New Zealand's economic ‘recovery’ is delayed by up to two years, says Brian Easton

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

The Treasury economic forecasts for May budgets are usually settled in April to feed into the fiscal forecasts and, critically, the borrowing program. They can be changed in the interim six weeks if anything happens. (Not too difficult with a fully balanced forecast; I was once involved in a morning rejig following Muldoon’s imposition of the wage and price squeeze – the printer’s deadline was noon.)

This year, very unusually, the Minister of Finance gave us a glimpse of the April forecasts when she released the GDP, CPI and unemployment figures at the end of April. She felt it necessary due to the uncertainty arising from the turbulent state of the world’s oil markets. There were four scenarios, ranging from what if Trump had not attacked Iran (the ‘base forecast’) to a long closure of the Strait of Hormuz. I’ll focus on the mid-scenario (2) with growth down and inflation and unemployment up.

Treasury's March 24 conflict scenario table

The base forecast – a revision of HYEFU – has a slightly stronger growth forecast in GDP than the end-of-2025 view, but essentially it is the same expectation that New Zealand was in the ‘recovery’ phase of the economic cycle before the Iran War. Unemployment is fractionally lower and inflation fractionally higher. An experienced forecaster would think the changes were within the margins of error.

Scenario 2, based on $US135 for a barrel of oil and other international supply disruptions from the Iran War well through to the end of the year, has markedly lower GDP growth, especially in 2026. Unemployment is up, too. Not surprisingly, inflation is up, fuelled by the higher oil prices, again especially in 2026 when the Treasury thinks annual inflation will be 2.5 percentage points higher in the middle of the year.

The Treasury forecasts of interest rates were not released by the Finance Minister, while the fiscal forecasts are not a part of the economic forecast. However, it seems likely that the government’s debt servicing costs will rise and its (tax and other) revenue will be down compared to the HYEFU25 forecast. It seems likely that the purpose of the announced cuts in public services is to meet the government’s debt level target on time. 

We don’t know which scenario Treasury will settle upon. Willis was hoping for Scenario 1, which involved the supply of oil returning to normal by the end of September. It would not be all over by the NZ election (November 7), but things would be settling down. Scenario 2 (used here) assumes the Strait of Hormuz is constrained for a longer period.

It depends on Trump – economists have little skill in predicting his behaviour. We know his party faces the midterm elections (November 3), and it is bleeding support from the Iran War. The Iranians know that, too.

The government will be arguing it is not its failure, but the consequence of the Iran War. Fair enough, but the public, facing higher unemployment and inflation, may not be so forgiving. Nor may be the Credit Rating Agencies, who are but representatives of the bond market, as in, ‘I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.’ 

It is a gloomy outlook. It seems likely that the relevant indicators during the next election will be worse than they were at the end of 2025. Unemployment will be higher than during the 2023 election; inflation lower. In effect, the ‘recovery’ is delayed by up to two years.

The apparent failure of this government does not mean that the opposition is on top of the problem. Slick Willis aside, nobody may be, although I shall set out an alternative fiscal strategy over the next few months, which will be consistent with rational economic analysis and the demands of bond markets, which can be implemented by those with quite different ideologies, to implement, extremists aside. However, the period during an election campaign is the wrong time for such serious discussions.

Apologies for being so gloomy. You don’t have to listen to Cassandra; the Trojans didn’t.

Endnote 

While I accept that the economic cycle was going into the recovery phase before the Iran War, my judgement is that it is a weaker upswing than the Treasury set out in the HYEFU25 and the April-published ‘base scenario’.

I understand and respect how Treasury may think the upswing will be stronger than I do. Their underlying assessment of the long-term (secular) growth rate is an average of past growth rates, whereas I think that the long-term (secular) GDP growth rate has slowed down throughout affluent economies. (See chapter 7 of In Open Seas.) It is difficult to be certain until we have a lot more data. A slowdown means a projection based upon past performance will overestimate the growth rate. 

There is much evidence of businesses struggling. Some big firms are closing down; some small firms too, with fewer new entrants. The labour market remains soft. Anecdotally, people report that they are having difficulty finding jobs (not only those in Wellington).

Nor do I see what the drivers of the upswing are. There is no power in the engine to accelerate the economy: not the housebuilding market; not Shane Jones’ ‘Think Big’, which is still to come on-stream; not the public sector, which is heavily restrained. It is thought that the Fonterra payout will, at first, be used mainly to pay off Farm debt, so it will only feed into extra activity slowly.

A complication is that the higher oil prices draw off New Zealand income to offshore oil producers so that the Effective National Income is growing more slowly than output. That probably means that consumer spending will be slower than we might hope.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.