ANALYSIS: Last week, a headline declared New Zealand’s “rock star economy” was “back for an encore”. The rock star status was bestowed on New Zealand’s economy by a foreign economist a decade ago. It was woefully wrong back then and anyone thinking the same now would have to be in la la land.
It is true the economy is now entering its third recession in two years as a result of high interest rates. Falling rates will therefore bring relief. But there is more to an economy than just borrowing costs and for New Zealand, there are key factors in play that are not conducive to a stellar economic outlook.
Consider net migration flows. The annual total peaked at 137,000 in October 2023 and now sits at 73,000. That is still a strong number. But the rate of decline is huge. In the three months to June, the annualised net flow was 8000, down from 129,000 a year ago. We are already in a much weaker-than-normal migration environment and I can see the impact in the monthly survey of property investors I run with Crockers Property Management.
This month a record net 21% of landlords reported that finding good tenants was difficult. Only five months ago a strong net 27% said finding good tenants was easy. The rental market has turned on a dime as the unusual migration boom rapidly fades. Soon the focus will be on the record net loss of Kiwis.
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Consider also that for nearly six years to late-2023 fiscal policy actions added to growth in the economy and boosted government debt over 80% - for no sustained economic or social improvements. Now, fiscal policy is having to be tightened to get the books back in order and remove public sector flab. This will slow the pace of growth in our economy for many years.
Third, it pays to remember that in past periods of tight monetary policy the Kiwi dollar soared and then fell away when rates were quickly cut. This time around our currency has not gone up during the tightening period so there is no special boost over 2025-26 coming to our exporters, farmers, and the regions from a downwardly correcting currency. In fact, our currency has on average gained almost 1% since last week’s monetary policy easing.
Expect access to some foreign markets to become more difficult, regardless of who wins the US election. That is a problem because China’s economic outlook is poor and our export receipts from that country have fallen almost 11% this past year while falling 3.4% for all destinations. China now takes just over 27% of our exports, down from almost 33% three years ago. Bye-bye boom.
Independent economist Tony Alexander: "The rental market has turned on a dime as the unusual migration boom rapidly fades. Soon the focus will be on the record net loss of Kiwis." Photo / Fiona Goodall
Consider also that tourist receipts into New Zealand seem to have flatlined, which makes sense because the same thing has also happened in Australia. Absence of a return of sufficient Chinese visitors is the main explanation.
Now take into account the increasingly parlous state of many business finances now that pandemic savings have been used up. The IRD is cracking down on delayed payments and Kiwis are probably still holding back from buying things, having already secured them during the pandemic binge. There are a lot more businesses across all sectors yet to be weeded out by this downturn.
I could mention other things but what those above add up to is this: New Zealand has stepped down a notch or two on its underlying pace of productivity growth, its underlying pace of economic and income growth, and its overall long-term prospects.
These things won’t stop a good recovery in the housing market from occurring, which will eventually lead to a construction upturn from probably late next year. But there is no clear reason for believing that our economy is now set on such a stellar path because we are easing monetary policy. The 80,000 Kiwis who have left this past year certainly don’t see roses just around the corner.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
