ANALYSIS: I consider myself an optimist and as a rule can usually find and highlight the positive side of most things to do with our economy. In that light, I can write glowingly about the upturn in our economy coming along as a result of interest rate cuts, which are arriving sooner than expected.
However, I would advise people to curb their enthusiasm about the strength of the coming economic upturn in light of some fairly significant factors, which haven’t really been brought together before and considered as a gestalt.
Our economic upturn won’t be accentuated by the usual factor of a rapidly falling currency boosting export receipts and the regions. The Kiwi dollar has not soared during the period of restraint since late-2021 and in fact, is about 8% lower now than it was three years ago. Downside from current levels looks limited when we allow for rate cuts also coming offshore.
The recovery in our international tourism sector seems to have flattened out, with the Chinese market in particular remaining muted. In fact, our recovery over 2025 won’t be boosted by an upturn in world growth. The IMF is predicting just 3.3% global growth next year from 3.2% this year. But recently worries have deepened about both the Chinese and United States economies.
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We are a small trading economy reliant on good access to foreign markets. But the world is slowly moving away from liberalised trade and a multilateral approach to trade access, and if Donald Trump wins this year’s US election, the promised placement of a 10% tariff on all imported goods into the US will harm our receipts. The move may spark similar actions by other countries.
Net migration flows into New Zealand are falling rapidly and the net loss of Kiwis offshore at a record 60,000 is likely to grow further. Every day the media tells young New Zealanders how bad our country is with multiple crises. The brain drain is likely to remain strong and understandably so in the next few years.
The level of house-building activity looks like falling all through this year and next. Consent numbers are already 34% down from their peak and still falling. Even when standalone house-building recovers it may take a year for the heavily debt-reliant multi-unit construction sector to turn upward. Before then more liquidations are highly likely.
Councils around the country have promised ratepayers many years of large rate rises (though without cost-saving restructuring and reform to try and minimise the shock from these monopolies). These rises along with the country’s low productivity growth rate imply that while the coming cuts to interest rates may be rapid, they almost certainly will not be deep.
Independent economist Tony Alexander: "Net migration flows into New Zealand are falling rapidly and the net loss of Kiwis offshore at a record 60,000 is likely to grow further." Photo / Fiona Goodall
In fact, it pays to remember that despite all the woe people can see around them a net 38% of businesses in the ANZ’s monthly Business Outlook Survey still say they plan to raise their selling prices in the coming year as a cost-plus pricing mentality persists. This is worrying because the average reading for this measure which is consistent with inflation near 2% is 25%.
More worrying is the fact that the 25% reading applied during a period when the pace of economic growth averaged 2.7% a year. With our economic growth rate at only 0.2%, the extent of stimulus the Reserve Bank can allow to drive the economy upward will have to be limited else inflation will bounce right back above 3% again when it falls below that level in just a few months.
Throw in the additional waves of weeding out across all sectors which experts in liquidation and restructuring tell me is yet to come and all I can say to those following a “survive to ‘25” policy is do not change that to “thrive in ‘25” just because interest rate pain is about to ease somewhat. New Zealand is set on a low growth path.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
