Economic outlook – where do we go from here?

It was perhaps inevitable that, given its publication on Hallowe'en, the team at Westpac should sub-title their latest report on prospects for the New Zealand economy Trick or Treat (or 'demanding money with menaces', as a lawyer friend used to call it).

Writing in the foreword to the Overview, Kelly Eckhold, the bank’s Chief Economist, notes: ‘A key question on everyone’s mind is whether the policy mix under the new centre-right government will deliver New Zealanders a trick (perhaps in the form of a prolonged weak fiscal outlook with low growth and high inflation) or a treat in the form of policies that help the economy more quickly overcome past imbalances and bring us back to a sustainable growth path. For now, we are very much in “wait and see” mode as we don’t know the exact nature of the final coalition government and the policies they will pursue.’ However, the Overview does make some suggestions.

The change in government and policies will have important implications for the economic landscape. Notable areas where the potential coalition partners agree include:

• Tax cuts / lifting of tax brackets (New Zealand First favours a zero-rate bracket for incomes <$14,000).
• Easing of tax obligations on property investors.  
• Reduced regulatory burdens, with a particular focus on the agricultural sector and less ambitious climate change policies.
• Focusing the RBNZ on inflation control, rather than its current dual mandate. In essence, the likely suite of policies will see a smaller role for government with lower taxes, less regulation and lower government spending.

In terms of fiscal policy, that is likely to see the new government run a similar (or slightly higher) operating balance as under the previous government, but with roughly equal cuts to tax revenue and government expenditure.

More broadly, the new government’s policies are likely to be supportive for businesses. Notably, by reducing red tape the new government is aiming to lower businesses’ costs, and thus lift incomes while also encouraging hiring and investment.

While the change in government signals greater restraint in spending over the next few years, governments of all stripes continue to face tough longer-term choices. New Zealand’s population is growing rapidly as well as ageing, increasing the demand for core public services, including spending on health, superannuation, and education. Also, in the short term at least, high inflation is putting further pressure on government spending. Unless governments are prepared to run higher operating deficits and higher levels of debt, future budgets will likely require further cuts to spending and/or additional sources of revenue.

Beyond the general economic outlook, the Overview also comments on some specific areas of interest to the franchise sector.

Business

The Overview says that, with domestic spending turning down and weak demand in some key export markets, businesses across the country have reported a downturn in trading activity and forward orders. That downturn has been widespread across industries, but it’s been especially pronounced in the construction and manufacturing sectors.

There’s also been softness in many rural regions, where falls in commodity prices have been weighing on incomes. In contrast, activity has been more resilient in regions such as Auckland, Canterbury, and Otago, which are benefiting from the recoveries in net migration and international tourism. Gisborne and the Hawke’s Bay have also bucked the trend.

Migration

According to the latest estimates, a net 110,000 people came to New Zealand in the year to August with the likely intention of remaining for at least 12 of the subsequent 16 months – the timeframe required for a visitor to be considered a long-term migrant. More than 225,000 long-term migrants arrived over this period, including around 26,000 returning New Zealanders. That inflow was only partly offset by the departure of around 68,000 New Zealanders and around 47,000 foreigners. Just over 60% of the long-term arrivals into New Zealand were in the 15-39 age group, with a further 20% in the 40-64 age group. The median age was just over 30 years – a couple of years older than typically seen prior to the pandemic.

The inflow of almost 200,000 non-New Zealand citizens is dominated by arrivals from Asia, including over 34,000 from India, almost 25,000 from the Philippines, over 24,000 from China and over 20,000 from elsewhere in Asia. The number of arrivals from North America, the UK, Germany and France stood at just over 21,000 combined – only slightly larger than typically seen prior to the pandemic. Given that mix, it seems reasonable to think that the wealth of today’s average migrant might be lower than seen in the past.

Editor’s note: This change in migration mix is likely to ease the labour shortage which has affected so many businesses for the past couple of years, especially in the hospitality sector, as well as reducing wage pressures. It will also increase the appeal of low investment and part-time franchise opportunities as new arrivals seek to better their futures.

Global conditions

Westpac reports that growth in many of New Zealand’s key trading partners remains constrained by tight monetary policy as central banks strive to lower inflation from still elevated levels. Recently, higher longer-term interest rates have further tightened financial conditions and will help sustain the current downtrend in inflation. However, given resilient labour markets, most central banks are unlikely to consider easing off the brake before the second half of next year.

According to the Overview, ‘Our key goods export industries have had a tough 2023 so far. Weak Chinese demand has been a key driver for this underperformance over the year. We are cautiously optimistic that goods exports will improve over 2024 as the Chinese economy recovers. We expect services exports (tourism) to rebound to around their pre-Covid levels over the next year. A gradual improvement in the performance of the external sector should see our current account deficit narrow somewhat, but it will likely remain relatively high.’

The full 22-page Westpac Economic Overview can be downloaded in pdf form here.

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