NZ economy: It’s tough out there, but the tide is turning
Shamubeel Eaqub
Chief Economist at Simplicity
Guest Writer
What’s happening in the economy? From both broad and narrow perspectives, things are tough out there. Preconditions for a recovery are here, but it may not gather strength until after Christmas.
Risks from frayed social cohesion
From a broad or fundamental perspective, declining trust and eroding social cohesion are the biggest risks facing the country.
The fundamental drivers of prosperity are culture, institutions, geography and luck. The last two can’t be changed easily, but when culture becomes fractured and institutions become untrusted and thus unable to meet the needs of the community, progress becomes harder. Around a third of Kiwis trust media, and around half trust government and business – this is alarming.
We are seeing the consequences of declining trust this globally. The level of policy uncertainty in the US right now is like the onset of the Covid pandemic. This time it is not as a response to a novel health crisis, rather it is unorthodox policies and politics that is actively changing norms and dismantling institutions.
This has come about because of entrenched inequality over the last 40 years, which has led to polarisation in society, which is now spilling over into the politics and policies.
We aren’t immune in New Zealand. Majority of kiwis think the country is headed in the wrong direction – a sentiment that has persisted since early 2021. Its not so much who is politically in charge, rather a dismay and discontent with the economy, politics and a wider malaise. New Zealand’s social cohesion is frayed and is worse than in Australia.[1]
We should expect social, political and policy variability to be facts of life in coming decades.[2]
Shamubeel Eaqub, Chief Economist at Simplicity
Deep and long recession
There is also a cyclical recession underway – it started in 2023, which has been deeper and longer than the global financial crisis. Although it has led to fewer job losses, and businesses have taken a bigger hit on profits. In large part it reflects labour hoarding, because labour shortages are intense and firms are loathe to let go of staff, unless they must.
The recession has not been a surprise. The economy was already weakening in the lead up to the pandemic in 2020. Perversely, the economy boomed outside of the tightest pandemic restrictions, because there was so much stimulus, both from government support (largely borrowed) and monetary policy (low interest rates and easier mortgage).
But then cost of living spiked, and central banks raised interest rates to quash inflation and the economy. So, households bore the brunt of higher cost of living, that cramped spending and then were hit by higher mortgage rates. It worked – recession was engineered and inflation slowed. Investment was particularly hard hit, including house building. This is unfortunate, as there is still a very large shortfall of housing, and every bust we lose skilled workers to Australia, making subsequent recoveries slower and more expensive.
But interest rate cuts over the last year and half haven’t improved the economy yet, partly because of elevated global uncertainty, slowing net migration dampening the economic cycle, and fiscal austerity – especially a big pullback in infrastructure investment (unfortunate in light a large infrastructure deficit [3]). The final reason is because interest rate changes take a long time to flow through to households, because Kiwis tend to fix their mortgages. So, the benefits of lower interest rates are only realised when mortgages are refixed. This is happening now and there is relief, laying the foundations of a recovery.
There are now signs of a bottom… While things are still difficult now, consumers and businesses are hopeful for next year.
Seeds of recovery sown
There are now signs of a bottom. Spending by households and business have flatlined, rather than falling. Sentiment is improving. While things are still difficult now, consumers and businesses are hopeful for next year. Hope of course is not a strategy; we are yet to see that translating into advertising more vacancies, or people spending more money at the shops. When hope turns into action, especially hiring by business, we can be confident of the recovery.
There are small pockets of strength already. The primary sector is booming. Driven by the three export powerhouses: dairy, meat and forestry (also Kiwi fruit), going to China, Indonesia and Malaysia. The product mix is the same, but there is increasing evidence of diversifying towards non-traditional markets. This is good and continues a long trend of New Zealand diversifying it export products and markets.
What to do?
For new graduates, or the 216,000 people on unemployment benefits, the timing is challenging. There are few advertised vacancies and the competition is intense. Further training, interning, volunteering and overseas experience are all good options until the recovery picks up. It’s not you, it’s the economy. But it will remain competitive for a while.
Businesses should be readying for the recovery. That means prioritising low cost strategies that prepare systems and workforce for the recovery. On the job training, mentoring, and leadership training are examples of low cost and high impact investments.
[1] https://helenclark.foundation/publications-and-medias/social-cohesion-in-new-zealand/
[2] https://www.informedinvestor.co.nz/new-investor-in-a-new-world-order
About the author
Shamubeel Eaqub makes economics easy and fun. Shamubeel is the Chief Economist at Simplicity. He is also an author, media commentator and a thought leading public speaker.
He has over two decades of experience as an economist in Wellington, Melbourne and Auckland in leading international banks and consultancy (ANZ Bank, Goldman Sachs JBWere, NZIER, Sense Partners and Simplicity).
