The two most comprehensive forecasts of the New Zealand economy are by the Reserve Bank and the Treasury. They are especially important because they inform monetary and fiscal policy. What do they say?
Shortly after the Reserve Bank and Treasury published their end-of-year forecasts, Statistics New Zealand announced a 2.0 percent GDP increase between the June 2022 and September 2022 quarters. The forecasts published after the September quarter had finished were 1.3 percent for Treasury and 0.9 percent by the RBNZ. I leave you to judge whether the forecasting errors were too large, noting that SNZ may revise the figure when further data comes in.
Whatever, the point is that economic forecasting errors are not hanging offences. This is but another illustration of how difficult forecasting is and that any recent or forecast figure is subject to a error. In contrast, when the figures are published, they will be discussed by journalists and the commentariat as if they are accurate to the last decimal point. That is simply not true. It is said that economists use decimal places to show that they have a sense of humour; commentators because they havn’t.
So, what are we to make of the official end-of-2022 forecasts? Although they are independent, they tell similar stories through to the March quarter 2024; over the period they expact no GDP growth. (After March the two official forecasts diverge, with Treasury expecting annual GDP growth of a respectable 3 percent – about normal for the decade before Covid, while the RBNZ thinks it will be nearer half that.) As we have already seen, neither forecaster will get the profile exactly right but let’s assume they are broadly right and that output will be near flat for 2023. (I am focusing on this period because it covers the run up to the election, which most commentators will explicitly or implicitly focus on.)
Why do they think the economy will not be growing? A broad explanation is that people will be spending less in real terms, as will the government, while the housing and business sectors will be investing less. Why? Each expenditure component has a different story.
Private Consumption is down because of consumer inflation with nominal incomes increases not keeping up with prices. An additional factor is higher interest rates which reduce discretionary spending for those with debt, such as mortgages. But the savers who are beneficiaries of the higher interest rates will not increase their consumer expending as much. Some of the government’s income support to individuals is about to be unwound too; the reasons are in the next paragraph.
Public Consumption is down because the government is trying to restrain spending to reduce its outstanding debt; it is partly unwinding the spending boosts for dealing with Covid. There is a political judgement as to how quickly we should be getting the public debt-to-GDP ratio down. Note that in June 2027 (four years away), government spending is expected to be only fractionally higher than it was in 2018 when the Ardern-Robertson Government came to power. Lest we forget, recall that level of spending has led to a broken-down public service, which has yet to recover. (Of course, a change in government or government policy could alter this story.)
Residential Investment appears to be falling off. To what extent this is because enough houses are being built or whether supply constraints are slowing down the building program and what is the effect of falling house prices is a column unto itself. (An example of the latter is that last October Carter Holt announced it has had to constrain timber supply for 18 months.) Higher interest rates are not helping. The Business Investment story is similar with supply constraints and higher interest rates inhibiting business.
On the growth side, Net Exports (exports minus imports) are providing some positive boost, while the terms of trade are expected to remain high and slightly higher, which means that real income growth will be slightly higher than real production growth.
I shall be paying close attention to the unemployment statistics. Employers are desperate for workers at the moment; some are even shutting down at times when, though they know there is strong customer demand, they cannot get the staff. It will be interesting to see whether the flat GDP will result in much higher unemployment – both the RBNZ and Treasury think it might.
It is not a happy picture, but elsewhere in the world the outlook is gloomier with forecasts of a serious international recession this year. A close international watcher turns to New Zealand for cheer.
Now for the caveat. There is a little population growth expected. A flat GDP and with National Income (allowing for the terms of trade) only a modicum better means that average real incomes per person are falling. But they do not fall uniformly. Some households will be suffering drastic reductions in their income available for spending after they have paid their mortgage expenses. While not in any way wanting to detract from their difficulties – I was one of a number who pointed out, during the Minsky bubble housing market, that this it was bound to happen – such struggling households are easy stories for journalists. Writing about people who are doing well is much harder; such people will be harder to find too. Even so the media portrayal will be of wider hardship than is actually happening.
In summary, the first column of the year opens on a gloomy note. It is, of course, easier to write about the economy in retrospect. I used a third-world-war trope to describe the impact on the economy. It is not just the guerrilla viruses are still romping around. Jack Baker’s authoritative history of the economy of the economy in the Second World War points out that it took twice as long to recover from the war as it took to fight it. Perhaps we are still in post-Covid recovery. The war in Ukraine must be adding to the difficulties.
I have said nothing about the politics of the 2023 economy. Other people have a comparative advantage in that area. But it will be helpful if they do not confuse what is happening to the economy with their political preferences, that is why the official forecasts are a good anchor.