As we inch closer, Mood of the Boardroom and the nation signals we may be on the cusp of a continuum of change that could easily be accelerated. Australia is lagging New Zealand on this front and set for a wake-up call in 2027.
Out with the old
Bye-bye Great Moderation. That 1993-2000 era of low inflation, lower interest rates and volatility, and perceived better management by policymakers. Rules trumped power. The world became increasingly globalised and interconnected.
We sold more expensive houses to each other and thought we were getting wealthier. Immigration was a growth ripcord to be pulled.
The headline model worked but it was a fallacy, and we let policy settings slip, allowing a deeper rot to set in, eventuating in average yearly productivity growth 0.2%
In with the new
Three tectonic shifts are now colliding at once.
First, the old neo-liberal model has been exposed economically and geopolitically. Economic prosperity is now heavily intertwined with national security across food, energy and technology. House prices cannot grow rapidly in excess of income growth, nor debt. Eventually you reach an economic and societal tipping point.
Second, society is pushing back. Whether it be to the far left, far right or the emergence of National conservatism with immigration under the spotlight in many countries. Lacking income growth, which is a function of productivity, living standards stagnate and cost-of-living pain hurts more.
Third, financial markets are starting to behave like headmasters. With repeated tellings-off not working (small lifts in rates), we’ve seen the US 10-year bond and bond yields around the global rise more markedly, reaching 10-15-year highs. The message to central banks is simple; either get serious about price stability or term premiums (the additional compensation required for holding a long-term bond over a short-term one) will rise. Government debt is rising in focus.
An improving, though mixed, backdrop
The economic scorecard for New Zealand is a bunch of liquorice all-sorts.
The gross domestic product (GDP) of New Zealand is up 2.6% on a year ago. However, GDP per capita is the same as it was four years ago. Hours worked are up 2.8%. That means productivity growth (GDP/hours worked) is absent, as is growth in living standards.
Core measures of inflation are within the 1-3% band, but we have not had real price stability (2% inflation) since 2020, a whopping six years ago.
Exports have soared. The housing market – outside of Canterbury, Otago and Southland – has soured and will likely continue to do so in 2027, given demand relative to supply.
The current government has continued to borrow and run deficits, just like the previous one, with the tough decisions back-loaded into forecasts in a case of promise-you-nomics.
There is no credit accelerator in this economic recovery with borrowing growth anaemic.
Business confidence is high. Consumer confidence is not.
Canterbury and Otago have eclipsed the golden triangle as the place to do business, going by the growth in business numbers.
The current government has continued to borrow and run deficits, just like the previous one, with the tough decisions back-loaded into forecasts in a case of promise-you-nomics.
Cameron Bagrie
Happier days
They call economics the dismal science. This is because economics often involves analysing difficult choices, resource constraints, and societal conflicts, which can lead to conclusions that are sobering or pessimistic.
It’s possibly also the science of tough love.
Accept interest rates are not going to be as low, nor housing the economic driver it once was. The new and better era involves taking real risk to make real money. The Mood of the Boardroom suggests businesses are up for it.
Future governments will face tough choices, with the bond market providing oversight.
There is a collection of small things in themselves that perhaps aggregate up to a bigger story.
We are having more debate on issues we’ve kicked down the road, such as New Zealand Super. Almost everyone is backing more into KiwiSaver. Congrats to the departing chief executive of ANZ, Antonia Watson, for accepting the need for a capital gains tax. It will not be a wrecking ball across the economy.
Education has become a key election issue. Wow and hooray!
Many council amalgamation plans, despite being parked for now, could be ignited in 2027.
While higher energy prices force de-industrialisation, renewable and solar energy investment is roaring.
Congrats to various journalists and media personalities for trying to get consensus in debates and politicians for signalling some.
Competition policy and structural ideas to improve market outcomes are being put on the table. Many sectors will not like proposals but competition policy links two major crises in this country: the cost of living and the income (low wage) crisis. Competition lowers costs and drives innovation and efficiency. We need to go hard in this area.
The young are flexing their political voice, calling for different economic direction, some nutty and some not. But they are expressing a voice that is overdue. The boomers have been over-represented for too long.
Each month the property market stagnates, I become more upbeat.
There appears to be some maturity over what a change of government could mean. Business confidence, a red/blue oscillating measure, has remained robust, despite polls suggesting a cliffhanger. Investment must be able to straddle political shenanigans.
The bottom line
In an uncertain world where the only certainty is uncertainty, three years of economic pain is making way for economic and social gain.
We have growing acceptance of the need for change and more examples of it. There will be more gestation issues – but bring it on.