Well, that was certainly quite a lot of fuss over something that (probably) happened three months ago, wasn't it?
And now here we are busily talking the Official Cash Rate down to zero (well, I'm exaggerating, I've seen 2% now mentioned seriously).
The 0.9% decline in GDP for the June quarter, as revealed by Statistics New Zealand last week raised a whole heap of issues, which, I'll try to make some sense of here. Balance and perspective are needed.
The Reserve Bank has its next review of the OCR (currently at 3.0%) on Wednesday, October 8. I'll have much more to say on that directly next week when I preview the decision.
Clearly though, the RBNZ is back in the gun again.
Let me try to assemble some of the facts as best known. The GDP result was a nasty shock because the figure was so much worse than any predictions. The RBNZ had forecast -0.3% while economists were in a -0.3% to -0.5% range.
Do we believe the -0.9% figure? Well, we'll have to wait and see how accurate it is, won't we. I instinctively doubt the economic performance in the quarter was as bad as that. And I will not be surprised at all if we see a bounce back by a similar, if not slightly higher amount for the September quarter. Although we won't sadly see that result till mid-December. (If you were wondering, doubts over the accuracy of the figures are why I used the word 'probably' in the first paragraph).
Surely the whole timeliness issue here is a big part of the problem.
Timely and accurate would be good - we don't have either
If we are going to have to wait ages for data, then we want it to be accurate. But if we look at some of the massive revisions that have taken place to our GDP figures in the past year well, sadly, we know that's not always the case.
There appears to have been quite a shift in emphasis at the RBNZ since the middle of last year in terms of paying closer attention to more timely 'high frequency' data. They are not going to say they don't 'trust' the official data. But their actions may well indicate that. The change in emphasis came after the RBNZ horrifically misread the tealeaves in its May 2024 OCR review and Monetary Policy Statement and actually INCREASED the perceived possibility of another OCR RISE.
But as high frequency data started showing an economy heading off the cliff in June 2024, so, the RBNZ, to give it some credit, rapidly reversed direction in its July OCR review and indicated cuts ahead.
Fast forward to the middle of this year, 2025, and we had a very interesting situation developing. On June 19 Stats NZ announced a 0.8% (subsequently revised up to 0.9%) rise in GDP for the March quarter.
I wasn't celebrating. On June 16 - three days before we found out officially what happened in the March quarter - I wrote up the latest BNZ – BusinessNZ Performance of Services Index (PSI) for May, which showed a massive drop in activity. The services sector makes up about two thirds of GDP. In addition, the BNZ – BusinessNZ Performance of Manufacturing Index (PMI) for May that had been released on June 13 also came down with a bump.
So, in other words, we didn't officially know yet what had happened in the March quarter - but we had some reasonably clear indications the economy was tanking again in the June quarter. And those indications were proven correct.
How about a monthly economic snapshot?
Would it have helped to have 'officially' known earlier of the June quarter slump? Well, yes.
The RBNZ relies on accurate, timely, information on the economy on which to base its monetary policy stance.
In this year's Government Budget, funding approval was given for Stats NZ to begin a monthly Consumers Price Index (it's quarterly now) - but not till 2027. Never mind, it will help.
However, we definitely also need some sort of monthly economic snapshot. Now, it could be argued that a monthly series might throw up rogue results. But is that any worse than our current situation where we wait three months for the data and then can't be confident it's accurate anyway? I think not.
In the meantime, we must do our best with the information in front of us. As must the RBNZ.
Given that the official version of GDP for the September quarter won't be with us till December 18, what is the 'high frequency' data suggesting thus far about how this quarter is travelling?
Well, better. That's what we need to bear in mind ahead of the RBNZ's last two OCR decisions for this year.
Things are looking up
Without going into chapter and verse, I can say that retail spending figures are now moving up (although, goodness, they needed to), employment stats are starting to look firmer, as are job ad stats. Our exports - led by the primary sector - are going well. The only real negative I've seen so far, and it is significant, is that activity in both services and manufacturing slipped again in August after reasonable bounces in July.
If that hadn't happened, I would be feeling rather more confident about the GDP outcome for the September quarter - but I am going to stick with my view that there will be a reasonable lift. Things will get better. I think the RBNZ definitely overdid the extent of OCR hikes between 2021 and 2023 and that's why the recovery's taking time.
But, anyway, without going into detail of what the RBNZ might do with the OCR on October 8 - because I'll do that next week - what is now needed and what will help?
The RBNZ indicated after the August OCR decision that only around half of the 250 basis points worth of OCR cuts since August 2024 had so far fed through into the economy. That's right, about another 125 still to be 'felt[ and that's before we add in any more cuts that might be made subsequently.
Amid the clamour for an ever-lower OCR, we need to bear in mind such facts. How much more cutting can help in one go and when do we start risking over-cooking the cuts, such that the economy (for 'economy' read 'property market') starts to heat up. And yes, as I've said before, we are miles from that situation at the moment, but these things can turn real quick. We've been there and done that.
Over to you, RBNZ
It's up to the RBNZ to decide how much more cutting is really needed given that the economy is 'seemingly' picking up again.
What would be really, truly, helpful is if we can avoid getting these nasty shocks. For that we've simply got to find a way of measuring our economy more often, in a more timely fashion. And as accurately as possible.
Good economic data is not a nice-to-have, it's an essential - if we want to keep our economy on an even keel.
We can't have the RBNZ resorting to what looks suspiciously like educated guesswork when it's setting our interest rates.
We deserve better. We need better.
Here's to no more 'June swoon' shocks. We can't stop bad economic news. We can just be better prepared for it - and be able to react to it faster.
36 Comments
'We deserve better. We need better.'
What anthropocentric arrogance. The RBNZ are as blind to the problem, as pretty much every economist and economics reporter (listen to Ryan/Brunskill yesterday - 2% growth ad-infinitum taken as read by both; a total back-cast-to-project-forward nonsense. 2% growth doubles in 35 years. And doubles that in the next 35. ).
The problem is the increasing entropy - our best-first approach to everything (mining, city-siting, corridors) means that every 'next' option is 'worse'. And it's a compound problem; the oil now takes more of the oil, to get the oil. The copper now takes more of that oil, to get the copper (EROEI has reduced from 100:1 to below 10:1, while 10 tons of overburden-removal has become 400 tons - none of this figures in economist's equations, and increasing debt distorts any impactive repercussions).
And identifying what a real economy is, would help remove things which aren't (ponzi speculation, virtual this, virtual that) - again, economics as taught doesn't its students any knowledge or skills which would help them differentiate.
We are entering a permanent period of increasing entropy - pushing of a piece of limp spaghetti (shifting interest rates) will be an increasingly useless tool. Although the realisation will likely come too late...
I think it will shoot up next one. Primary industries are raking it in.
Agriculture makes up about 5% of our GDP - I don't see it being a game changer. Also, exports are cyclical - strong prices means more global production which leads to lower prices - probably next year.
Keynes,
That figure is not accurate, as Professor Keith Woodford has pointed out more than once. It takes no account of all the ancillary services and employment created around farming. Farming real proportion of the economy is much higher. Jacqueline Rowarth, Adjunct Professor at Lincoln University in a herald article recently. " The wider dairy sector purchases goods and services from approximately a third of all industries in the NZ economy(NZIER reported 40 industries for dairy farming accounting for 41% of GDP and 33 industries for dairy processing accounting for 29% 0f GDP). farmers also purchase professional services to support their operations, $933 million on agricultural services(contractors for example), $433 million on financial services and $200 million on accounting and tax services."
The 5% figure hugely underetimates the impact of agriculture on the economy.
That's a fair counter point. But here's another factor to consider - the levels of debt held by the farming sector - if it is high then farmers will use surplus income to pay down debt first before they spend.
Rural debt has basically stayed between $62-$64b for almost seven years. Very surprised at that.
Rabobank surveys 6 months ago suggested debt repayment was the main intention and in the most recent survey the intentions have shifted to investment.
Keynes,
Quite possibly. I simply wanted to dispel the idea that the value of farming to the economy is only some 5%, when it is much higher than that.
Farmers getting rid of debt is a great thing.
I think you have touched on a really good point here. When we throw interest rates around we know it impacts housing more than anything. And the wide held belief is construction is a reasonably small part of our economy. But I live in Tauranga and from what I see the house building industry and ancillaries were a very large proportion of the economy. Hence why this recession is so severe. It didn’t just impact house construction. The trickle through effect's have been massive. Take Kitchen things. That’s classed as “ retail”. No it’s not it’s housing. And so on.
If.you add up all sectors claims about the proportion of GDP they contribute will the answer total more than 100%....
Yes.
We even have stupid folk saying the government should pay for Taylor Swift to come. Because folk will spend up large on food, alcohol and accommodation.
I'm quite happy for folk to go see Taylor, fun is good. But it is not the business of government. And it does not help the economy much.
What next. the government promoting car crashes. So the repair industry turnover increases ? And the money spent on the health service has to go up.
Articles are beginning to sound like a broken record. It's all on the reserve bank and interest rates - that's the only economic lever available to the country. There are no other levers for economic growth - apparently we are hapless victims of circumstance.
Especially when the government have openly admitted their goal of cutting spending to 30% of gdp. No help coming from them.
You say that but recent announcements by the government to bring forward maintenance and build projects suggest the coalitions inner Keynesians - probably people at Treasury and in the business sector - have spoken up and been heard.
An increase in government deficit spending is the standard counter-cyclical tool (one that has been used globally since the 1930's) that no NZ economist is allowed to mention for fear of career termination.
The collapse in Q2 GDP has forced Willis to pull this lever and I expect this to ramp up going forward and into election year - without it the NZ economy will stay down and continue contracting.
The (re) announcements are both marginal and too late.
Yes - I think so but it might be enough to shift the dial a little - especially if they do more of it quickly. Let's see what happens over the next couple of months. I expect the Willis team is panicking. Their current economic plan has set the NZ economy into a self reinforcing contraction. Time to get out the Keynes textbooks and start reading fast.
Broadly targeted and direct injections of new money into the economy are needed. Too many of the coalitions policies are pushing costs off the governments books and onto the private sector - effectively removing money. That comes at an economic cost - it is not a benefit to the private sector to have lower taxes and lower government spending.
If you havnt realised by now that Keynesian thought does not figure in neoliberal thought by now you never will.
Despite the mountains of historic economic data going back to the 1930's. It's actually impressive how studiously and meticulously NZ economists and commentators avoid mentioning fiscal policy. Even when it's punching them in the face with obvious economic indicators and data.
How fast do you think stimulus coming from government can kick in? From first discussion of policy to hitting GDP?
Good point. Not sure. In time for the election will be the governments hope.
Personally I don’t think they should make any massive changes to spending now. The economy will pick up regardless, all a spending spree will do is create inflation and worsen our debt.
Let's see - as a Keynesian I say the NZ economy only recovers from here with increased government deficit spending. And I predict that this is what's going to happen over the next few months. Along with higher immigration - this is another standard way to grow demand in the economy.
If you believe in fiscal stimulation, then go out and spend a few grand on your credit card. You can get it done this afternoon.
That's not what she told Sean Plunket yesterday. She's still determined to achieve a net reduction in spending. The recent infrastructure announcements are what the government should be doing anyway. It's all smoke and mirrors while the RB is left to do the heavy lifting.
The government will take all the credit of course.
In the end economic reality will determine government policy - so far the belief in supply side policy tweaks and fiscal consolidation have delivered a continuous, unhalted and growing economic contraction.
Winning next years election will force the coalitions hand and there is going be announcements around increased and urgent spending by the government over the next few months.
https://www.rnz.co.nz/news/business/569726/truckometer-data-shows-econo…
Unfortunately both indicators require an uplift in imports.
GDP Q3 figures will be bad too, Q4 likely to improve.
That sounds about right.
How much effect to you think the fall, not only in prices, but volume of sales, in house sales has had?
Especially given that all the RB use to have to do to 'stimulate' the economy was lower interest rates, which the majority of the stimulated growth was an increase in house prices and turn over.
This is not happening with lowering of interest rates now.
Property sector: New Zealand’s economic powerhouse - Property Council New Zealand
latest analysis reveals the sector’s direct contribution to GDP has soared to $50.2 billion, marking a remarkable increase of $25.4 billion since 2012. This impressive figure now accounts for 15% of the country’s total GDP.
In a way the bad June GDP could turn out good for the government. Let’s say they get 0.3% growth in the next 3 quarters, we will go into the election with the feeling that things are slowly picking up when in reality it will be a year of no growth.
Unemployment is still rising and the announcements are rolling in of business closers and restructures. We'll need to wait for this to stabilize.
We need confidence and right now lack it
We get jobs data weekly, credit flow and govt spending monthly, benefits data and ird primary income data monthly. These datasets collectively tell you what's going on.
Some call it cost cutting. I see it as shifting the resource to better uses.
I agree David, the data is old, there are definite signs of improvements in most areas, and as you note, there is key relative data to flow through post-the next OCR, inflation is already tracking up, and enough has been done for now.
There is also still the flow on from the large drops the last 3-4 months that have been passed on to borrowers, and with another $135b in lending to come up for review in next 6 months, there is plenty to go wrong with over-cooking the OCR drops.
I'll say it again; Banks are posturing to lower rates so testing rates can reduce and then they can lend more. That is a problem for borrowers in the future, and a risk to households when invariably the OCR will need to be firmed up to cool inflation.
I think a small drop or none, wait and hold, until after Christmas would be a smart move to stop the "Boom-Bust our small economy is seeing.
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