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Cameron Bagrie Economic Update

9 May 2024

Thud. Here comes the hard landing for the economy. While hardly an endorsement for positivity, often you require pain before change unlocks gain.

Inflation is proving to be sticky and is still households biggest concern according to the IPSOS Issues Monitor. New Zealand’s latest non-tradable (domestic) inflation figures came in at 5.8%, compared with the Reserve Bank’s expectations of 5.3%. That’s a massive miss.

If the growth outlook wasn’t so bad for 2024 – and recent indicators clearly show further weakness, it’s likely the Reserve Bank would be hiking the Official Cash Rate further. They’re not alone. Inflation in the United States is coming in more strongly than expected. In Australia too. Progress returning inflation to target has stalled.

Getting rid of inflation requires weak growth so people spend less, and it appears growth is not yet weak enough to force sufficient disinflationary pressure. Growth in 2023 just wasn’t weak enough to do the job and looks like the appetiser on the main course (2024). Geopolitics (think oil), and 15% prospective rises in local authority rates, rising dwelling insurance, energy and Air New Zealand flight costs don’t help contain inflation, and mean the economy needs to see even more disinflationary pressure.

That will involve economic pain, driven by tight monetary policy, higher unemployment, some businesses failures, and real stress on families. The social safety net will face pressure. We don’t like the effects of inflation, nor the sacrifices to get it low again.

Out of the mess we’re starting to see signs of light at the end of the tunnel.

Performance bifurcation is starting to appear in sectors. A weak economy exposes businesses or people with weak business models, over-sold skills and poor microeconomic foundations. Why is Briscoes doing better than many other retailers? What will happen within the red meat sector? Is necessary consolidation, talked about for years, finally around the corner?

New Zealand’s growth cycle is more advanced than others on some levels. Disinflationary headwinds are building with each step down in growth. Builders are easier for find and labour market capacity pressures have eased. With that comes prospective lower interest rates, though unlikely until 2025. The Treasury acknowledged in the Budget Policy Statement that the “assumption of potential growth that underpins the Treasury’s real GDP forecasts has been lowered”. Both the Treasury and Reserve Bank have now acknowledged the productive capacity of the economy is lower than previously thought. A lower productive capacity of the economy is a fancy way of saying we are not as wealthy as we thought we were. Reset your spending accordingly and cut out the discretionary purchases you do not really need.

Cancel-nomics from the Government needs to morph into can-do-nomics. Finally, the education sector is getting the long overdue attention it deserves. Want better roads? Odds are we’ll need to pay more for it. If many cheaper building products are good enough for the Australia market, they are now good enough for here too. Fixing three-waters will require higher rates, or a different funding model, and better management of the assets. Tough decisions and discussions are replacing can-kicking ones. How do we use water to drive growth and job creation? Can we turn a global economic theme such as shifting from the economics of trade into the security of trade into an advantage as a food producer?

We need to be careful though. New Zealand is very divided, and division is corrosive. We’re in danger of swinging too far to economic orthodoxy, forgetting about the complexities between economic and social metrics. The previous government took us too far the other way into wellbeing, forgetting about the economic base wellbeing is premised. We need to find balance. New Zealand might still look good to a lot of Americans post the upcoming US election.

With each step down in growth and profit downgrade we set in train the seeds of a productivity upswing. It’s a big field to plough and lots of clods to turn. Recent data shows a major deterioration in productivity performance. Labour productivity fell 0.9% in the 12 months to March 2023, and the 2024 numbers will be worse. The three-year average is negative. Capital productivity fell 3.8% in the year ended March 2023. Multifactor productivity – the combination of labour and capital efficiency, dropped 2.2%.

Such performance means we’re poorer not wealthier, and a reason people head overseas.

Every economic upswing starts with producing more with less. Pain and tough times shake the complacency tree and the need for efficiency. We’re entering that mode and it’s long overdue.

The upshot

Few like to undergo resets. They’re unsettling and challenge complacency and ways of thinking. A bit less Freddy Mercury: “I want it all and I want it now” is not a bad thing. Don’t be afraid to have tough conversations or make tough decisions.