1.0 The Front Pages

The election is in the rear-view mirror and, depending on who you ask, the “largely ceremonial” or “very important” role of Deputy Prime Minister is to be shared, a first and a very interesting phenomenon that we will watch closely. The coalition agreements, between National and Act and National and New Zealand First, were tabled and it is full steam ahead with the 100-day plan. These agreements will shape much the domestic economic environment for the next three years. 

The new Government begins on the front foot with GDP growing by 1.3 percent over the year ended September 2023. This exceeded the expectations of the Treasury, which in the Pre-Election Economic and Fiscal Update (PREFU) had forecast 0.2 percent GDP growth, and the Reserve Bank of New Zealand (RBNZ) which forecast negative growth of 0.6 percent. 

Inflation continues to decline, falling to 5.6 percent in the year to 30 September 2023. However, the consequence of RBNZ’s efforts to bring inflation under control has been a further increase to the unemployment rate to 3.9 percent in September 2023. This follows the increase from 3.4 percent in March 2023 to 3.6 percent in June 2023. Despite the change in government this increasing unemployment trend looks set to continue towards a peak in 2025. 
 

The First 100 days

As the end of the year approaches and many of us start looking ahead to the summer holidays the new government will be getting to work implementing the 100-day plan. Addressing the impacts of inflation and the cost-of-living will be some of the first actions the new government takes. The Reserve Bank’s remit will return to a single mandate, with the removal of maximum sustainable employment as an objective. While this change is likely to have longer term impacts, short term relief will come from the new government’s commitment to cancel the increases to fuel excise duty and road user charges, and to repeal the Auckland regional fuel tax which currently adds 11.5 cents to each litre of fuel in Auckland. 

Although the reduction is likely to be welcomed by those filling up their cars as they leave Auckland for their summer break, the cancellation of future increases will be welcomed across New Zealand. However, it will leave holes in transport funding that will have to be filled from elsewhere. National’s pre-election fiscal plan indicates that it will contribute $3.7 billion from general taxation over the coming four years. National’s agreement with Act also allows more public private partnerships (PPPs), tolling, and value capture rating to fund infrastructure. So instead of the cost of roads being included in the price of fuel, expect to see more individual charges for transport such as the proposed congestion charging for Auckland. 

Tax relief to go ahead

National’s plan to lower taxes has survived the coalition negotiations, although there are some tweaks from the original proposal. As has already been well publicised, changes were required after New Zealand First refused to allow National’s proposal to relax the foreign buyers ban and impose a 15 percent foreign buyer tax on houses worth over $2 million. 

Households earning the average income will be better off by $100 per fortnight, and National’s FamilyBoost childcare tax rebate of up to $150 per fortnight will come into effect in 2024. However, the proposal to raise the Working for Families abatement threshold from $42,700 to $50,000 in 2026 is no longer planned. The Parties also confirmed no ongoing commitment to income tax changes beyond 2024. This includes National’s proposed increases to income tax thresholds which remain open for debate amongst the coalition partners. The agreements are silent on National’s proposal to link benefits to inflation rather than wages. 

The $740 million shortfall resulting from the failure to repeal the foreign buyers ban will be made up by reprioritisation and other revenue gathering. National’s agreement with Act will require public sector agencies to reduce spending on non-essential back-office functions. National had wanted a 6.5 percent reduction from certain public agencies while Act wanted a far greater reduction by returning the public service to 2017 levels. As a compromise there is no fixed proportion and expenditure reduction targets to be set for each agency informed by the increase in back-office head count since 2017, despite a population that has grown by 8.5 percent since 2017.

Other revenue gathering will come at the expense of New Zealand’s world leading anti-smoking legislation. National's coalition deal with New Zealand First will repeal amendments to the Smokefree Environments and Regulated Products Act 1990 and regulations before March 2024.

Although the new Prime Minister stressed that the tax revenue from tobacco sales was "not the motivation for doing it" new Minister of Finance Nicola Willis commented that "we have to remember that the changes to the smokefree legislation had a significant impact on the government books, with about a billion dollars there". However, this is difficult to reconcile with the 2021 Regulatory Impact Statement (RIS) prepared by the Ministry of Health to inform the former government’s decisions on the proposed legislation. The RIS concluded that the changes in smoking laws and regulations would result in an estimated $5.25 billion in health savings and $5.88 billion in extra income from productivity benefits, which would have resulted in more tax revenue as well.

A start on delivering much needed infrastructure

In our Winter 2023 Birds Eye View we highlighted New Zealand’s $210 billion infrastructure deficit. Both coalition agreements include policies designed to close this gap. National’s agreement with New Zealand First includes a commitment to establish a National Infrastructure Agency to coordinate government funding, connect investors with New Zealand infrastructure, and improve funding, procurement, and delivery to prioritise regional and national projects of significance. 

Within the first 100 days, the government will fast-track a one-stop-shop consenting process for these projects which are likely to include 13 roads of national significance, including Whangārei to Port Mardsen in Northland, the East-West Link in Auckland, Cambridge to Piarere in the Waikato, a second Mt Victoria Tunnel in Wellington, the Hope Bypass in Nelson, and the Belfast to Pegasus motorway in Canterbury.

New Zealand First is back in government and its desire to make its mark on regional New Zealand remains. The Provincial Growth Fund has returned, sort of, albeit with significant cosmetic surgery. The cornerstone of New Zealand First’s coalition agreement with Labour in 2017, it will make a comeback as the Regional Infrastructure Fund. This fund will have $1.2 billion in capital funding over the term to invest and will be overseen by the same Minister as the Provincial Growth Fund, Shane Jones. 

Increasing skills through increased immigration

The Employers and Manufacturers Association (EMA) Skills Shortage Survey 2023 identifies the current challenges faced by businesses in New Zealand in finding and retaining employees. Ninety percent of respondents with vacancies were struggling to fill those vacancies, and 71 percent of respondents said highly skilled jobs were the hardest to fill.

Nearly half (47 percent) of employers surveyed are considering immigration to address the current talent shortage and, among these employers, an overwhelming majority of 87 percent expressed an interest in utilising the Accredited Employer Work Visa (AEWV) category. These businesses will welcome National and New Zealand First’s commitment to Improve the Accredited Employer Work Visa to focus the immigration system on attracting the workers and skills New Zealand needs. The agreement also includes retaining the Apprentice Boost scheme. This will be popular with survey respondents, with 54 percent currently engaging with apprentices, and 24 percent planning to engage in the next 12 months. Meanwhile, the agreement with Act commits to increasing the cap on the number of workers under the Recognised Seasonal Employer scheme and removing median wage requirements from Skilled Migrant Category visas.
 

2.0 Special feature: Looking ahead to 2024

GDP outlook - more of the same

Uncertainty and volatility have characterised economic data in the post-pandemic world, making 2023 a year of unexpected twists and turns. Given the relentless natural disasters, wars, and the pandemic that have battered the global economy this volatility is not unexpected. Indicators such as GDP have been noisy and volatile. The graph below highlights the sharp ups and downs in growth from one quarter to the next across many economies, making it harder to predict the path ahead. The latest GDP data release showed that after being revised away, it turns out that GDP growth in the December 2022 and March 2023 quarters was in fact negative. GDP also fell by 0.3 percent in the September 2023 quarter. This means that New Zealand’s economy has not been as resilient as previously thought, especially when compared against other advanced economies. The United States of America’s (USA) economy has been particularly strong, as has Australia’s. 

2024 looks set to begin on a pessimistic note from a growth perspective. OECD projections put global GDP growth at 2.7 percent in the 2024 year, compared to 2.9 percent in 2023. In New Zealand, growth for the year is expected to be much lower at just 1.3 percent in 2024 according to the OECD. This is close to what the RBNZ is also predicting for the year ahead. This tepid prediction is attributable to high interest rates, a weak outlook for global trade, and low consumer and business confidence the world over. Although per capita spending has been falling in the second half of 2023 in New Zealand, aggregate demand is still outstripping the productive capacity of the economy, which means the RBNZ may see the need to inflict more pain in the form of higher interest rates than previously thought.  

Migration will continue to play an important role

Many advanced countries, including ours, have relied heavily on migration to generate growth. In fact, migration to OECD countries reached a record high in 2022, and this will almost certainly be surpassed by the end of 2023. These two years of record high migration levels have mainly been driven by labour shortages in advanced countries. New Zealand stands out amongst all OECD countries for having the largest increase in permanent-type migration (as a share of total population) between the 2013-2019 period (average) and 2022. Low GDP growth coupled with high migration has resulted in “per capita recessions” in several countries such as Australia, the UK, and even New Zealand. National disposable income per capita has been falling each quarter since the December 2022 quarter in New Zealand. The fact that GDP growth is not keeping up with population growth is worrying given that it points to a drop in living standards. 

The flow of skilled people from developing to developed economies, which has accelerated over the past two years, will have longer-term consequences for labour markets the world over. Advanced countries that are successfully attracting migrants stand to gain in many respects. Migrants are increasing the diversity of the workforce and boosting the working-age population by keeping the threat of ageing populations at bay for now. Migrants also have the most positive impact on the public purse as they contribute more in taxes than they receive in benefits. In 2023, New Zealand (shared with Sweden, Switzerland, and Australia) was the most attractive OECD country for highly skilled workers. The rankings factor in a range of categories including the quality of opportunities, future prospects, family life, and inclusiveness. Migrants play a key role in shaping the future prosperity of New Zealand. However, in order to continue to attract highly skilled migrants, there is an urgent need to address our growing infrastructure challenges to ensure equal access to high quality housing, education, health, and a healthy environment for all New Zealanders. Meeting these needs will become increasingly more challenging over the coming year in the context of high inflation, high interest rates, and governments reaching the limits of the amount of debt they are willing to hold.

Inflation outlook still uncertain

The biggest risk for the global and domestic economies this year has, by far, been inflation. The cost-of-living crisis has been front of mind for New Zealanders, dominating the election campaign. But our experience of high inflation and cost-of-living has not been unique. Other advanced economies have also been battling rapid price increases in recent years. Where New Zealand’s experience does seem to diverge is in the “stickiness” or persistence of high inflation. The pace of price increases has slowed down considerably from peak levels in many other advanced countries. However, as the graph below shows, inflation is not reducing fast enough in New Zealand. Inflation is now being driven primarily by domestic factors (non-tradables) including central and local government charges, household utilities, and insurance premiums. In fact, the RBNZ noted in the November monetary policy statement (MPS) that inflationary pressures were higher than in the August MPS. Our high rate of migration has played a role here too by placing pressure on productive output, which has not kept up with increasing demand.

In light of this, the RBNZ has put further rate hikes back on the table as other central banks, such as the USA’s Federal Reserve, pivot to considering rate cuts. It is not at all clear whether we are out of the woods yet and central banks all over the world hope to avoid the costly mistake of loosening rates too early and will most likely err on the side of caution, even if this comes at the cost of a recession and high unemployment. It is important to remember, however, that this trade-off is temporary and in the medium- to long-run, growth will recover, in theory creating more employment. 

The RBNZ has indicated that the OCR is expected to remain contractionary until the end of 2025. Lower demand, slow global growth, and loose labour market conditions will eventually lead to lower inflation domestically. However, the high level of migration poses upside risks, particularly for house prices. CoreLogic’s house price index showed a 0.7 percent rise in property values in November alone. Population centres such as Auckland, Hamilton, Tauranga, Wellington, and Christchurch all saw monthly rises in the range of 0.7 percent to 0.9 percent. 

Brace for higher unemployment

So far, the labour market has remained remarkably resilient, even in the face of rapid interest rate hikes and less than impressive GDP growth. In the February 2023 MPS, the RBNZ was expecting unemployment to reach 4.8 percent by December 2023. Although rising, it is currently standing at 3.9 percent, which is largely in line with other comparable countries. The resilience of labour markets throughout 2022 and 2023 globally has no doubt played an important role in driving the migration of young, working-age people in and out of developed countries. 

We are, in all likelihood, headed towards a future with higher rates of unemployment that are in line with pre-pandemic levels. December numbers will undoubtedly show another increase. The increase in unemployment in New Zealand is higher than what the OECD is projecting for other member economies. The OECD expects only mild increases over the next year with OECD-wide unemployment stabilising at 5.1 percent. In New Zealand, unemployment is expected to peak at 5.3 percent according to the RBNZ. Labour demand has already been falling, and over the year to September 2023 online job advertisements have fallen by 24.5 percent according to the All Vacancies Index (AVI) produced by the Ministry of Business, Innovation and Employment (MBIE). As a result, wage inflation will also start to ease as the balance of bargaining power shifts back towards employers. The AVI for the year to September 2023 showed that while job advertisements fell for jobs of all skill levels, the biggest drop in demand was for unskilled roles such as labourers. If inflation does not come down rapidly over the next year the combination of high inflation and higher unemployment could intensify the cost-of-living crisis, the impacts of which are very real for households with lower disposable incomes. Charities all over the country are reporting an unprecedented increase this year in the number of people, including those in work, seeking support with essentials such as food. 

The need for fiscal contraction is growing

The issue of high public debt is, again, something a number of advanced countries are struggling with. It should be noted, however, that New Zealand’s debt-to-GDP ratio is on the lower end of the spectrum compared to other OECD countries. Nevertheless, it is still high by historical standards. Several factors have converged to create these conditions. For starters, governments introduced a range of COVID-19 support measures, which required borrowing large amounts in a low interest rate environment. Interest rates have since skyrocketed, increasing the debt burden. Longer term trends such as ageing populations and the climate transition will continue to tug on the fiscal purse. The OECD has highlighted that there is a need for fiscal policy to match the constraint of monetary policy in New Zealand. Fiscal consolidation is not happening fast enough. A number of policies introduced by the new government look to be inflationary, including tax cuts and incentives to continue to invest in housing. A weaker labour market and economy will not help as the tax take from businesses and individuals will reduce through 2024. The new government has a mammoth task of displaying fiscal restraint and discipline in the face of rising calls for increased spending on education, health, water and transport infrastructure, and a range of other key areas as all eyes are on them.

2024 will be the year of elections

Many breathed a sigh of relief as electioneering came to an end here in New Zealand and the new government was sworn in last month, providing much needed certainty to both the public and private sectors. From a global standpoint, 2024 will be the biggest year for national elections in history. Voters in 40 countries, representing 41 percent of the global population, will head to the polls during the year. These countries account for 44 percent of global GDP, and include major economic powerhouses such as the USA and India. And China will undoubtedly be keeping a close eye on the Taiwanese elections. What will this mean for New Zealand? For starters, gains on the trade policy front may be slow given the uncertainty around policy direction beyond 2024 in these countries. There is also a high risk of a rise in disinformation, heightening the deterioration of trust in governments. The range of possible outcomes from these elections will play an important role in how the global economy diverges from the path it is on currently and could act as a further drag on growth next year.

3.0 BERL forecasts

GDP growth in the last quarter (-0.3 percent) leads to what we anticipate being a long, slow road to recovery. Over the coming year, economic growth will be muted in the face of high interest rates and the weak global growth outlook. High net migration may continue to lend a helping hand towards propping up growth. The recovery of the services sector may also be a bright spot. But other drivers may not be as strong. Households continue to face a gloomy outlook as increased mortgage repayments weigh down spending. Retail sales volumes are still trending downwards. Weak economic conditions for our key trading partners and low prices for our key exports will also have an impact on New Zealand’s growth prospects. Looking beyond 2024, assuming inflation and interest rates begin to trend downwards, higher investment and consumption will lead to an increase in productive capacity, and eventually higher growth rates. We see growth slowly inching upwards over the next few years.

Inflation has peaked and is starting to ease, albeit slower than the RBNZ would like. Although international price pressures have eased, domestic forces (non-tradables) are still at work. We expect inflation to remain above the RBNZ’s target range of between one and three percent throughout 2024 and the first half of 2025. Oil price volatility is an upside risk to future tradeables inflation. High demand from increasing net migration will continue to exert upward pressure. We expect inflation to ease to the RBNZ’s target rate of two percent in the latter half of 2025. Thus, we anticipate that the current economic environment of low growth, combined with high inflation, will persist over the medium term. 

Growth in FTE employment has been unprecedented over the past year as demand for labour surged in the aftermath of COVID-19. Recent migrants helped fill these new roles in an exceptionally tight market. Looking ahead, the labour market is expected to gradually lose steam as demand for goods and services falls. Labour demand, as measured by job advertisements, is already on the downturn in all regions of the country. In the context of low growth, there is not much scope for the economy to add new jobs. As unemployment and underutilisation increase, FTE growth will be marginal over the next two years. Once the economy begins to add productive capacity, the number of filled jobs will begin to rise at a faster pace again. However, it is unlikely that the 2023 rates of growth will be replicated.  

The buoyant labour market has, so far, provided resilience to the domestic economy. However, the period of historically low unemployment is over. Unemployment usually increases with a lag as employers reduce new hiring, and then make workforce cuts if economic conditions continue to deteriorate. We have already seen a few quarters of rising unemployment. Underutilisation is also increasing fast. We are still expecting unemployment to peak at around five percent in 2025 as the RBNZ keeps interest rates at elevated levels. We also see unemployment remaining at around five percent through to 2026.

The recent surge in net migration has been a consequence of the international borders reopening to new workers after a long closure in an exceptionally tight labour market. Over the past year, net migration has climbed to levels not seen before. In the year to September 2023, net migration inched towards 120,000 people. This was more than double the pre-pandemic average of 50,000 people a year. As demand for workers falls, so will net migration. In the year to June 2024, we see the net inflow falling to 60,000 people and returning to the pre-pandemic average after that.

Growth in exports, which has largely been driven by high international prices for commodities, will come off recent highs. Low economic growth in key trading partners, such as China and the EU, does not bode well for New Zealand’s export market as demand for our goods and services will drop. The prices for our key commodity exports are also falling. Export growth is already starting to slow down as commodity prices return to pre-pandemic levels. As global inflation slows, export growth will depend more heavily on growth in volumes rather than being value-driven. Import growth is also expected to slow down as domestic demand, particularly for goods, is falling with households tightening their belts. There are risks to the upside as oil prices could spike again.

The focus of the next government will be to bring the operating balance before gains and losses (OBEGAL) into the green. A sluggish economy will not help to meet this objective with the tax take from individuals and businesses expected to fall in 2024. Thus, we see the OBEGAL deficit rising from 2023 levels in 2024 and eventually narrowing as economic conditions improve.
 

All % growth rates are annual June years

We have simplified the contents of our forecast data tables to focus on a selection of key variables. If you would like to obtain forecasts of other variables not shown, please email info@berl.co.nz or phone +64 21 868 190.