1.0 The Front Pages

At the end of July the government’s tax cuts, announced in Budget 2024, came into effect. However, the big story of the winter quarter was the Reserve Bank of New Zealand’s (RBNZ) 0.25 basis points cut of the official cash rate (OCR), to 5.25 percent, for the first time since March 2020.  

The RBNZ is confident that the high interest rates induced by the OCR have had their intended effect, reducing demand in the economy. The high rates combined with subdued global growth, slowing net immigration, and lower government spending have shifted the economy from a period of excess demand to excess supply. This was evident in the June 2024 GDP release, with a 0.2 percent decrease in GDP in the year to June 2024, putting the county back on recession watch.

Less pressure on resources domestically and lower imported inflation have driven the decline in headline inflation which fell to 3.3 percent in the 12 months to June 2024. In the August Monetary Policy Statement that accompanied the OCR announcement, the RBNZ governor Adrian Orr stated that “New Zealand’s annual consumer price inflation is returning to within the Monetary Policy Committee’s one to three percent target band” and that “surveyed inflation expectations, firms’ pricing behaviour, headline inflation, and a variety of core inflation measures are moving consistently with low and stable inflation”.

The announcement was immediately followed by most major banks dropping their borrowing and saving rates. Kiwibank decreased its home loan and business variable lending rates by 25 basis points and ASB reduced all its fixed home lending rates by between 10 and 34 basis points.

The RBNZ warned that the pace of further easing will depend on pricing behaviour remaining consistent with a low inflation environment, and inflation expectations remaining anchored around the two percent target. The RBNZ expects annual inflation to fall back within the one to three percent target band in the September quarter, forecasting inflation of 2.3 percent. It is then expected to gradually decline to two percent by June 2026.

Non-tradables remain the biggest threat to further rate cuts

As noted by the RBNZ, the annual inflation rate continued its slow return to the one to three percent target range. However, not all inflation is created equal. Annual tradable inflation, the price increases of the goods and services that are imported or are in competition with foreign goods, was just 0.3 percent. This is a result of declines in tradable inflation over the past three quarters.

Prices for goods and services less exposed to international competition increased by 5.4 percent. The trend of non-tradable inflation surpassing five percent annually has persisted since December 2021.

In the year to June 2024 housing and household utilities increased 4.4 percent. This was driven by increases in the costs of actual rentals for housing (up 4.8 percent), home ownership costs (up three percent), and increasing property rates and related services (up 9.6 percent). Additionally, insurance costs were up 14 percent year-on-year.  

Does this mean the economic tide has turned?

The RBNZ’s decision to decrease the OCR is just the first step of many on the road to economic recovery. GDP growth is negative, and the short-term forecast is not optimistic. The Monetary Policy Committee noted that there are a broad range of indicators pointing to a material weakening in domestic economic activity in recent months. Recent releases from Stats NZ, Seek, ANZ, and the Real Estate Institute of New Zealand (REINZ) highlight some of this weakening:

• In July 2024, the number of filled jobs was down 0.5 percent (12,464 jobs) compared with July 2023
• The number of new dwellings consented in the year ended July 2024 was down 22 percent from the year ended July 2023 and the annual value of non-residential building work consented was down 12 percent from a year earlier
• The value of electronic card transactions in retail industries in July was 0.1 percent ($6.3 million) lower than June 2024
• In July, the Seek NZ Employment Report showed that the number of jobs advertised on the site was down 29 percent on the same time last year
• In August, the ANZ Truckometer heavy traffic index, a good steer on production GDP in real time, was 3.3 percent lower than a year ago
• In August, the REINZ Monthly House Price Index fell by 4.7 percent year-on-year, including 5.3 percent in Auckland and 4.4 percent elsewhere.

At the end of August, ANZ released the results of its ANZ-Roy Morgan Consumer Confidence Index, revealing an increase of four points. This came on top of a five-point lift in July, with consumer confidence remaining well below its ten-year average. The view of ANZ was that consumers are feeling a little better overall. However, the bank noted that “for the person on the street, things are still likely to feel worse before they feel better.”  

Although the interest rate cuts are a positive start, the number of households with fixed rate mortgages means it will take time for these to flow through to households’ disposable incomes in a meaningful way.  

Businesses appear to be more confident in the recovery. In August, the ANZ New Zealand Business Outlook Business Confidence Index increased by 23 points to reach the highest level in a decade. However, as the index measures the percentage of respondents who expect an improvement against those who expect a deterioration, the hurdle to clear for expecting improvements is very low. Perhaps indicating that it can’t get much worse, rather than a positive outlook.  

Despite the OCR cut, unemployment is still expected to increase further

Subdued economic activity has meant that firms have cut back on hiring. The release of Stats NZ labour market statistics for the June 2024 quarter showed that the seasonally adjusted number of unemployed people rose by 8,000 to 143,000. This resulted in the unemployment rate increasing from 4.4 percent in March to 4.6 percent. For men, the unemployment rate was 4.5 percent, compared with four percent in the last quarter. For women, the unemployment rate was 4.7 percent, compared with 4.8 percent in the last quarter.  

The weak job market has seen the underutilisation rate increase to 11.8 percent. This is a 21.3 percent increase from June 2023. The 377,000 people underutilised include:

• 143,000 people who do not have a job but are available to work and are actively seeking employment
• 128,000 people who are employed part-time and who both want, and are available, to increase the number of hours they work
• 83,200 people who want a job and are available to work, but are not currently looking
• 23,000 people who are unavailable to start work, but are looking as they will be able to start work within the next month.

The RBNZ expects that labour market conditions will weaken further over the coming year. It is forecasting that the unemployment rate will continue to increase and peak at 5.4 percent in March and June 2024, before slowly declining to 4.5 percent by September 2027.

Despite the bleak unemployment outlook, the July Seek NZ Employment Report provides some optimism. The number of job advertisements on Seek in July increased three percent after an eight percent fall the month prior. This was the first time since January that job advertisements rose month on month. July’s rise was driven by increased demand in most regions, and in all but one industry (consulting and strategy). 

2.0 Special feature: Infrastructure 

The September quarter was a big one for infrastructure announcements. On 1 July applications opened for the Regional Infrastructure Fund. Then, at the beginning of August, the government announced the core components of its water services delivery model – Local Water Done Well. Fast-forward to the end of August and the framework for regional deals was announced, as was the 1 December start date for the new National Infrastructure Agency. This led into September, when the 2024-27 National Land Transport Programme (NLTP) was released.

Why the focus on infrastructure lately?

Infrastructure encompasses the physical and organisational structures and facilities that enable the production and movement of goods and services. New Zealand’s infrastructure is vital to our social and economic well-being. Energy, water, communications, social assets, and the transport of people and freight all play a critical role in supporting the physical, financial, social, and natural capitals that underpin our standard of living.

With our low population density and reliance on international trade (exports and imports), which makes up around 60 percent of New Zealand's total economic activity, businesses need the confidence that they will have reliable access to adequate infrastructure before they invest in New Zealand. Infrastructure that is fit for purpose is also key in the delivery of social services such as education, health, and justice.

However, despite the importance of infrastructure to our economic performance, New Zealand has an infrastructure deficit that is estimated to be valued at $200 billion. ASB Bank estimates that New Zealand will face a bill of up to $1 trillion over the next 30 years to bring the country's infrastructure up to the necessary standard.

New Zealand faces several challenges in addressing this infrastructure deficit, including the need to renew ageing infrastructure, the pressures of an ageing and urbanising population, tight fiscal constraints, changing technology, the effects of climate change, and the increased pressure on our natural resources.

New Zealand’s historic infrastructure investment

There are signs that New Zealand under-invested in the early 1990s, but investment levels recovered to their long-term trend by the early 2000s. Over the last 20 years, infrastructure investment has been roughly constant as a share of GDP, although individual sectors have seen increases or decreases. New Zealand’s current investment levels are average, or even above average, relative to other high-income countries.  

A report by the New Zealand Infrastructure Commission stated that In 2022 New Zealand’s infrastructure assets, excluding land, were valued at $287 billion with 45 percent owned by central government, 26 percent owned by local government, and 29 percent commercially or privately owned.  

New Zealand’s infrastructure assets have generally grown in line with the overall size of our economy. In 1990, the financial value of infrastructure assets was equal to 77 percent of New Zealand’s GDP, and in 2022, it was 79 percent. As our population has grown larger and wealthier, the size, quality, and utilisation of our infrastructure has also increased. This has seen the inflation-adjusted value of New Zealand’s infrastructure assets increase from $32,900 per person in 1990 to $55,800 per person in 2022.

Between 2003 and 2022, infrastructure investment averaged 5.8 percent of GDP. This included spending 3.4 percent of GDP on horizontal infrastructure which involves network structures, such as transport, electricity and gas, water and waste, and telecommunications. It also included spending 2.4 percent of GDP on vertical infrastructure which typically involves larger buildings, occupying more vertical space rather than being spread out, such as hospitals, education, public administration and safety, and social housing. 

From 2013–2022, New Zealand invested an average of $3,780 per person, per year, on infrastructure. Not surprisingly road transport was the single largest investment category, averaging around $700 per person, per year, all funded by central and local government. Electricity and gas, water and waste, and telecommunications infrastructure each had investment of around $450–$480 per person. Investment in school infrastructure averaged $250 per person and university infrastructure was at $360 per person. Hospital investment of $140 per capita potentially highlights an area for concern with an ageing population putting additional pressure on health infrastructure in the coming decades. 

New Zealand’s infrastructure investment is weighted towards maintaining what we have. For every ten dollars spent on infrastructure, almost six dollars went towards replacing existing infrastructure. This ratio is likely to continue, leaving four dollars out of every ten dollars of investment available for new or improved infrastructure.

Analysis by the Infrastructure Commission suggests that renewal spending for electricity distribution infrastructure, and existing flood protection infrastructure, equals or exceeds depreciation, meaning we are improving the quality of these assets. However, renewal spending is below depreciation for state highways, local roads, water supply, wastewater and stormwater infrastructure, and gas distribution infrastructure. This has shown up in the recent media reports about potholes in our roads, pipes that are bursting, and stormwater infrastructure that cannot manage high levels of rainfall.

Despite infrastructure investment remaining relatively stable over the past decade, the perception of the state of New Zealand’s infrastructure, and the investment we make, is likely to have been influenced by what we are seeing in Australia. Between 2008 and 2012, New Zealand infrastructure investment levels were comparable to Australia. However, since 2013, Australian infrastructure investment levels have increased significantly compared to New Zealand and the average of other high-income countries.

We invest as much as most other countries, but we are inefficient

A common solution proposed to close New Zealand’s infrastructure deficit has been to call for increased infrastructure investment. However, as the Infrastructure Commission identifies in its 2021 report, Investment gap or efficiency gap? Benchmarking New Zealand’s investment in infrastructure, spending more money does not necessarily lead to useful, high-quality infrastructure projects.  

New Zealand’s infrastructure investment, as a proportion of GDP, is comparable to the average of high-income countries. However, as the Infrastructure Commission notes in its 2024 Briefing to the Incoming Minister for Infrastructure “New Zealand’s biggest infrastructure challenge is one of investment efficiency. Our infrastructure is becoming more expensive to build and maintain, infrastructure prices have risen one-third faster than prices elsewhere in the economy, while infrastructure construction productivity has grown at one-third the rate of the overall economy.”

New Zealand’s infrastructure efficiency lies in the bottom ten percent of high-income countries. Put simply, we get less value from our infrastructure spending than most other developed countries.

Some of the reason for this lack of efficiency can be put down to factors we cannot easily change. We have a small population spread far and wide across two long shaky islands, distant from major markets. Countries with larger populations tend to have higher efficiency as they can sustain specialised expertise in delivering and managing infrastructure networks. Greater population density also increases efficiency as it lowers the per-person cost.

However, there are things we can do that are within our control. For example, improving the quality of our institutions, planning frameworks, investment decisions, and management of cost and delivery pressures. Countries with better institutions tend to have greater efficiency. The success of the fast-track applications process implemented in response to COVID-19 will be extended when the Fast-Track Approvals Bill is passed. This is intended to increase the efficiency of the applications.  

Volatility is bad for efficiency. Countries that experience swings in public investment tend to be less efficient. Stop-start investment patterns make it difficult to build capability and capacity to deliver efficiently. Certainty of the pipeline of work encourages the businesses that deliver the infrastructure to invest in capital and labour. This increases the capacity to deliver infrastructure which brings down the cost.  

The combination of demand for new infrastructure, increasing costs, and declining productivity risks creating a growing financial burden. This will require a mix of additional debt, higher taxation, and/or increased application of user charges. The Infrastructure Commission estimates that attempting to fund or finance the predicted demands of all publicly provided infrastructure would require:

• A 98 percent increase in the government’s debt-to-GDP ratio by 2051
• A three percent increase in the tax-to-GDP ratio (equivalent to increasing GST from 15 percent to 21 percent, or a 21 percent increase in income tax)
• A 38 percent increase in household spending on infrastructure services (about $5,200 extra per household per year).

These scenarios show that we simply cannot build our way out of our infrastructure problems. New Zealand needs a combination of investment, reducing demand for existing infrastructure, and increasing the efficiency of our infrastructure construction.

Looking to Australia is not the answer. Australia’s efficiency is also below average for high-income countries. Infrastructure Commission analysis suggests that we should be looking at best practices in Chile or Switzerland, which are small countries that seem to be highly efficient despite similar geographic challenges.

The pipeline

The National Infrastructure Pipeline is New Zealand’s national dataset of infrastructure project information. It provides an evidence base for how New Zealand maintains, renews, and improves our infrastructure. As of 30 June 2024, the pipeline includes $147.6 billion of active and planned projects from central government, local government, and the private sector. Of these, almost 60 percent ($87.7 billion) are projects that are funded, part-funded, or have a funding source confirmed.

The pipeline includes 1,465 projects with a value of over $140 billion from 85 contributing organisations. This includes $82.7 billion of transport projects, $23 billion for water projects, $9.9 billion of energy projects, and $8 billion for housing.  

Approximately 583 active projects with an estimated worth of $10.9 billion were in procurement at the time of the update, and a further 174 projects with a value of $3.3 billion are expected to enter procurement in the 12 months from 1 July 2024.

The Infrastructure Commission’s projections estimate a total of $16.1 billion of infrastructure spending in 2024 which equates to 3.9 percent of GDP. Looking beyond the immediate horizon, the projected spend for 2025 is currently $14 billion, and three quarters of all current projected pipeline spending will occur within the next five and a half years.

New Zealand has failed to maintain its road infrastructure

Given its proportion of the pipeline, when New Zealanders think of infrastructure our first thought is often transport, and in New Zealand that means roads. Recent analysis by the Infrastructure Commission indicates that New Zealand has failed to invest in maintaining our road infrastructure at both a national and local level and this has led to the declining condition of many parts of our road network.

In its Build or maintain? report, the Infrastructure Commission identified that insufficient renewal funding for the maintenance of both state highways and local roads led to declining reseals in the early 2010s. The share of the state highway network resealed annually dropped significantly between 2014 and 2016. After rising slightly in 2017, it rebounded in 2018. However, funding has been too low to fully achieve required resealing rates. As a result, the average condition of New Zealand’s roads has gradually declined over the last decade, especially in low-volume and less strategic parts of the network.  

The future of land transport infrastructure investment

The Minister of Transport produces the Government Policy Statement on Land Transport Funding (GPS) every three years. The GPS sets out the outcomes the government seeks to achieve from its investment in land transport, how it will achieve these outcomes, the funding that will be provided, and how the funding will be raised.

The GPS for 2024 – 2034 (GPS 2024) outlines the Government’s land transport investment priorities, and guides expenditure of over $7 billion from the National Land Transport Fund (NLTF), and around $1.5 billion from local government, each year. The New Zealand Transport Agency (NZTA) then allocates the funds to projects to give effect to the GPS.

The GPS sets the balance between investing in new projects and ensuring we maintain and repair our existing infrastructure. GPS 2024 focuses on achieving four key strategic priorities:

• Economic Growth and Productivity
• Increased Maintenance and Resilience
• Safety
• Value for Money.

The main features are the return of Roads of National Significance (RoNs), which started under the previous National Government in 2009, and a programme of Roads of Regional Significance. The RoNs are four lane highways that are intended to reduce congestion, improve safety, support housing development, boost economic growth, and provide a more resilient roading network. In addition to the roads of national significance, the government has committed to investment in Roads of Regional Significance.  

The GPS sets out the funding ranges for activity classes. In GPS 2024, State highways will receive the greatest expenditure. The mid-point of the combined state highway expenditure in the GPS is $2.8 billion in 2024/25. This is forecast to increase to over $3.95 billion by 2033/34. In 2024/25, expenditure on state highways improvements will be between $1.2 billion and $1.95 billion, while state highway maintenance and operations, including pothole prevention, has a midpoint of $1.2 billion. This includes $560 million for potholes and $660 million for operations.  

The midpoint of the range for expenditure on local roads is $1.3 billion in 2024/25. This is forecast to increase to just under $1.9 billion by 2033/34. In 2024/25 expenditure on local roads includes $1 billion for local road maintenance and operations, including $675 million for pothole prevention, and $275 million for local road improvements.

A principle underlying land transport expenditure is that the NZTA will manage expenditure so that it links with the amount of revenue raised. NZTA produces the National Land Transport Programme (NLTP) which sets out its three-year programme of investment to give effect to the GPS. To be included in the NLTP, activities must either be proposed in a Reginal Land Transport Plan or be delivered nationally, like the RoNs.

In the 2024/27 NLTP, NZTA will fund $32.9 billion of investment. This includes $11.4 billion (35 percent) on state highways, with $7.1 billion for improvements, $2.1 billion for pothole prevention, and $2.3 billion for operations. Local roads will receive $7 billion (21 percent) with $3.4 billion for pothole prevention, $1.3 billion for improvements, and 2.3 billion for operations.  

Looking ahead to the next 30 years

Increasing investment levels in future decades, to maintain and improve the quality of our infrastructure, will require increases to taxes, rates, and user charges. To maximise social and economic well-being, New Zealand needs to increase the efficiency of infrastructure investment. This will require pipeline certainty that encourages investment, grows capacity, increases productivity, and brings down the cost. This will require the recently announced 30 year National Infrastructure Plan to have broad political consensus. 

3.0 BERL Forecasts

Quarterly growth in GDP has flatlined the past four quarters, crawling along with a high of 0.1 percent in March 2024 before a 0.2 percent decline in the latest June 2024 quarter. As council rates increase across the country, we anticipate tax cuts not having enough of an impact to boost spending, along with the first decline in the OCR in over four years not having a material effect for some time. We expect growth to be sluggish over the next year as the effects of high interest rates continue to linger. As the RBNZ continues to cut the OCR, economic activity will start to pick up in the second half of 2025.  

Inflation has continued to fall, reaching a three year low at 3.3 percent for the June 2024 year. But domestic inflation (non-tradable) still remains sticky at 5.4 percent. High interest rates have played a role in lowering inflation and we expect this to continue as inflation returns to the RBNZ target band. However, increases in rates and expected bumps in insurance costs will continue to add pressure to non-tradable inflation.  

High interest rates have taken a toll on FTE employment growth, which we expect will remain sluggish in the context of a weak labour market. Cuts throughout the public sector continue and businesses have also cut back on hiring. The number of filled jobs was down 0.5 percent and the number of unemployed people increased to 143,000 in June 2024. Unemployment continues to rise in line with these conditions and we expect it to peak in 2025. We do not see FTE employment growth improving until 2027 when economic conditions begin to improve, and we expect unemployment to remain around the five percent mark over the next three years.  

Net migration has started to normalise in recent quarters, down from the record levels of 2023 and early 2024. Net inward migration has slowed down in pace while outward migration of NZ citizens remains strong in the face of a worsening domestic labour market and relatively better conditions across the Tasman. We expect net migration to normalise to a long-term average of around 50,000 people a year over the forecast horizon.  

Export growth was a mere 1.6 percent in June 2024 with previous highs in export growth no longer propped up by high global prices. A balance between lower export volumes and a slight increase in export prices contributed to positive growth in June 2024. Services exports were responsible for part of the climb, increasing by eleven percent, while goods exports decreased 1.5 percent. The slowdown in China’s economy has also impacted demand for our exports. For example, our beef exports to China were down 45 percent in May 2024. The current Government has put great focus on increasing New Zealand’s trade but it is unknown when this focus will materialise to actual exports.  

Total import growth was 0.7 percent in the June 2024 quarter, driven by a 0.9 percent decline in goods imports and a five percent increase in service imports. With a general lack of household spending throughout the economy, and given that so much of our import profile is consumer focused, we expect import growth to remain subdued over the coming year. Once the effects of interest rate cuts start to kick-in we might see an improvement in import growth.  

We anticipate the operating balance before gains and losses (OBEGAL) to continue to worsen until 2025. The government’s emphasis on bringing the books back in balance will face up against what we expect to be a smaller tax take with less income being earned as a result of unemployment rising and GDP growth being sluggish.  

*BEFU 2024 forecast

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.