1.0 The Front Pages

Heading into the second half of 2024, economic confidence continues to remain low. Low confidence was reflected in the results of the March ANZ-Roy Morgan NZ Consumer Confidence index where it fell by nine percent. Consumer confidence continued its downward spiral in April when the index fell a further four points, getting very close to the low levels seen during the global financial crisis. On the back of four out of five quarters of negative economic growth, gross domestic product (GDP) for the March 2024 quarter crept into the positive at 0.2 percent. 

May brought with it a flurry of reports on the state of the New Zealand economy. The International Monetary Fund (IMF) concluded its Article IV consultation with New Zealand, and released its final report. This was followed by the release of the Reserve Bank of New Zealand’s (RBNZ) monetary policy statement (MPS) and announcement of the Official Cash Rate (OCR), and then Budget 2024 on May 30 included the release the Budget Economic and Fiscal update (BEFU).

Budget 2024 delivers tax cuts, the basics, and not much else

There were no big surprises in Budget 2024 with tax cuts largely delivered as promised and the major investments focused on education and health. Overall, it was in line with the IMFs appraisal that “Budget 2024 should deliver a tight fiscal stance in the near term and provide a comprehensive consolidation strategy for the medium term.”

In keeping with the theme of reduced spending in Budget 2024, the government has reduced the operating allowance (additional spending in the following budgets) to just $2.4 billion per year through to Budget 2027. In recent times, a large portion of this funding has been used to meet cost pressures faced by existing services. Treasury estimates that around $2.5 billion will be required to maintain the existing level of services, meaning any shortfall, or spending on new initiatives in future budgets, will need to be offset by further savings, reprioritisation, or additional revenue raising.

Treasury has warned that “the smaller allowances compared to recent years will require hard choices by the Government on the allocation of funding to maintain existing services and new policy initiatives.” This will involve difficult choices and trade-offs for the Government which are likely to become harder over time.

The single largest area of government expenditure for the upcoming year is on New Zealand Superannuation. It has grown from $15.5 billion in 2020 to $23.2 billion in 2024 and is now just under 13 percent of all spending. With the proportion of population aged over 65 expected to increase from 17 percent in 2023 to a 25 percent in 2058, superannuation as a proportion of government spending is only likely to grow further as the working-age population shrinks. While not politically popular, this is going to force political parties on all sides to have difficult conversations about the future of Superannuation arrangements in New Zealand. 

Gross domestic product growth to remain subdued

Forecasts from the Treasury show that GDP is expected to gradually strengthen from the second half of 2024. Tax cuts, a continuing recovery in tourism earnings, and an easing inflation outlook will see GDP growth increase to 1.7 percent in the year to June 2025 and average 2.9 percent per annum over the final three years of the Treasury’s forecast. This is below pre-pandemic levels, but consistent with the IMF’s outlook for advanced economies. In its 2024 World Economic Outlook the IMF forecasts the growth of advanced economies to be 1.7 percent in 2024 and 1.8 percent in 2025.

Treasury expectations for interest rates seems optimistic 

Forecasts in the BEFU show that the Treasury expects inflation to fall below three percent in the second half of 2024, and interest rates to gradually begin to ease from late 2024. However, this is contrary to what RBNZ was expecting just eight days earlier when it opted to hold the official cash rate (OCR) steady at 5.5 percent. 

In its May MPS, the Reserve Bank of New Zealand (RBNZ) noted that for inflation to return to the two percent target midpoint, in a similar timeframe to that estimated by Treasury, it expects the OCR will need to remain at a restrictive level for longer than assumed in February. In its most recent forecasts, the RBNZ was expecting the OCR to remain at or above its current rate until September 2025.

The RBNZ will be likely to avoid acting prematurely to not undo its previous efforts. Therefore, we expect that the RBNZ will adopt a conservative approach, holding off on reducing the OCR until it is confident that inflation is headed to two percent. The RBNZ will be wary of any decline being tempered by sectors of the economy that are less sensitive to interest rates including higher dwelling rents, insurance costs, domestic services, and the double digit council rates increases that many households are facing.  

The July 10 Monetary Policy Review announcement will reveal what impacts the RBNZ thinks the tax cuts and other Budget announcements will have on inflation, and how it intends to respond. 

Productivity continues to lag and requires a solution

Despite inflation grabbing all the headlines, productivity remains New Zealand's biggest economic challenge, with GDP per hour worked falling by more than three percent since September 2022. 

Productivity is the biggest long-term determinant of wages and standard of living. Our capacity to raise productivity depends on our ability to increase both the amount of goods and services each worker produces, and the value they add. Therefore, it is disappointing to see this government, like all our previous governments, prioritising short-term relief over initiatives that are likely to have greater long-term benefits.

The IMF warned that “structural reforms are needed to boost the housing supply, revive productivity growth, lower emissions, and address challenges from climate change.” To address slow productivity growth the IMF identifies that public investment in research and development (R&D), new infrastructure, and maintenance of the existing public capital stock are critical. The IMF recommends promoting innovative investment by expanding R&D tax credits and other support measures, while also promoting their uptake and scaling up government investment in R&D.

The IMF notes that housing affordability challenges cannot be solved without a significant increase in residential construction. Its recommendations include reforming land use restrictions, addressing local infrastructure funding needs, and using land value and capital gains taxes to incentivise more efficient land use, and investment in more productive assets. 

Immigration, together with efforts to improve education outcomes and skills matching, could address skills shortages and boost productivity. While New Zealand’s population is, on average, highly educated, we lag behind other advanced economies in terms of post-graduate degrees, partly due to the emigration of skilled New Zealanders. This risk is exacerbated by the currently high levels of youth and young adult unemployment. 

With limited financial resources available for government investment, New Zealand will need to rely on legislative and regulatory solutions to boost productivity over the next three years.

2.0 Special Feature

Changing demographics

The population of New Zealand is changing rapidly. The first release of Census 2023 population data from StatsNZ reveals the dynamic demographic shift currently underway. New Zealand’s future workforce will be defined by these demographic shifts, and we need to make sure our young people today are equipped with the skills and knowledge that they need to succeed.  

According to the 2023 Census, New Zealand’s usual resident population fell just short of the five million mark, with a more diverse population than recorded in previous Censuses. Asian, Pacific Peoples, and Māori were New Zealand’s fastest growing ethnic groups between the 2018 and 2023 Census and their share within the population is expanding.  

Table 1: New Zealand Census usual resident population

Source: StatsNZ

Within New Zealand’s actual population increase of just under 300,000 between 2018 and 2023, increases in both the Asian and Māori populations were the two lead contributors, increasing by 154,000 and 111,700, respectively. This builds on the momentum of growth both ethnic groups have experienced in the past decade, particularly for the Asian population. Largely a result of trends in immigration, the size of the Asian population almost doubled between 2013 and 2023, and is now nearly on a par with the size of the Māori population. However, the 2023 Census data does not capture the significant level of migration from Asian nations into New Zealand throughout 2024 and the latter part of 2023. International migration estimates for the year ended April 2024 suggest that the size of the Asian population might now have surpassed that of the Māori population. 

In the year ended April 2024, there were just over 137,000 migrant arrivals from Asia, most notably with around 48,000 arrivals from India, 30,000 arrivals from the Philippines, and close to 26,000 from China. This comfortably outweighed the number of Asian people departing New Zealand during this time, contributing to net migration (total arrivals minus total departures) of 115,000, far exceeding previously recorded highs. 

At the same time, departures of New Zealand citizens hit a twelve year high, with an exodus of 81,200 people. While (mostly young) New Zealanders continue to leave the country at scale, migrant inflows, particularly from Asian nations and largely of working age, continue to populate New Zealand. These simultaneous trends, coupled with the growth of the Māori population, are changing the makeup of New Zealand’s working-age population. 

There are distinct age differences in New Zealand’s largest ethnicities

The age structure of New Zealand’s European population is characterised by a dip in the share of working-age people and a stark peak in people 65 years and older. This reflects both the exodus of many young working-age New Zealand Europeans and the fast-ageing European population. 

In contrast, the Māori and Pacific Peoples populations consist predominantly of younger people, with the share of older age groups much smaller. As at Census 2023, just under half of all Māori were under the age of 24, accounting for more than a quarter of all people under the age of 24. Meanwhile, the Asian population are overrepresented in key working ages as indicated by the two peaks between the 25-to-44-year age grouping. This means that working-age families make up a large portion of the Asian population. New Zealand’s immigration settings, with a priority on bringing in skilled labour, have been the driver for this over the past few years. 

The Māori population is more widely dispersed

The geographical split between New Zealand’s largest ethnic groups is another layer to consider within New Zealand’s shifting demographics. Although population growth and age structure statistics can provide insight into the makeup of the current and future working-age population, it is important to view these demographic trends within the context of urban and rural areas. On average, differences in outcomes tend to vary notably by geographical location. People in rural areas are more likely to experience inadequate labour protection and lower wages. Main urban centres, such as Auckland, Wellington, and Canterbury, tend to not only be associated with more job opportunities, but also greater diversity of work opportunities. Our bigger cities are already established centres that are well positioned to leverage innovation. There is also greater economic mobility that comes from more opportunities, enabling greater knowledge and skills development. 

The rural and urban split between our top ethnicities is glaring. The Asian and the Pacific Peoples populations are particularly concentrated in Auckland, whereas the European, and even more so the Māori, populations are much more rurally dispersed. In the 2023 Census, Auckland was home to 60 percent of the Asian population and 62 percent of the Pacific Peoples population. This was compared to 24 percent of Europeans and 23 percent of Māori living in Auckland. Europeans were more strongly represented in the next two biggest urban centres, Wellington and Canterbury, compared to the Māori and Asian populations. 
Although we live in a more digitally connected world, urban centres continue to attract people due to high value jobs, quality education, and innovation being concentrated in major cities. This is a key challenge for rurally dispersed populations. In preparing especially Māori youth of today for the future workforce, planning around these geographic disparities will be critical to lifting outcomes. 

Māori have the potential to earn a ‘demographic dividend’

There is no doubt that the workforce of the future will be very different to our current workforce. It will be more multicultural and diverse with a higher share of Māori, Pacific Peoples, and Asian people. The young age structure of these groups, particularly Māori and Pacific Peoples, brings with it a huge opportunity to drive social, cultural, and economic progress for not only Māori but New Zealand as a whole. However, a young age structure is, by itself, not enough. The key to unlocking the potential of the youth is empowerment through education. Decision makers today need to ensure that young people are equipped with the knowledge and skills that they need to succeed in the future. 

Unfortunately, New Zealand’s education system is far from equitable, and it is clear that Māori and Pacific Peoples have been underserved for decades, at all levels of the education system. By the time youth reach the tertiary level, these disparities are incredibly self-evident. 

Māori have low rates of educational attainment at higher levels

Interestingly, as of the latest available data from 2022, young Māori (those aged between 20-24) were participating in formal tertiary study at similar rates to other youth (excluding Europeans, who have the highest participation rate). In 2022, 31 percent of Māori aged between 20 and 24 participated in formal study, compared to 32 percent of young Asians. However, this rate has fallen drastically from the early 2000s. 
 

However, these high-level participation rates do not tell the whole story. Breaking down the data by level of study illustrates stark differences. Young Māori are significantly less likely than youth in any other ethnic group to engage in higher level studies (level 7 and above). The high participation of Māori youth in lower level qualifications is partly a reflection of the fact that Māori are less likely to leave school with an NCEA qualification, and thus need to bridge that gap at a later stage in life. Other factors such as parental education, financial barriers, geographical barriers, and socioeconomic status are also important determinants of participation in education at higher levels. 

These disparities in youth participation rates are inevitably reflected in the rates of overall educational attainment for the working-age population. As of 2021, 18 percent of the adult Māori population aged between 25 and 65 had a bachelors degree or higher qualification, compared to 35 percent of the total population. For our other ethnic communities, of which those of Asian ethnicities make up the largest proportion, the share with higher qualifications was significantly higher at 53 percent in the same year. 

Although there has been progress in tertiary educational attainment for Māori over the past decades, this has not happened at a fast enough pace. In fact, disparities in attainment have only widened over this period. For instance, the gap between Māori and the ‘other’ ethnic group in 2001 was 27 percentage points. By 2021, this had grown to 35 percentage points. The effect of migration, and New Zealand’s focus on attracting highly skilled migrants in particular, is an important factor at play here. This becomes an even more pressing issue as the future of work shifts towards more highly skilled roles, and it becomes clear that not enough young Māori are being equipped to succeed at all levels. This would also require closing the digital divide between Māori and non-Māori youth.

Quality education is associated with better socio-economic outcomes

There is no shortage of evidence to show that providing young people with equitable access to good quality education is one of the most valuable tools policy makers have in realising high social returns, the benefits of which span generations. For instance, in 2023, the unemployment rate for all Māori was double the economy-wide unemployment rate. However, there were no significant differences between Māori and the total population for those who held a higher-level qualification. Earnings data from Education Counts also shows that the weekly median earnings for Māori with a bachelors degree or higher qualification surpasses that of the average New Zealander with a qualification at the same level. Previous research has also shown that the earnings premium for Māori who complete tertiary qualifications, particularly at level 7 and above, tends to be greater than for non-Māori, highlighting the potential of good quality education in targeting disparities. 

Tertiary participation and achievement determine, to a large extent, the nature of participation in the labour market. As of March 2024, over 43 percent of Māori were employed in low or unskilled occupations, compared to 38 percent of the Asian population. The Asian population is also more concentrated in skilled or highly skilled occupations. This again, in part, reflects our immigration settings, which prioritise the inward migration of highly skilled people to fill gaps in these areas. 

In the absence of system-wide policies and interventions that address the gaps in educational attainment, the social and economic disparities between Māori and non-Māori will only continue to widen. A failure to recognise the potential of young Māori, and address long-standing systemic barriers, will have wide-reaching implications. Employers will continue to rely on migration to fill in areas of skills shortages, which also tend to require specialised skills and are highly paid. To add to this, the nature of work is changing at a rapid pace as the economy is shifting from being physical resource-based to knowledge-based. If current trends are allowed to persist, these labour market divides will continue into the future with Māori being concentrated in low-skilled roles. 

Universities, the primary providers of qualifications at level 7 and above, have not traditionally served the Māori population well. The current funding model encourages competition between tertiary education providers with low regard for the diverse learning needs of students and the skills needs of industry. The rural-urban divide between Māori and other populations is in itself a systemic barrier given that university education is designed to be accessed in urban settings. This creates a trade-off between higher education and continued connection to iwi, hapū, and marae for Māori. Wānanga, on the other hand, recognise that economic progress and opportunities for Māori must go hand-in-hand with cultural connection and revitalisation, with the benefits flowing on to whānau, hapū, and iwi. Such models of delivering high-quality tertiary education must be supported and enabled for succeed.

On the whole, a one-size-fits-all approach to education is doomed to create winners and losers. Our tertiary education system must be flexible, accessible, and able to offer world-class, future-focused education in line with the changing aspirations of our increasingly diverse and vibrant population. 
 

3.0 BERL Forecasts

A mere 0.2 percent growth in GDP over the last quarter reflects a slow crawl out of a recession but builds on what has been a bleak period for the economy. We continue to anticipate a long, slow road to recovery over the coming months, with economic growth to remain constrained by high interest rates that are not expected to budge until late 2024 or early 2025. 

High interest rates have been having their intended effect on inflation which has fallen in recent quarters, reaching an over two year low at four percent in the March 2024 quarter. However, domestic inflation (non-tradables) has remained sticky, at 5.8 percent. We do not see inflation returning to the RBNZ target band until next year.

In this environment, we expect growth in FTE employment to be sluggish in parallel with low economic growth. High levels of employment growth and record low unemployment are now behind us. Seasonally adjusted filled jobs increased by 0.3 percent in the March 2024 quarter. Although austerity through public sector job cuts has been at the forefront of political discussion throughout 2024, businesses are also finding ways to cut costs and have needed to reduce employment. Most sectors of the economy are feeling the crunch but our retail sector, in particular, is experiencing the brunt of this as consumer spending levels have dropped. Record levels of migration have been the counteracting balance, propping up employment growth. 

As largely expected, we are seeing unemployment continue to rise as worsening economic conditions take their toll. Both businesses and the public sector are reducing employment in response. Unemployment rose to 4.3 percent in the March 2024 quarter and is expected to continue on this trend. We anticipate unemployment to reach a peak in 2025 before it gradually starts to fall. 

Although, falling from its peak in October 2023, net migration has been at record levels and remains high. For the year ended April 2024, net migration totalled 98,500, with 130,600 migrant departures outweighed by 229,100 migrant arrivals. Of note, migrant departures of New Zealand citizens increased a further 42 percent, reaching 81,200. We expect net migration to continue to normalise with less capacity for job creation in the economy. It is likely that it will edge closer to the long-term average in 2026. 

Export growth in the last couple of years has been largely driven by high prices as a result of global inflation. But we are now seeing global headline inflation temper down and expect this to be the tone for our exports. Instead, our export growth has been volume-driven rather than price-driven, as was the case in the March 2024 quarter where a volume increase of 6.3 percent contributed to a quarter-on-quarter growth of 6.6 percent in export value. 

Following this trend, we expect import growth to decrease considerably as demand for goods and services remains low in a constrained economy. Adding to this, with global inflation decreasing, import prices will continue to fall. In the March 2024 quarter, import prices fell 5.1 percent compared to the previous quarter. We see imports beginning to grow once the economy picks up some positive momentum in 2025 and 2026. 

The current coalition Government has slightly reigned back their position on bringing the books back into balance as they have been limited in their ability to find cuts while providing the promised tax relief. A sluggish economy is also playing its part, with higher unemployment and lower levels of spending. We expect the operating balance before gains and losses (OBEGAL) to worsen in 2024 and 2025 before slowly recovering in the following years. 
 

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.