1.0 The Front Pages
As the sun sets on summer, the cooling temperature matches the outlook for New Zealand’s economy in 2024. High inflation, persistent high interest rates, and the squeezed cost of living are weighing on households. Economic growth is expected to remain cool, with unemployment ticking up and wage increases slowing down.
Right before the festive break, the government’s Half Year Economic and Fiscal Update (HYEFU) threw cold water on our holiday cheer. It revealed stronger than expected activity, but also persistent inflation. This means interest rates are likely to stay high for longer than expected. Despite near term growth exceeding the Pre-election Update, the extended period of high interest rates will dampen the economic recovery according to the Treasury’s revised forecast.
High interest rates, aimed at curbing inflation, are having their intended effect by cooling economic growth. GDP grew by just 0.6 percent across the 2023 calendar year. Data for the December 2023 quarter shows that GDP fell by 0.1 percent meaning New Zealand was in recession after a 0.3 percent decrease in September 2023. Given the high rates of migration, GDP per capita fell even more strongly, by 0.7 percent. This measure has been falling every quarter starting in December 2022. The Treasury is forecasting gross domestic product (GDP) growth to average just 1.5 percent over the next two years due to the increased cost of borrowing and servicing existing debt. This is projected to continue to suppress consumption and investment. While strong net migration and the ongoing recovery in international tourism offer a glimmer of hope for some sectors, the ever-present burden of the high cost of living threatens to keep economic growth sluggish.
This is expected to reduce labour demand and lead to an increasing unemployment rate which is forecast to peak in early 2025. Once inflation is within the Reserve Bank of New Zealand’s (RBNZ) one to three percent target band interest rates are expected to fall and growth will start to pick up, averaging 2.8 percent per year from 2026 onwards.
Housing costs continue to increase
The first major announcement of 2024 was the release of Stats NZ’s December 2023 inflation statistics. Despite the 4.7 percent increase in the Consumers Price Index (CPI), inflation is down from 5.6 percent in the 12 months to the September 2023 quarter, showing that efforts to drive inflation back within its one to three percent target range are on track.
Housing and household utilities were the largest contributor to the December 2023 quarter inflation. This was mainly driven by higher prices for rent, construction, and rates. Rent prices increased by 4.5 percent, while construction increased by 3.6 percent, and rates by 9.8 percent.
The government recently announced that from April 1st it will reintroduce the ability for landlords to deduct mortgage interest on residential investment properties from taxes. In the announcement David Seymour said that “these costs are inevitably passed on to tenants, one of the reasons New Zealand has all time high rental costs.” However, research from Treasury, RBNZ, and the Ministry of Housing and Urban Development shows mortgage costs have only a minor effect, and rents are more closely connected to household incomes, housing supply, and population. High demand for housing, including net migration remaining at a near record level, and the lack of quality supply makes a reduction in rents for tenants an unlikely outcome.
Official Cash Rate steady
The RBNZ kept interest rates on hold at 5.5 percent in their February Monetary Policy Statement, following signs that inflation is gradually easing. It identified that a combination of lower demand and increasing supply is bringing domestic inflation down. Slow global growth and slightly lower prices for imported goods and services have also helped to reduce headline inflation. Monetary policy will remain restrictive to ensure that inflation returns to within the target range.
The RBNZ now expects inflation to return to the target range in the September quarter this year and return to the two percent target midpoint later in 2025.
In an article in March we highlighted the relief that many homeowners will be feeling following the RBNZ’s February OCR announcement. Especially given the impact that the OCR increases have had on mortgage repayments and housing costs since the RBNZ began increasing the OCR in 2022.
Low retail spending is a risk for small businesses
As consumers have faced higher costs for housing and other essentials, retail spending has declined. Retail spending fell by 1.9 percent in the December 2023 quarter making it the eighth consecutive quarter of declining retail sales.
Fourteen of the fifteen retail industries had lower sales volumes in the December 2023 quarter compared with the September 2023 quarter. The only exception was pharmaceutical and other store-based retailing, which was only up slightly by 0.3 percent.
Businesses are feeling the pressure of this reduced spending. January data from credit reporting firm Centrix shows company liquidations rising by 16 percent, and business defaults by 28 percent, compared to last year. The retail sector has been the hardest hit, followed by construction, hospitality, and transport. In an interview with Radio New Zealand the Managing Director of Centrix, Keith McLaughlin, commented that "we've also observed an upswing in mortgage stress for a sole proprietor, with many needing to leverage their home equity to continue funding their businesses - a concerning trend that could spell trouble for these owners in the long- term."
Unemployment set to climb
Raising the OCR to fight inflation has come at a cost - higher unemployment. The unemployment rate climbed to four percent in the December 2023 quarter, and the Treasury forecasts it will rise further to 4.5 percent in June 2024. It is expected to peak at 5.2 percent in June 2025 before gradually declining to 4.4 percent by 2028. Treasury expects that the increase in unemployment will slow the rate of annual wage growth from 6.7 percent in September 2023 to 5.1 percent in June 2025.
In its February Monetary Policy Statement, the RBNZ noted that labour market pressures are easing, but by a slower pace than anticipated. It identified that easing labour shortages appear to be due to both lower demand and increased supply of workers. It expects that the unemployment rate will increase to a peak of 5.1 percent in the first half of 2025 before declining to 4.7 percent by March 2027.
Looking beyond the government’s first 100 days
With the first 100 days in the rear-view mirror, the Autumn 2024 quarter will be pivotal for the medium-term direction of New Zealand’s economy. March 27th will see the release of the Budget Policy Statement that outlines the Government's priorities for Budget 2024. This will give us our first glimpse of what to expect from the new Government’s first Budget.
At the Budget delivery on Thursday 30th May we will finally get the answers, and the details, as to how the government will "deliver tax relief to hardworking New Zealanders, rebuild business confidence, and restore the Crown’s finances to order". We will also see how many departments have been able to identify the savings of either 6.5 or 7.5 percent, and what has been sacrificed to achieve it.
With the RBNZ signalling that it expects the OCR to remain steady for 2024 we will be watching the July 10th Monetary Policy Review announcement closely to see what impact it thinks the tax cuts and other Budget announcements will have on inflation, and how it will respond.
2.0 Special feature: Education in the post-pandemic era
The COVID-19 pandemic resulted in significant disruptions to nearly every aspect of the economy and education has been no exception. The sudden and swift separation of learners of all ages from conducive learning environments, and their peers, was bound to have an impact. Digital literacy and access to technology became a precursor to successful continuation of, and participation, in, learning. All of this only amplified the barriers many learners already faced, widening the gulf in outcomes. Although pandemic-related health measures are behind us, they seem to have left a lasting impact on the education sector.
New Zealand already performs poorly on some education-related outcomes compared to other advanced, high-income OECD countries. For example, New Zealand has a learning poverty rate of 11.4 percent, which is higher than the rate for Australia (8.6 percent), Canada (4.3 percent), and the United Kingdom (3.5 percent). The learning poverty rate is a measure that combines gaps in access to primary schooling and learning deprivation (not being able to read and understand a simple text at ten years old).
Learners are becoming less engaged
Globally 1.6 billion children were impacted by school closures during the pandemic. On average, schools were fully or partially closed for 199 days, which is equivalent to 12 months of learning. In New Zealand, we were lucky enough to have avoided the worst effects of the pandemic, which allowed for shorter closures. According to the World Bank, the school closures in New Zealand resulted in an average of 88 days of lost learning.
Attendance is linked to both student well-being and attainment. The past two years have seen a decline in students regularly attending school, and an increase in chronic absences. Part of the increase in chronic absences can be explained by higher levels of illness and our reduced tolerance for being exposed to those who are sick. However, the pandemic has also caused a shift in parents’ and students’ attitudes toward the importance of regularly attending school. “Justified absences”, such as going on holiday, have become more normalised and frequent. Chronic absences amongst Māori and Pacific students are alarmingly high, with nearly one in five students attending school less than 70 percent of the time.
A return to pre-pandemic attitudes toward attendance is not going to be an easy task and punitive measures that do not consider the factors driving low engagement, particularly in Māori and Pacific communities, are unlikely to lift attendance rates. The current government has identified the need to lift students’ engagement but is yet to announce concrete measures to achieve this. In addition, challenging behaviour from learners, which has been identified as an increasingly significant issue by the Education Review Office (ERO), is going to be harder to address in the short-term.
Disparities in educational attainment are widening
The share of learners leaving school without any NCEA qualifications has been increasing since the pandemic. The 2022 year saw a sharp increase in the proportion of Māori learners leaving school with no qualifications, from 23 percent to 27 percent. In total, 15 percent of students left school with no qualifications in 2022, compared to ten percent in 2018. Since 2018, there has been an 8.3 percentage point increase in the number of Māori leaving school with no qualifications, and a seven percentage point increase for Pacific learners. This is much higher than the increase for European (five percentage points) and Asian (one percentage point) learners. The share of school leavers with NCEA Level 1 literacy and numeracy has also been declining, and the drop has been particularly strong for Māori and Pacific learners.
Some of the decline in attainment can be attributed to a strong labour market in 2022. Youth employment reached record highs as borders remained closed and employers faced widespread labour shortages. However, the low rates of attainment are still worrying as they indicate that students may have been prioritising immediate and temporary gains in the labour market, over longer-term gains that come from higher level qualifications.
School achievement matters
The qualifications that young people leave school with are important determinants of their outcomes and career opportunities. Research has shown that two in five leavers with no school qualifications do not work or engage in further education or training, which means that they face poorer long term employment prospects. Just two percent of school leavers with no NCEA qualifications end up with a Level 7, or higher, qualification, compared to 66 percent of those who leave with Level 3 and University Entrance (UE). Individuals who do not have any tertiary qualifications are also the first to experience the effects of economic downturns, and face some of the harshest effects, such as long periods of unemployment. This also negatively impacts their long-term earnings prospects.
School and tertiary achievement is also closely linked with the earning potential of individuals. Nine years after leaving school, those who left with no NCEA qualification earned, on average, half as much as someone who left with a Level 2 qualification. School leavers who stay on and achieve UE can expect to earn 25 percent more, on average, compared to those leaving with just NCEA Level 2.
COVID-19 changed the tertiary education landscape
The tertiary education landscape changed considerably in the wake of the COVID-19 pandemic. Tertiary providers in New Zealand were forced to respond promptly to nationwide lockdowns in 2020, completely shifting the delivery of learning online. Meanwhile living situations, needs, responsibilities, and the priorities of people and students changed. The result was an environment that was not conducive to an engaged, well supported, and successful tertiary experience for students. This environment, and the socio-economic implications of the pandemic, only further widened disparities in educational performance between demographics. It also made the decision about whether to participate in tertiary education more complex. COVID-19 had a lasting impact on both the social and economic factors that are typically involved in this decision.
Looking at how participation in tertiary education has changed as a result of COVID-19 provides insight into the impact of these social and economic factors across the sector.
The COVID-19 pandemic resulted in an immediate reversal of enrolment trends prior to 2020. For nearly a decade, domestic enrolments in public tertiary providers (universities, Te Pūkenga (Institutes of Technology and Polytechnics prior to 2020), and Wānanga) were falling, while international enrolments were on the rise.
An appealing job market in New Zealand, and lower numbers of school-leavers, contributed to the falling number of domestic enrolments with more people entering the workforce rather than tertiary study. International students were a growing share of the student mix at universities and Te Pūkenga, while remaining a very small share at Wānanga. International enrolments represented 19 percent of enrolments at universities in 2018, up from 14 percent in 2013. At Te Pūkenga, international enrolments grew from ten percent of enrolments in 2013, to 16 percent in 2019. Universities, in particular, were receiving an increasing amount of their student fees and charges revenue from international students, with revenue from domestic and international students nearly converging, before the pandemic abruptly halted this trend.
The impact of COVID-19 varied between providers and students
The impact of the COVID-19 pandemic on public tertiary providers was not uniform. Differences in student demographics, the domestic vs. international student mix, and other factors all played a role. Universities and Te Pūkenga suffered from the loss of international students severely in 2020, with a decrease in international enrolments of 9.3 percent and 13.7 percent, respectively. The brunt of this impact was only to worsen in the following years. New Zealand’s borders remained closed for much longer than many countries that we competed with for international students, such as Canada, the United Kingdom, and the United States. By 2022, international enrolments in universities had dropped by 29.8 percent, and in Te Pūkenga by 73.2 percent, compared to 2019.
Tertiary providers had largely reopened in 2021 allowing for the relatively normal delivery of learning, albeit with a three-week lockdown in August for most of the country and an extended period for other areas (Auckland, Northland, and Waikato). Economic cycles play a part in influencing people’s decision to participate in tertiary education and the tight labour market at the time, with limited international migration into New Zealand, meant more people were opting to invest in themselves rather than enter the workforce. Between 2020 and 2021, domestic enrolments (measured by EFTS) in universities increased by 7.3 percent, domestic enrolments at Te Pūkenga increased 13.6 percent, and domestic enrolments at Wānanga increased 17.5 percent. This included an increase in students enrolling for the first time, and in those who had not been enrolled for a year.
But the following year, as the cost-of-living persistently grew, unemployment remained low, and inflation remained high and sticky, domestic EFTS enrolments decreased at universities, Te Pūkenga, and Wānanga. The need to earn an income to support yourself, as well as your family, grew. This made the decision between investing in yourself or entering the workforce more straightforward.
The worsening economic landscape significantly impacted Māori participation in tertiary education. Māori EFTS enrolments at public tertiary providers fell by 8.8 percent between 2020 and 2021, a steeper decline than for Europeans (six percent) and Pacific Peoples (six percent). The trend was also evident in Wānanga enrolments.
Initially, the nationwide lockdowns did not have much impact on domestic enrolments between 2019 and 2020 for universities and Te Pūkenga, as many students were already enrolled prior to the pandemic. For Wānanga, however, the story was different. During the height of the pandemic in 2020, domestic enrolments at Wānanga dropped significantly, from a total of 21,795 EFTS in 2019 to 17,725 EFTS in 2020. This was partly attributed to the demographic mix at Wānanga providers compared to universities, and to a lesser extent, Te Pūkenga. In 2019, Māori represented 57 percent of domestic EFTS at Wānanga providers, compared to 12 percent at universities and 25 percent at Te Pūkenga. Wānanga students are more likely to be second chance learners, female, and aged over 40. Thus, they were more likely to have competing responsibilities, such as work or looking after children and whānau. During lockdowns, and the times that followed, these responsibilities took priority, with education often taking a backseat. Furthermore, Wānanga have a strong focus on face-to-face courses, and this was adversely impacted by the lockdown measures.
Lockdowns were complex for students
The complete shift towards online delivery of education from tertiary providers was a sudden change from the traditional form of face-to-face delivery. This not only took away from the usual tertiary education experiences, such as connections with peers and study groups, but had a range of broader impacts on students, including loneliness, heighted stress and anxiety, and financial pressure. This was coupled with a very different, and often challenging learning environment for students. Many students needed to relocate, some moving back with family for the initial periods of lockdown. Some struggled to find suitable conditions for their studies, whether it be a lack of privacy, access to technology, or connection to good quality Wi-Fi.
A space to study and access to Wi-Fi were main challenges for students
An immediate concern with shifting the delivery of education to online was the ability of students to access the appropriate technology and have access to good Wi-Fi. Specifically, concerns of a digital divide emerged. An international survey, with a small New Zealand sample size (n=147) and no ethnic identifier, reported that New Zealand students had comparatively high access to a good internet connection (70 percent) compared to other countries. This survey also found that students who had moved home since the pandemic generally reported lower access.
With tertiary campuses closing, the option to study in libraries or shared workspaces was also gone. This was an inherent challenge for many students who found it difficult to find appropriate spaces for their studies in their living arrangements during lockdowns. Just over half of the New Zealand respondents in the international study indicated that a lack of space for their studies was an issue. It noted that when coupled with increased workload, the absence of an accommodating space increased anxiety and learning challenges for students.
A report from Te Mana Ākonga (National Māori Tertiary Students’ Association) found that just under 40 percent of Māori moved home with family during the lockdowns, and that one in four Māori students did not have access to strong, reliable Wi-Fi or internet. Māori students were particularly challenged within their living arrangements during lockdowns. Only 37.5 percent of Māori agreed that they had spaces where they could study without interruptions.
Uncertainty about the lasting impact on students
The underlying challenge during the height of the COVID-19 pandemic and lockdowns was the high degree of uncertainty. It was an uneasy and tense period, with fast-changing developments. Any degree of uncertainty can cause stress and a lack of support and social connections only adds to this.
Usual social interactions and connections between students were also disrupted. Such social interactions are crucial parts of the tertiary experience and are critical determinants of individuals’ overall well-being. Many students reported high levels of stress, anxiety, and loneliness. Financial stress was also a serious concern, and only worsened in the years that followed. There was, however, some positive experiences reported. This included valuing the added time with family during a period where the future was uncertain. Some also noted that the improved flexibility in the delivery of learning better catered for their needs.
Changes in living arrangements, socio-economic pressure, and negative impacts on well-being were some of the core challenges that COVID-19 posed for students. Although the extent of influence these challenges had on students varied drastically across the population, there was largely a consensus among students that their studies suffered as a result. The lasting impact of these challenges is unknown. Course completion rates overall seem to be unaffected. But the impact on Māori is more evident. Wānanga completion rates have dropped by over ten percent between 2019 and 2022.
3.0 BERL forecasts
GDP growth in the last quarter (-0.1 percent) leads to what we anticipate being a long, slow road to recovery as we enter a “technical recession”. Over the coming year, economic growth will be muted in the face of high interest rates and a weak labour market. High net migration has been a key driver of GDP growth at an aggregate level. Sectors that rely on domestic demand, such as manufacturing, construction, and retail trade have contracted over the year as people are spending less on non-essentials in the face of rising housing costs. The service sector, which was proving to be buoyant seems to also be losing steam. Tourism-related industries such as arts, recreation, and other services (-0.8 percent) and retail trade and accommodation (-0.9 percent) contracted over the quarter. Looking ahead, we are forecasting a growth rate of one percent for the June 2024 year. We see growth increasing over 2025 and 2026 and monetary policy becomes more accommodative and business and consumer confidence bounce back.
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. Inflation in New Zealand is still at higher levels than in comparable countries. Household still expect inflation one-year ahead to be at five percent and these expectations appear to be anchored. It will be crucial for the RBNZ to de-anchor these expectations. We forecast 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 tradables inflation. Although net migration is slowing down, the record number of new arrivals over the past year will continue to exert pressure on the demand side. We expect inflation to ease to the RBNZ’s target rate of two percent in the latter half of 2025. Thus, our outlook remains the same – 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 and young people helped fill 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 employment 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. The unemployment rate has gone from a historically low 3.2 percent in 2022 to four percent at the end of 2023. 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 several quarters of rising unemployment. Underutilisation is also increasing fast. We are still expecting unemployment to peak at around five percent in 2025, and remain at that level through to 2026, as the RBNZ keeps interest rates at elevated levels.
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, peaking at over 140,000 people at the end of 2023. However, the latest data shows that migration is now falling in the context of lower demand for workers from employers. In the year to June 2024 we see the net inflow falling to 80,000 people, and returning to the pre-pandemic average in the years following that.
Export growth has been far from impressive as commodity prices for our primary exports have been low in the second half of 2023. Low economic growth in our key trading partners, such as China and the EU, also does not bode well for New Zealand’s export market as demand for our goods 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 expected to slow down as domestic demand, particularly for goods, is falling with households tightening their belts. Global inflation has been falling rapidly, which will mean falling import prices. There are risks to the upside as oil prices could spike again.
The focus of the new government has been to bring the operating balance before gains and losses (OBEGAL) into the green. However, the slow economic outlook has put a spanner in the works. The tax take from individuals and businesses is expected to fall in 2024 in the face of rising unemployment and declining production and spending. Thus, we see the OBEGAL deficit rising from 2023 levels in 2024, and eventually narrowing as economic conditions begin to 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.