So the fact that the result caught our politicians, economists and even the Reserve Bank off guard should see us asking some questions.
But I’m surprised that we’re surprised. Most of the people that I talk to knew that the period from April to June was exceptionally tough. On the ground it felt bad. Numbers aside, it was easily the worst quarter we’ve had in this cycle. It felt like 1991 all over again.
In the course of my daily life I talk to people operating businesses. Transport groups and freight forwarders. Motor vehicle dealers, media companies and real estate operators. Retailers, construction companies and software developers. Even professional services firms. The people on the ground. Most of those people weren’t even slightly startled at the June GDP horror. They felt it as it happened.
The impending disaster was so obvious that in July, I went so far as to say publicly that the Reserve Bank needed two cuts of 0.5% before the end of October to save what’s left of our economy. In August they cut rates by just 0.25%.
I don’t have a swathe of computer screens in front of me, nor do I have a constant stream of government officials briefing me. But I talk to the people on the ground every day. It’s a lesson that everyone from our Finance Minister to our new Reserve Bank chief would do well to heed.
In this writer’s opinion, the Reserve Bank has been too late to act at almost every turn of the economic rollercoaster over the past five years. It has one job: to keep inflation within the targeted band. And you get the sense that it has become so cautious that it operates reactively, based on what has happened, rather than proactively, based on what is happening.
To be fair to the bank, the Government hasn’t helped it.
New RBNZ Governor Dr Anna Breman (right) with Finance Minister Nicola Willis when Breman’s appointment was announced this week. Photo / Mark Mitchell
The Government inherited an overburdened administration. Its predecessors made little in the way of economic or infrastructural progress during their six-year term. Meanwhile they employed too many people, injected too much stimulus and introduced too much debt. Inflation, house price bubbles and, ultimately, economic paralysis were the result. There was only one way we could go after that.
So, when Christopher Luxon’s coalition Government came to power, most of us knew the economy had been left in a very sorry state. We expected the new team to do something about it.
Luxon came into his prime ministership with the support of two other political parties, both of whom, we believed, would support the need to get the economy in order.
They also came in with the permission of the electorate, who for the most part had voted with the understanding that we were not in great shape and that we would need some harsh medicine to restore economic order. We knew we needed to get the cost of running Government down. And we knew we had to reduce our debt.
At the same time, we needed to invest money on infrastructure, building assets and creating jobs. There’s a difference between investing and spending.
But the medicine never came. During its first year the Government talked cautiously about trimming the size of the bureaucracy. But the massive action never happened. Instead, we have continued to borrow and spend, actions that run counter to the Reserve Bank’s inflation objective.
The weapons to combat inflation include reducing demand through increased interest rates, restrained government spending and reduced borrowing. We’ve only done one third of the job.
As a result, the burden has fallen on everything and everyone, except the Government and its related bureaucracy. That burden has therefore been concentrated on the commercial sector. The sector that could feel those cold winds of April, May and June. That sector that has seen hospitality businesses and large construction companies alike fail. That same sector that has seen a regular flow of discontinued jobs across a spectrum of businesses from retail to timber processing.
When the commercial sector fails, tax revenue reduces. That’s the income the Government uses to pay its operating costs. If tax revenue declines, and costs aren’t reduced to compensate, additional borrowing is the only way to fill the gap.
And so here as we sit here today, inflation is back under control and our harsh interest rate punishment is almost over. But our Government’s borrowings, as well as its operating costs, are greater than before. There is, therefore, a real risk that any recovery that may come is temporary.
Under Finance Minister Nicola Willis, GDP shrank 0.9% in the June quarter. Photo / Mark Mitchell
Most of us will understand the impact of buying that house that you can’t quite afford. Once the initial enthusiasm fades, you’re left with a mortgage payment that you struggle to make each month. There are only a few things you can do. Sell the house, probably at a loss. Earn more money, by increasing the productivity of your household. Or finally, get your other costs down by reducing spending. If you can’t get things under control you become paralysed, and unable to do what you need or want to do.
The options for the Government are no different. But we don’t have many assets that we want to sell, and our productivity is appalling and unlikely to improve any time soon. We have to stop spending money.
Having missed the opportunity to “cut its cloth” during the first 18 months of its parliamentary term, the Government is now paralysed by the prospect of an election a year or so away.
Accordingly, the other “non-surprise” of the week was this newspaper’s Mood of the Boardroom survey results. The survey, across 150 business leaders, dealt some harsh feedback to both the Prime Minister and our Finance Minister for their performance on the economy. And why not?
During the past few years, businesses have been forced to get their act together. They’ve innovated, reduced costs, and hit the roads selling harder than before, just to stay afloat. They’d feel better if they saw the Government doing the same.
One commentator described the Government’s fiscal position as a “ball and chain around the economy” in calling for the Government to tackle the big issues, including the structural deficit.
The business bosses rolled out their concerns about the usual issues too. Infrastructure. Business confidence. Productivity. Loss of talent. All things we’ve heard before. All things that we continue to struggle with. All things that need some aspiration and a turnaround plan.
Business leaders are calling for tougher action as economic pain spreads across industries.
But the Mood of the Boardroom wasn’t all bad news. In fact, if you put aside the economic management, the survey tells us that we have plenty to be positive about. The Government has made real progress across a number of our portfolios that had been previously neglected and run down, and it has done that in a short amount of time. The business community is noticing that progress and celebrating it.
Most importantly, the replatforming of our education frameworks is one of the highlights and may well be the lasting legacy of this parliamentary term. The re-engineering of Pharmac was also overdue and with new leadership now in place, we seem poised to get better bang for buck for those living with medical misfortune. Act leader David Seymour said during the week that “our goal is to make Pharmac the world’s leading medical technology assessor”. We need more aspiration like that.
Meanwhile, our trade and foreign policy teams are doing great work internationally, again after a period of neglect. The geopolitical mess is a tough landscape at present and, if we are to become outrageously successful, our small economy needs the rest of the world on our side.
But there’s a shadow that hangs over these achievements. As the saying goes, “it’s the economy, stupid.” It’s not in the place that we need it to be. And as much as we want waiting lists down and our kids to be educated properly, we can only do that stuff if we run a successful and viable economy.
Fonterra’s strong results are set to inject millions into the rural economy. Photo / 123RF
The good news is that we should expect some better economic news on the horizon. This quarter feels better than the last, despite the gloom of winter. Fonterra’s result, announced during the week, provides an economic bonanza to the rural sector on which we rely so much. Those farmers’ pay cheques will pump millions of dollars into a thirsty marketplace and there’s positive noise around housing for a change.
Let’s take the economic medicine before it’s too late. It’s time to stop blaming the past and instead design the country we want for the future. One with infrastructure, jobs, education and healthcare, and a functioning Government that’s right sized and fit for purpose.
The green shoots won’t be here before Christmas, but 2026 is looking a whole lot better.
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