Finance Minister Nicola Willis has been under pressure for the country's economic contraction. Photo / Samuel Rillstone
By Susan Edmunds of RNZ
Finance Minister Nicola Willis and the wider coalition Government have been under pressure since gross domestic product figures last week showed a sharper economic contraction than expected.
How much worse is the state of the economy compared to when they took office almost two years ago?
Here’s how the economy is tracking on a few key measures.
The unemployment rate was 3.7% in June 2023 and is now 5.2%.
Infometrics chief forecaster Gareth Kiernan said employment growth had slowed from 4.3% a year to 0.9%.
Inflation has cooled significantly from a rate of 6% two years ago to 2.7%. Food inflation has dropped from 12.5% to 5%.
University of Otago associate professor Dennis Wesselbaum said inflation had been the key issue of the 2023 election.
“Inflation is down substantially from two years ago,” he said. “High interest rates and the Government committing to reduce spending jointly contributed to this - this is a big win.
“The flipside is that economic activity had to go down to achieve this, hence we get the hangover from the high interest rates coupled with current global dynamics, which aren’t positive for New Zealand.”
Simplicity chief economist Shamubeel Eaqub said the inflation track in New Zealand followed that of other countries around the world and it was no fairer to credit the Government for the improvement than it was to blame it for the recession that caused it.
Retail volumes are down 0.2% from June 2023, but the rate of core retail sales growth has improved from -5.1% to +1.9% per year.
GDP is 1.2% smaller than in June 2023. GDP measures the size of the economy.
Economist Kiernan noted year-end growth was down from +4% to -1.1%. On a per capita basis, GDP is 2.8% smaller than in June 2023.
Manufacturing activity is 5.8% smaller than in June 2023, but year-end manufacturing activity growth – as measured in GDP data – improved from -5.2% to -1.7%, Kiernan said.
Construction activity has been hit hard and is 18% smaller than in June 2023. Year-end growth has dropped from 6.6% to -12%.
The OCR has dropped from 5.5% to 3% and one-year mortgage rates have dropped from 6.9% to 4.9% – or better, in some cases.
The current account deficit – that’s the difference between what we export and import – has dropped from 7.5% of GDP to 3.7%.
It has improved partly because of commodity prices and partly because the economy is not as overheated as it was a couple of years ago.
In 2023, New Zealanders still spent a relatively large amount and imported more, compared to what the country exported.
Now, that has turned around.
The Government deficit is now about $10 billion, from $7.2 billion, Kiernan said.
The New Zealand dollar has dropped against the US. Mid-2023, it was worth about US61c and is now about US59c.
Commodity prices have been a good-news story. Kiernan said they were up 21% in the three months to August from two years ago – meat 28%, dairy 27%, horticulture 9.4%, forestry -3.0% and aluminium 19%.
“It does augur well in terms of economic outcomes going forward in provincial parts of the country.”
University of Otago senior economics lecturer Murat Ungor said productivity had declined.
He pointed to Stats NZ data showing falls in accommodation and food services, wholesale trade, transport, postal and warehousing, driven by rises in labour inputs, without corresponding increases in outputs.
“Research consistently shows that productivity is a key driver of living standard differences across countries, yet over recent decades, New Zealand’s productivity growth and overall levels have lagged behind its peers.”
Eaqub said blaming the Government for poor productivity data wasn’t reasonable, because it had been a problem for a long time.
New Zealand’s terms of trade are up 11% from June 2023 and growth has improved from -5% to +12.2%.
We asked several economists for their take.
Kiernan said the problem with the Government blaming the previous Government was, the longer it went on, the less realistic it seemed.
“Part of the reason the economy has been weak has been the particularly tight fiscal approach,” he said. “We can have arguments about how appropriate or necessary that is… if National had decided to take a not-quite-such-a-tight approach to fiscal policy, then arguably the sort of immediate economic growth outcomes and some of those other indicators we’re getting through, maybe they wouldn’t be quite as negative either.
“In terms of their own choices about how the hell we get back to something more sustainable, they do have to take some responsibility for it themselves, and it’s just a question of whether you think they’re doing the right thing or not.”
He said lower interest rates and higher commodity prices promised economic improvement.
“If we went back 18 months, people were saying ‘Thrive in ’25’ and then it was ‘Survive until ’25’. Now I’m telling people ‘Stay in the mix until ’26’, because it’s very hard to find things that rhyme with ’26.”
Equab said people blamed too much on the Government.
“I think everybody’s saying, because they’ve been in charge, this is all at their feet, and I think that’s completely unfair. You know, governments don’t have tools that work that rapidly.
“Given that this recession turned out to be deeper and longer, are they responding to the evidence in front of them? That’s what matters.”
He said tax cuts were meant to put a floor under consumer spending and had not.
“Government policy in terms of reducing government spending was meant to unleash private sector spending, which was very naive in the middle of a recession with lack of confidence, interest rates relatively high, global uncertainty, all those kinds of things.
“It was essentially the wrong prescription for the middle of a recession.”
He said there was a missed opportunity to invest in “boring” stuff that was eventually going to be spent on anyway.
“What we find in this period of demand failure, which is a recession, is you need somebody in the market to act. That somebody who can do that is government, because – particularly when it comes to things like infrastructure – you’re going to buy that stuff anyway.
“You either buy it today or tomorrow. We need more boring stuff done sooner.
“Maintenance projects that have been languishing for the last 10 years... bring it on.”
Ungor said the economic recovery was fragile and uncertain.
“The Government’s commitment to fiscal consolidation may prolong weakness in the near term, although structural reforms could support stronger medium-term growth. The outlook is also highly dependent on global developments, particularly trade relations between the US and China.
“New Zealand’s reliance on agricultural exports to China makes it vulnerable to any deterioration in Sino-American trade relations. However, strong commodity prices and previously aggressive monetary tightening – which now allows room for easing – provide some grounds for cautious optimism.
“Given these challenges, the Government’s focus on economic growth is appropriate, although the effectiveness of its policies remains to be seen.”
Wesselbaum said there had not been a way to unwind the 2023 situation without a downturn.
“I don’t think that there is any fair criticism of the current government in this. If there is something that needs to change, then it is the low productivity – but that’s not exactly news for New Zealand.
“History has shown us that leaving stagflation, you need sound monetary and fiscal policy, and supply-side policies, and that this takes a while.
“Given this, it’s very hard to judge the economic performance of the current government over the past two years.
“At best, you can say that the situation stabilised and that a credible fiscal policy, the focus on an economic growth strategy, coupled with movements towards improving the supply-side – de-regulation, productivity – have set the stage for future growth.
“It is fair to say, though, that the next year should see an improvement in economic activity – without any major events.”