Liam Dann: Tougher economic year ahead? How dark will get it get?


Everyone seems to agree that New Zealand faces a tougher economic path this year.

But how bad is it really?

The urgency of the news flow and hyperbole of some commentators can make it seem like we’re bouncing from one crisis to the next.

Are we emerging from the grip of the pandemic straight into a full-blown economic meltdown?

Spoiler alert – we’re not.

Let’s take a look at the latest forecasts and assumptions being made by both local and international economists to get a sense of what we should expect.

First though, after all we’ve been through in the past two years, surely we can reflect briefly on how well we’ve done.

“New Zealand’s management of the Covid-19 crisis has been successful.”

That’s not my opinion. That’s how the International Monetary Fund (IMF) called it in its latest report on New Zealand, published last week.

There were no great revelations in the report.

The IMF warned of inflation headwinds and slowing growth. It warned that the big risk to our economy is a bursting housing bubble.

But it was heartening to see the dispassionate international organisation make a clear call on the country’s pandemic response.

“New Zealand has weathered the Covid-19 pandemic better than most countries in terms of health, fiscal and economic outcomes.”

That one is from ratings agency S&P Global in its latest report affirming New Zealand’s AA+/A-1+ credit rating.

These guys don’t muck around with emotive or political judgements.

“The outlook is stable,” S&P concluded.

That really should be the starting point for rational debate about New Zealand’s economy right now.

It might not feel very stable because we’re paying more for things and interest rates are rising.

But that’s a process New Zealand and every other country has to go through to (as the IMF says) “normalise” macro-economic policy settings post-Covid.

Monetary and fiscal policy measures taken in the past two years were designed to absorb the shock of the pandemic and spread the cost across time.

Arguments (from the Right) that we shouldn’t have taken these measures and arguments (from the Left) that we don’t have to pay for them are equally juvenile in my view.

We did what needed to be done in a crisis. Now we need to shift our focus forward to the rebuild and recovery.

There’s still plenty of room for scepticism about government policy and for opposition voices to offer alternatives without resorting to doom-mongering.

That just risks undermining public confidence in what remains a robust and resilient economy.

It’s robust and resilient because of cautious fiscal management by both major political parties since 1984.

That is not under threat.

Finance Minister Grant Robertson said last week he’ll announce a return to debt targeting in the May Budget.

The IMF describes “the scheduled tightening of fiscal policy” as”appropriate”.

I suspect Robertson will pick a higher debt target than National. That’s another area of some robust debate.

But regardless, the country will be back on a path to pay down debt.

Meanwhile, we need the Government to tackle low productivity and wage growth, housing and inequality, poverty and the crime it comes with.

Whether the current Government has the right policies to deliver these things – or the competence to do so – seems like the logical focus for political debate.

A number of economists have downgraded their GDP forecasts in the past few weeks, providing good examples of how to contextualise the economic cycle without catastrophising.

Let’s dive into the gloomiest of the market economists – from the ANZ economics team.

Last week they downgraded their GDP forecasts for 2022 – from 2.4 per cent to 2.1 per cent.

That’s not great, but it’s clearly not a recession either.

It is fair to say that the forecast puts ANZ in territory where recession risks if (what economists like to call) downside scenarios play out.

ANZ economists are also the most hawkish right now.

That means they are most concerned about inflation and believe the Reserve Bank needs to hike interest rates hard and fast.

“If inflation is not contained fast enough with monetary tightening, the RBNZ will likely need to act even more aggressively later on – with an even more difficult job to do,” argues senior economist Miles Workman.

“In short, recession risks are no longer a good reason for the RBNZ to hike gradually.”

ANZ’s is not actually the gloomiest GDP forecast.

That comes from Treasury, which (in December) saw annual growth of just 0.8 per cent in 2022.

One assumes that was based on Covid restrictions running longer than they have and it will upgrade in May.

Others are much more optimistic – even as they downgrade.

Last week, international research unit Fitch Solutions downgraded its New Zealand 2022 growth forecast to 3.4 per cent -from 3.8 per cent.

That’s in line with the call from Westpac’s local economists.

Although, I suspect a series of negative looking consumer and business confidence surveys may see Westpac downgrade at its next opportunity.

Kiwibank softened its expectations to 3 per cent for 2022.

A lot of the variability in forecasts is to do with uncertainty about the border reopening.

How quickly and strongly tourism will return to boost the economy? What will net migration look like? Who could know?

Clearly, someone’s going to be proven more accurate. But in broad terms one thing is clear – nobody sees this economy going to hell in a handbasket.

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