Inside Economics: ‘An aspirational quality’ – can we trust Treasury forecasts? … plus, oil shock round two

Of course, the “better than expected” numbers were expected.

They shouldn’t come as a surprise to regular readers of economic commentary.

Treasury is always playing catch-up with its economic forecasts, compared to bank economists who have the luxury of updating them whenever they see fit.

The last set of Treasury forecasts were signed off in late April when oil prices were US$135 a barrel, and we were all in a panic about the economic shock waves.

Things didn’t go as badly as first feared, and we saw that with the second-quarter GDP figure staying in positive territory.

So it would have been disappointing if the fiscal picture didn’t look a bit better too.

As for the forecasts from here? Well, they look good, but Treasury has been upfront about the probability that risks skew to the downside.

In other words, they remain at the mercy of the global situation.

“The Prefu forecasts look to have an aspirational quality to them,” ASB economist Mark Smith said.

He noted they bank on a stronger starting point but assume little fallout “from medium-term growth headwinds, including higher interest rates, higher oil prices and moderating population growth”.

As Westpac economist Darren Gibbs notes, the latest Prefu forecasts were finalised on August 21, “when both oil prices and especially bond yields were materially lower than they are today”.

“Had the forecast been finalised more recently, the fiscal forecasts would have been weaker, at least in the near term.”

Underscoring that is the fact that Treasury said its forecasts assumed that Brent crude oil prices had peaked and would “gradually ease to around US$77 per barrel by mid-2027, slightly above pre‑conflict levels”.

Hmm … Brent crude was trading at US$106 a barrel yesterday afternoon.

Will it go up or down? Who knows, but good luck forecasting inflation right now.

Treasury’s forecast has Consumers Price Index inflation at just 1.6% by June 30, 2027.

That looks pretty optimistic to me.

Needless to say, I’d take the forecasts for 2028, 2029 and 2030 with a grain of salt.

We should expect a series of better-than-expected and worse-than-expected Treasury updates before then.

Markets impressed

Hey, I probably shouldn’t let my cynicism about long-term forecasting crowd out the good news here.

Markets were impressed. The numbers might not be surprising, but they are the official numbers and that matters.

ANZ economists noted that bond yields fell in response to the Prefu, “with the yield on the 10-year bond down around 3 basis points half an hour after release”.

The good news is that we won’t have to borrow as much as previously expected to reach forecast targets.

“New Zealand Debt Management has lowered bond issuance guidance by a significant clip, down a cumulative $15bn to June 2030, with a $4bn downgrade in the current fiscal year through to June 2029, and a $3bn downgrade to the 2029/30 fiscal year,” ANZ said.

This highlights the virtuous circle that starts to kick in if an economy can outperform over a sustained period and the debt track starts heading in the right direction.

Competition conundrum

Q: In your recent article on competition in groceries, you quote [Cameron] Bagrie as being all in favour of competition but also saying the only problem with our economy is low wages.

Our economy struggles. It is not so much a lack of competition, nor low wages, but a lack of increased productivity to support higher wages.

Only meat, dairy and some horticulture are improving, not perhaps because of increased productivity, but because of world demand.

And that itself might lead to greater productivity.

Our economy is spoiled by inflation. Our small population is scattered. If you have a former government printing in excess of $80,000,000,000 for four million adults, you have inflation, and it takes a while to reduce it.

You don’t need increased wages. I am not sure Bagrie is an unbiased economist. But if competition is going to work to lower prices, it will only be in the big centres; elsewhere it may even increase.

Yours sincerely,

Rex Frye

A: Hi Rex. To be fair, I think Cameron would agree with most of your points there.

I’ll re-hit the point he was trying to make when I talked to him, in case I didn’t explain it well the first time.

He argues that we need to increase competition in New Zealand for two reasons.

One is that we have a cost-of-living issue and, yes, we’d all like to pay a bit less at the supermarket or petrol pump.

But the other side of the equation, which doesn’t get talked about as much, is that competitive markets drive innovation and efficiency in business. And that increases productivity.

So yes, he’d agree that it is a lack of productivity to try to raise wages up that is New Zealand’s big problem. But he argues that a lack of competition is one of the key reasons why New Zealand has a low productivity rate.

I agree. I think it is one of several issues underpinning poor productivity in New Zealand.

For me, the big one is the way we invest capital in New Zealand. That’s why I’m keen on policies to boost KiwiSaver and direct capital into productive and innovative sectors.

Others highlight issues with over-regulation slowing us down.

I see how it is an issue, but when you look at the complexity of doing business in places like the US, UK and Australia, I’m not sure that we are markedly worse.

On the ag sector, it’s true that it is benefiting from good global export prices, but it is also the one sector in the New Zealand economy where productivity has improved in the past 20 or 30 years.

Farmers have steadily improved the yields they get from their animals through better genetics.

They use all sorts of smart technology to maximise grass growth.

The export companies have honed in on tailoring their products to specific markets.

I reckon it is something of a role model for the rest of the country.

Innovation and technological improvement have been built into the business model right through the value chain.

Finally, I’ll make the point that Bagrie is one of the few independent economists out there. He doesn’t work for a major bank, and he isn’t tied to a think tank.

Whether you agree or disagree, his views are very much his own.

Inflation shocker

New research from Westpac has highlighted how badly many Kiwis have been hit by cost-of-living increases in the last decade.

Inflation, as measured by the Consumers Price Index (CPI), is up 38% since 2016.

That’s a pretty ugly stat all by itself.

But the CPI includes loads of discretionary items (like international travel).

Westpac has highlighted that many of the most basic expenses people face have risen by much more in the past decade.

A loaf of white bread increased in price by 120% over the decade.

Butter has risen 157%, cheese is up by 75%.

A kilogram of beef mince increased in price by 71% over 10 years.

Even a can of tinned tomatoes (it doesn’t get much more basic than that) is up by 43%.

Rates and services are up 87%, and building costs are up 72%.

It’s not surprising that it remains the top issue with Kiwis in polls like the one released by Ipsos last week.

Ask yourself: what have your wages increased by over the same period?

In aggregate, the Stats NZ Labour Cost Index (LCI) shows wages up just 30% since 2016.

The LCI tracks wages from the employer side, measuring the amount paid for the same job and hours over time.

So if you’ve been in the same job for the past decade, you’ve almost certainly gone backwards.

Things look a little better based on the Quarterly Survey of Employment (QES) that asks workers about their pay and so reflects promotions, pay-band shifts, and changes in the mix of jobs.

That’s up 51% in the past decade, so more than overall CPI but less than many basic food items.

Labour market progress

Filled jobs data (the employment indicator we get to whet our appetite before the full quarterly labour market data drops) shows continued signs of improvement – just.

In August 2026, there were 2.34 million actual filled jobs, up 20,800 jobs (0.9%), compared with August 2025, Stats NZ said.

That’s good if we restrict ourselves to binary thinking, ie it’s better than going backwards.

Unfortunately, it’s not strong enough growth that we are likely to see a meaningful improvement for job hunters just yet.

“[The] numbers were welcome, ASB economist Wesley Tanuvasa said.

“While there is growing evidence that labour demand is repairing, there remains spare labour market capacity. We do not expect to see a meaningful reduction in labour market slack until 2027.”

For August 2026 (compared with July), across all industries, filled jobs were up 0.2% (5391 jobs) to 2.36 million.

Primary industries were up 0.5% (555 jobs), goods-producing industries were up 0.5% (2008 jobs), and service industries were up 0.2% (2734 jobs).

It was starting to look like the labour market recovery was extending beyond the three major government-led industries of healthcare, public administration, and education, Informetrics economist Rob Heyes said.

Agriculture, manufacturing, construction, administrative services, and arts and recreation collectively posted 7802 more jobs between August 2025 and August 2026, he said.

“However, declining employment in professional services and IT/telecoms is undermining job growth in major centres such as Auckland and Wellington,” Heyes said.

While the Iran conflict and elevated fuel prices hadn’t hit employment as much as initially feared, businesses remained cautious in their hiring decisions with job ads remaining flat month-to-month.

“With fuel prices heading higher again in September, the nascent labour market recovery could take another hit,” he warned.

Speaking of which…

Oil shock – round two

Anyone who’s filled up at the pump in the last week will have felt the pain of the dramatic crisis in fuel prices.

New Zealanders have copped a double whammy as Strait of Hormuz tensions have pushed the oil price back above US$100 a barrel just as the NZ dollar has taken a big fall.

In the past month, the kiwi has dropped about 5% against the Greenback.

The upshot is we’re suddenly facing pump prices of about $3.50 a litre for 91 octane.

At the last check (on the Gaspy website), the retail price had jumped almost 20% in a month.

That has local economists worrying about the renewed squeeze on wallets and whether that will further dampen consumer spending.

“Upward inflationary pressures from elevated oil prices and a softening NZD dollar continue, as we have been highlighting for some time,” BNZ head of research Stephen Toplis wrote this week.

BNZ economists have now upped their inflation forecast for the fourth quarter from 4.1% to 4.3%.

If they are correct, and all the latest fuel price action suggests they may be, then the recovery is staggering into a significant headwind for at least another three months.

Don’t forget to check out the Herald’s new podcast, The Economy of Everything, with Liam Dann and Tamsyn Parker – thanks to CMC Markets.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.

He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”.

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