New Zealand's Economy
An end of year wrap.
New Zealand's economy in 2024 is a tale of contrasts, marked by both promising developments and daunting challenges. The annual inflation rate's drop from 3.3% to 2.2% by October 2024 signals a cooling of price pressures, a positive sign for economic stability. The Reserve Bank of New Zealand (RBNZ), under Governor Adrian Orr, has slashed the Official Cash Rate (OCR) to 4.25% by year-end, aiming to stimulate growth by making borrowing cheaper after a period of higher rates intended to curb inflation.
However, criticisms have emerged regarding the timing of these actions. Some argue that Orr acted too late in raising interest rates when inflation initially surged post-COVID lockdowns, and similarly, delayed too long in reducing rates once the recession hit, potentially exacerbating economic downturns.
Despite some positive signs, the economy remains fragile. The GDP contraction of 0.2% in the June quarter narrowly avoided a technical recession, highlighting the delicate nature of the economic recovery. The economy appears to be in a slow-growth phase, with certain sectors underperforming.
The New Zealand economy, as reflected by its household debt as a share of GDP in 2024, presents a complex picture that warrants a detailed evaluation. With a household debt level of 121% of GDP, New Zealand ranks among the highest in the world, surpassed only by Switzerland at 126% and closely followed by Australia at 112%. This high level of household debt raises several important considerations regarding the economic health and stability of the country.
Firstly, a high household debt-to-GDP ratio can indicate a robust consumer economy, where individuals are confident enough to take on debt for investments such as housing, education, and consumer goods. This can drive economic growth through increased spending and investment. However, it also suggests a significant reliance on credit, which can be a double-edged sword. While it fuels economic activity in the short term, it also increases vulnerability to economic shocks. Any adverse events, such as a rise in interest rates or an economic downturn, could lead to a sharp increase in default rates, potentially destabilizing the financial system.
Comparatively, New Zealand's household debt level is higher than many other developed economies, including Canada at 103%, the Netherlands at 94%, and the United Kingdom at 80%. This places New Zealand in a unique position where its economic policies and financial regulations need to be particularly robust to manage the risks associated with high debt levels. Effective management of household debt is crucial to prevent a potential debt crisis, which could have far-reaching implications for the broader economy.
Moreover, the high household debt level in New Zealand could be indicative of structural issues within the economy, such as high housing prices and a reliance on consumer spending. Addressing these underlying issues through policy reforms and economic diversification could help mitigate the risks associated with high debt levels. For instance, policies aimed at increasing housing affordability and promoting savings could help reduce the reliance on debt.
On the global scale, New Zealand's household debt level is significantly higher than that of many emerging economies, such as India at 37%, South Africa at 34%, and Brazil at 34%. This disparity highlights the varying economic conditions and financial behaviours across different regions. While emerging economies may have lower debt levels, they also face different challenges, such as lower income levels and less developed financial systems.
The rise in Jobseeker benefit recipients to over 200,000 indicates rising unemployment or underemployment. Job cuts across various sectors suggest businesses are either downsizing or restructuring, potentially due to reduced demand or cost-cutting measures in response to economic uncertainty. This rise in unemployment can lead to decreased consumer spending, further slowing economic growth.
The government's fiscal position has deteriorated, with projections now indicating a return to surplus delayed until 2029. This shift reflects lower than expected revenue, possibly due to weaker economic activity or changes in tax collection. The government's increased spending, alongside these lower revenues, has likely contributed to this fiscal slippage.
A global productivity slowdown is affecting New Zealand, leading to downgraded economic growth forecasts. This trend is part of why the return to fiscal surplus is now projected for 2029, rather than earlier estimates.
New Zealand has long grappled with productivity issues, with labour productivity growth particularly weak since the Global Financial Crisis. Factors like lower benefits from innovation, weak investment relative to employment growth, and a slowdown in international trade have been cited as contributors to this trend.
In some sectors, like construction, there have been signs of increased productivity. For example, the construction sector saw increased labour productivity due to a significant increase in workforce relative to new dwellings built.
There's a call for a focused innovation policy to support firms in exporting high-value products, which could enhance productivity. However, there's also an acknowledgment that New Zealand might not be well-placed to absorb new productivity-enhancing innovations due to declining educational attainment and relatively low R&D levels compared to other advanced economies.
The IMF and OECD have highlighted New Zealand's productivity performance in relation to global trends, noting that structural reforms are needed to boost productivity growth. This includes addressing housing supply, emissions reduction, and climate change agreement challenges.
The immediate future might continue to see cautious business investments and consumer spending due to uncertainty and the lingering effects of previous monetary tightening. The labour market might remain soft, with unemployment potentially rising if the economy does not pick up.
The lower OCR could eventually stimulate investment and consumer spending as borrowing costs decrease, assuming inflation remains under control. The tourism sector, a significant part of New Zealand's economy, might see further recovery as international travel continues to normalise post-pandemic.
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The government and RBNZ will need to balance fiscal discipline with support for growth. Policies aimed at enhancing productivity, supporting key industries, and possibly adjusting tax policies to encourage investment could be pivotal. Structural reforms in areas like housing might also be necessary to boost economic confidence.
New Zealand's economy is sensitive to global economic conditions, particularly those in major trading partners like Australia, China, and the United States. Any global economic downturn could delay recovery, while a robust global growth might accelerate it.
Significant improvement could be gradual, possibly not fully evident until late 2025 or 2026, depending on how quickly domestic and international conditions improve. However, initial signs of recovery might become noticeable in mid-2025 if current monetary policies gain traction and if there's an uptick in global economic conditions.
The state of the New Zealand economy, as reflected by its high household debt-to-GDP ratio, presents both opportunities and challenges. While there are signs of stabilisation in some areas like inflation, the broader economic picture remains challenging with recovery likely to be slow and uneven, if the current policies continue.
New Zealand's economic journey over the past century offers a compelling narrative filled with lessons on growth, resilience, and adaptation. From the post-World War II boom to the economic reforms of the late 20th century, and into the modern era, the Kiwi economy has navigated through various global and domestic challenges, providing invaluable insights for policymakers and economists alike.
In the aftermath of World War II, New Zealand's economy experienced one of its most prosperous periods. However, this prosperity was somewhat insulated, relying heavily on a single market, making the economy vulnerable to external shocks like Britain's entry into the European Economic Community, which redirected trade routes and forced New Zealand to seek new markets.
The economic lessons from the 20th century are clear. Diversification in both product and market is crucial for sustained growth. The heavy reliance on agriculture and a single export market taught New Zealand the hard way about the risks of economic concentration. The subsequent decades saw efforts towards diversification, but not without pain, as the removal of agricultural subsidies in the 1980s under Rogernomics led to a significant restructuring of the economy.
The housing market dynamics during the early 2000s also offer lessons. This period had a relatively stable housing environment, but policy decisions, including tax advantages for property investors and a lack of stringent regulations, led to a housing boom that has since become a bubble, significantly impacting affordability and skewing economic activity towards real estate rather than productive sectors. This situation underscores the importance of balanced policy making in housing, where incentives for investment must be weighed against broader economic and social objectives like accessible home ownership.
Fiscal policy post-Global Financial Crisis has taught New Zealand the value of maintaining fiscal discipline while also recognising the need for strategic spending to stimulate growth during downturns. The balance between debt management and economic stimulus is delicate, and New Zealand's approach has been to maintain credibility in global markets while ensuring domestic economic stability.
The modern era also brings lessons from trade policy, where the benefits of free trade agreements are undeniable, yet the need for domestic support mechanisms to help industries adapt to increased competition is evident. The economy's vulnerability to global supply chain disruptions, as seen during the recent global health crises, emphasises the importance of building resilience through local production capabilities and diversified supply chains.
New Zealand's economic history teaches us about the necessity of diversification, the benefits and pitfalls of economic liberalisation, the critical need for housing policy reform, the integration of environmental sustainability into economic policy, and the careful management of fiscal policy in an interconnected world. These lessons are not just historical footnotes but active guides for navigating future economic challenges, ensuring that New Zealand can continue to adapt and thrive in an ever-changing global landscape.
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