on New Zealand’s economic trajectory. These are productive citizens, who see limited prospects in a country determined to tax productivity whilst subsidising speculation. Human capital flight and financial capital mobility share parallels –both respond to incentives and seek the best risk-adjusted returns.
Housing market dysfunction remains
Our housing market remains in purgatory, with prices stubbornly elevated while transaction volumes are sluggish. Latest data shows “days to sell” extending and prices slipping nationally for six of the past seven months. Wednesday’s modest rate cut is unlikely to break this deadlock.
Young Kiwis are emigrating, recognising their homeownership prospects have been systematically destroyed by policies prioritising incumbent wealth over economic dynamism. The social contract promising hard work would lead to homeownership has been broken: 72% of Kiwis without a home believe buying a property is beyond their reach. Yet, many Kiwis remain dangerously over-exposed to residential real estate.
Rethinking investment
The traditional Kiwi approach of leveraging into property and hoping for the best is dangerous where house prices may stagnate while debt service costs remain higher.
Global equity markets continue to climb, with the S&P 500 delivering 5-year annualised returns of 15.71%. Meanwhile, New Zealand’s NZX50 has delivered a dismal 1.8% annualised return over the same period.
The performance gap is devastating. A $100,000 investment in the S&P 500 over five years would have grown to $208,000, versus approximately $109,000 in the NZX50. This $99,000 difference is a documented reality for investors who remained domestically focused while global opportunities compounded wealth at dramatically higher rates.
Complexity extends beyond simple asset allocation. Tax implications vary dramatically between domestic and international investments. Currency hedging decisions can make or break returns. Liquidity needs must account for potential emigration scenarios – a consideration rational investors now embrace.
Economic crossroads ahead
New Zealand stands at an economic crossroads between fiscal irresponsibility leading to Japanese-style stagnation, or making hard decisions to restore economic dynamism. Next Wednesday’s timid rate cut suggests we’re choosing the former.
For investors, the message is clear: adapt or suffer consequences. Capital, like talent, flows to where it’s best treated. The 230,000 Kiwis who’ve recognised this reality are canaries in the coal mine. Smart investors should ensure their wealth enjoys the same mobility their fellow citizens have embraced.
The coming rate cut won’t be cause for celebration – it will be a symptom of deeper malaise and policy impotence facing structural decline.
- Nick Stewart’s iwi affiliations are Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha).