New Zealand Treasury says it expects to downgrade its economic and fiscal forecasts relative to Budget 2024 when it provides a half-year update next month, as the recession has been worse than expected.
In a speech to the Chartered Accountants tax conference, chief economic advisor Dominick Stephens said the latest evidence suggested the recession would be deeper and last longer than predicted in May.
The agency had forecast Gross Domestic Product to rise 0.2% in the June quarter but it actually fell by the same amount. Spending on electronic cards in October was 1% lower than a year ago, and activity indicators showed little or no growth in recent months.
Plus, businesses were reporting current trading conditions as being worse than any time since 2009, excluding the depths of the Covid-19 pandemic and its response.
Stephens said an ongoing slowdown in labour productivity had continued and was also likely to contribute to a worse economic outlook than what Budget 2024 was based on.
“Economic growth has proved slower than anticipated. Weaker economic growth means a smaller economy and less tax revenue, increasing the challenge for the Government in balancing its books”.
He said the fiscal impact could be even larger than usual, as tax revenue had also fallen short of expectations — even after accounting for the slowdown.
“Recent monthly data has shown that tax revenue overall has been close to the Treasury’s Budget forecast, but the detail reveals that GST collections have been surprisingly low relative to underlying economic activity. If this trend continues, there could be further downside risks to the Treasury’s revenue forecasts”.
GDP per capita has fallen 4.6% since late 2022 and likely continued to drop throughout the second half of 2024, despite the Treasury predicting a recovery in Budget forecasts.
Productivity hits zero
Stephens said the “deteriorating economic outlook” was not only because of a deeper recession, but also because of a sustained productivity slowdown.
“Labour productivity measures the amount of GDP produced per hour of work, and improving it is key to lifting economic growth and living standards.”
“Productivity growth averaged 1.4% in the 20 years up to 2013 but slowed to zero from 2014 until the end of 2019,” he said.
Oddly, labour productivity surged at the start of the pandemic but it was only a brief interruption to the trend which began in the mid-2010s and has continued.
“As this reality has slowly been revealed by the data over the past two years, the Treasury has lowered trend productivity in successive forecasts,” Stephens said.
This isn’t a problem unique to New Zealand, productivity has been slowing in other countries as well. The Treasury has said causes may include weak capital investment and a reduction in international trade and connections.
“There is scope for policy to help lift productivity growth over time by focusing on key areas such as private investment and capital intensity; internationalisation; innovation and the diffusion of new technology; and regulation and the competitive environment”.
Stephens said each downward revision of economic growth forecasts made it harder for the Government to bring its revenue and expenditure back into balance.
“The only certainty in economic forecasting is uncertainty. The Treasury will continue to update its forecasts, including its productivity forecast, as more information comes to light”.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.