Chief economist Dominick Stephens said that the official forecasts will likely be downgraded compared to the projections made in Budget 2024. Key economic indicators suggest the downturn will last longer and be more severe than previously thought.
The Treasury had originally forecast a 0.2 per cent rise in Gross Domestic Product (GDP) for the June quarter. Instead, GDP has fallen by 0.2 per cent, indicating economic recovery will take longer than expected. Other signs of a struggling economy include a decrease in credit card spending of 1 per cent compared to the same time last year. In addition, many businesses are reporting that current trading conditions are at their worst since 2009, excluding the effects of Covid-19.
Productivity Decrease
Stephens noted that a key factor contributing to the pessimistic outlook is a decrease in labour productivity. Productivity, which measures GDP produced per hour of work, has shown a worrying trend in recent years.
Between 1993 and 2013, productivity grew by 1.4 per cent a year on average. However, that figure has slowed to zero since 2014. Brief surges since have been short-lived, resulting in a long-term trend that suggests a weak economy.
While some recent data has shown that tax revenue is close to the Treasury’s forecasts, a closer look shows that GST collections have been low when compared to underlying economic activity. This trend may add to the pessimism in government forecasts if it persists.
Falling GDP
GDP per capita has fallen by 4.6 per cent since late 2022, and the trend is expected to continue through the second half of 2024. Stephens added that stagnant productivity makes it harder for the government to balance the books.
Productivity slowdown is not unique to New Zealand with other countries also experiencing similar trends. Reasons for this include weak capital investment, less international trade and weakening global connections.
Despite the pessimism, Stephens went on to add that these trends could be reversed with the right policies. For example, boosting capital investment, tweaking regulations and boosting international links could help make New Zealand’s future look brighter.
Conclusion
New Zealand’s economy is facing significant challenges with a deeper recession and ongoing productivity issues making recovery harder. However, while forecasts are not looking good, there is some scope for improvement with policy changes that could boost growth. And while the forecasts are not as bright as we would hope, the economy is showing resilience and things are unlikely to get worse in the near future.
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