Thomas Coughlan, Political Editor at the New Zealand Herald, loves applying a political lens to people's stories and explaining the way things like transport and finance touch our lives.
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Nicola Willis holds the finance and economic growth portfolios but fresh figures show the economy shrank in the June quarter. Photo / Mark Mitchell
Nicola Willis holds the finance and economic growth portfolios but fresh figures show the economy shrank in the June quarter. Photo / Mark Mitchell
THE FACTS
GDP contracted by 0.9% in the June quarter.
The contraction was broad-based across a number of industries.
Finance Minister Nicola Willis said the economy was buffeted by tariffs during that quarter.
Finance Minister Nicola Willis tried to make today easier for herself.
In Question Time on Wednesday, she had backbencher Hamish Campbell lob her a patsy beloved by several Finance Ministers: “What recent reports has she seen on the economy?”
Instead of the usual response of rosy figures cherry-pickedfrom the latest economic commentary, Willis launched into a philosophical declamation on the importance of distinguishing between forward-looking forecasts, “here and now” data and backward-looking “long lag” economic releases.
Chuckling erupted on Labour’s front bench. They knew where Willis was going – every major forecaster had been forecasting a grim quarterly gross domestic product print for Thursday and Willis was clearly trying to get ahead of the story, rehearsing her alibi before the corpse was wheeled in.
Willis, an avid reader, will be familiar with William Faulkner’s quote: “The past is never dead. It’s not even past.”
The reality was far worse, a broad decline in New Zealand’s GDP with 10 of 16 industries showing a slump.
The economy should be growing, not shrinking, and shrinking at such a scale is very bad indeed. Voters are telling pollsters they feel the economy is on the wrong track – and you can see why, on a per capita basis, GDP fell by 1.1% in the June quarter.
Willis, who began the year with the new economic growth portfolio, must now face the fact the economy is no larger after her first two quarters in the role.
Prime Minister Christopher Luxon’s year of growth pledge now belongs in the mausoleum of scene-setting political clangers. Photo / Mark Mitchell
I was the one who broke the bad news to Luxon, bumping into him after a late morning interview I had in the Beehive. He hadn’t yet seen the figures, then just minutes old. It’s not the sort of bad news you ever expect to deliver to a Prime Minister.
During a long press conference in Willis’ office, it was clear she is convinced her strategy is the right one and she will not be changing course: there’s no additional stimulus, no additional fiscal help from the Government. As the Reserve Bank continues to cut rates, businesses and households are going to be the ones pulling themselves up by the economic bootstraps.
She also offered plenty of excuses, some of which stack up and others that don’t.
The economy, in the first quarter of the year was growing, and growing faster than some forecasts. True. In fact, in a note published Thursday, ratings agency Moody’s described the late 2024 and early 2025 recovery as “galloping”.
And it sort of was. Inflation largely slain, Kiwis began borrowing and spending as the Reserve Bank’s Official Cash Rate (OCR) cuts gave them the licence and the means to do so – a textbook Tory economic recovery.
It was Trump’s tariffs, Willis said, that caused the economy to have “the stuffing knocked out of it”.
Fair cop, every major forecaster revised down their forecasts after the Trump tariff announcement. Uncertainty over the tariffs, their size and their impact not only on exports to the US, but on the global economy, has curtailed businesses’ desire to borrow and invest – and it’s very difficult for a borrow, invest, spend recovery without confidence that tomorrow’s trading environment will not be radically different from today’s.
ANZ’s May business confidence survey, taken after the first round of tariffs, showed our own activity, profitability and, crucially, investment intentions had evaporated.
Damien O'Connor was the only Labour MP to ask Nicola Willis a primary question on the latest economic figures. Photo / NZME
Quarter two was always going to be tough but the question is, should it have been this bad? It’s a question you can ask about this Government’s entire economic and fiscal strategy. The post-Covid hangover was always going to be really rough, but this Government must surely ask itself why it refuses to pop even a single Panadol.
Construction activity fell 1.8% in the latest quarter, taking the decline to 9.4% over the year.
In light of that massive decline, was it wise to scale back the forward programme of Kāinga Ora building if only to keep the construction workforce from haemorrhaging to Australia?
No, according to Willis, who is sticking to her guns. She maintains the Government’s fiscal policy is stimulatory, and by a basic definition, it is. Treasury expects a $15.6 billion deficit this year – money that’s borrowed and funnelled into the economy to keep it alive.
“We are stimulating the economy by definition,” Willis said.
“I highlight this because, frankly, it doesn’t come through in your reporting, the Government is borrowing at very high levels right now – we are running an annualised deficit bigger than many countries around the world.”
It’s indicative of how much politics has changed that a centre-right Finance Minister is now complaining that the media gave insignificant coverage of her Government’s enormous borrowing.
It’s a marked change from the election and the coalition’s first year in office, in which Willis’ great economic test was whether her tax cuts would be excessively stimulatory – now the great debate is over whether they’re stimulatory enough.
The Government is boxed in.
A Finance Minister shouldn’t drop everything and change tack on the back of one quarter of months-old data. The data is noisy, and prone to revisions, meaning the slump may not be as bad as we think.
The question we should be asking is not what Willis should be doing, but what she and the Reserve Bank should have been doing in the past.
The bank’s catalogue of sins is long: shouldn’t have printed so much money, shouldn’t have been so late to hike, shouldn’t have hiked so much, should have cut quicker, should have cut steeper, shouldn’t have stopped cutting in July.
Willis’ predicament is more challenging. Even if she wanted to do something, there’s very little room to move.
Inflation, that old marplot, is still quite high, at 2.7% and the trading banks are forecasting it to go higher, which could curb any appetite for serious stimulus on the part of the Government.
The economy is stalling as costs are rising – a 1970s-style stagflationary dilemma that perhaps explains the return of 1970s-style politics: pleas for the Government to control the prices of butter and milk, and to nationalise and reregulate the utilities plaguing households.
They fall on deaf ears (often for good reason), these are 1990s politicians in an uncertain, 1970s world. They know heavy-handed price interventions are the wrong medicine, but their medicine of deregulation, confidence boosts and monetary easing isn’t working either.
If there’s one ray of sunshine for the Government it’s that the market and some of the major forecasters are now predicting an even lower OCR track, meaning cheaper borrowing and potentially growing house prices.
It’s also true the economy is showing some signs of recovery – whether these signs are good enough and early enough for voters to feel better about the economy in time for next year’s election remains unknown.
Willis was also fortunate to have an Opposition asleep at the wheel.
Despite knowing new GDP statistics were out today, and knowing they would be bad, not a single one of the three opposition finance spokespeople bothered to show up at Question Time on Thursday. Barbara Edmonds, despite having a good week in Question Time last week, was absent from Parliament (she was sick, as was colleague, revenue spokeswoman Deborah Russell).
Willis faced a single primary question on the figures from Labour’s Damien O’Connor. The Government faced three times as many primary questions about Māori language and education as the economy.
Labour’s deputy leader (leaders are usually absent on Thursdays) Carmel Sepuloni decided to focus questions on perceived disunity between David Seymour and Winston Peters.
It was an incredible sight. Willis, one of the highest-ranking ministers in the Government and most significant MPs in her caucus, was on the mat but not a single finance spokesperson bothered to even show up and deliver what could have been a mortal blow.
As it happened, only one Labour finance spokesperson put serious pressure on Willis today – former Finance Minister Sir Roger Douglas was so incensed by the figures he bashed out a press release calling for her resignation.
