A high-powered group of economists yesterday produced a gloomy forecast for the New Zealand economy for the next year.
Importantly the forecast suggests we will go into election year — and into the end-of-year election – with the economy slowing and unemployment quite possibly rising.
The forecasts come as the OECD released overnight its Composite Leading Indicators (CLIs), designed to anticipate turning points in economic activity over the next six to nine months, and they continue to signal a slowdown in most major economies and in the OECD area as a whole.
There are lessons for our political parties from polling data and focus groups from the Australian election on this.
Briefings from pollsters working on the campaigns there suggest the cost of living and the economy was the over-riding issue, but voters were concerned to find which leader they could trust more to manage the economy.
That will pit Jacinda Ardern with all her experience up against the totally inexperienced Christopher Luxon.
But what will worry the Labour party will be the Consensus Forecasts issued yesterday by the New Zealand Institute of Economic Research.
These are a consensus of economic forecasts from ANZ Bank, ASB Bank, Bank of New Zealand, Kiwibank, the New Zealand Institute of Economic Research, Reserve Bank of New Zealand, The Treasury and Westpac.
What is now clearly evident is that the Treasury forecast of 4.2 per cent economic growth for the 2022/23 year set out in the May Budget was wildly optimistic.
The NZIER forecasts have been steadily dropping that figure through the year and now have it down to 2.5 per cent; almost half of what the Treasury thought it might be back in May.
This is the number that will matter as it describes the economy in the lead-up to the election when voters are confirming their intentions.
The Institute’s media release said their forecasts showed a downward revision to the near-term outlook for the New Zealand economy and the subsequent years to 2025.
“These revisions reflect expectations of weaker activities across most sectors in 2023 and higher inflation and interest rates,” it said.
“Added to this are the continued global supply chain disruptions due to ongoing uncertainty about the COVID-19 pandemic, the Ukraine-Russia conflict and signs of slowing global growth.
Finance Minister Grant Robertson acknowledged these forces in Parliament a fortnight ago.
“Sentiment does remain subdued amidst what are very challenging conditions for businesses as they deal with high inflation and ongoing supply constraints,” he said.
“While economic growth is forecast to slow this year, the resilience of the New Zealand economy and our strong fiscal position means that we are in a good position to support New Zealanders to deal with these challenges.”
From 2023/24 on, there is very little difference between Treasury’s Budget Economic and Fiscal Update forecasts and the latest NZIER forecasts.
But the NZIER forecasts have made small adjustments downwards since their last forecast in June.
“Despite a stronger starting point for household spending, the downward revision through to 2025 reflects the expectation that the dampening effect of higher interest rates on spending will become more apparent as households roll into much higher fixed mortgage rates,” the statement said.
“The residential investment forecast has also been revised down, reflecting weaker housing market activity and dampened demand due to higher interest rates.
“Businesses are more pessimistic.
“In the face of rising cost pressures, higher interest rates and heightened uncertainty, their appetite to invest will reduce further over the coming years.”
The outlook for wages continues to be good though there is now a risk of rising unemployment, which the Institute forecasts could get to 4.8 per cent by 2025/26.
They are forecasting wages (average hourly earnings) to rise 6.8 per cent this year (22/23) against inflation of 4.8 per cent, a real increase of two per cent.
“Outlook for wage growth has revised up again throughout the projection period, with a downward revision in employment and upward revision in unemployment,” the statement said.
“Although the tight labour market has been driving up wages in the past year, the reopening of New Zealand borders may weigh on wage growth as more firms can bring in workers from overseas. “Meanwhile, the stronger wage growth is also underpinned by the high inflation environment.”
The Institute’s forecasts come as the trading bank economists are all looking forward to Thursday and the release of GDP figures.
ASB Chief Economist Nick Tuffley said, “the broad story is the economy looks like it has been rebounding from the most severe period of Omicron disruption (over February and March) only to bang straight into capacity constraints.”
Kiwibank’s economics team believes the economy has bounced back since Omnicron.
“Despite a solid 1.1% print, the June quarter report will likely reveal a weaker economy than the RBNZ had forecast in August,” they said.
“The RBNZ’s latest projections see a 1.8% increase in economic output.
“We, too, had initially forecast a 1.8% quarterly gain.
“But with the benefit of additional data, it’s clear that supply issues persist, which continue to weigh on economic growth.
“That is, our downward revision is more reflective of supply struggles than slowing demand.”
Westpac’s economics team emphasised the work the Reserve bank would have to do to get inflation back down to the target range.
“It’s likely that some parts of the economy (such as the household sector) will have some pain to wear in the years ahead, even as other sectors such as tourism begin their recovery,” they said.
And that is the problem facing the government; that it is the household sector – that is to say, ordinary voters —- who look likely to get hit hardest as the economic adjustment to recover from Covid and the Ukraine War and the inflation those events have induced plays out in the lead up to the election.