Subj : What will make New Zealand a 'rockstar' economy again?
To   : All
From : News
Date : Tue May 21 2024 12:21 pm

New Zealand should aspire to become a "rockstar" economy again, but it will
take some work to get there.


That is according to HSBC chief economist for Australia and NZ Paul Bloxham,
who made headlines a decade ago when he said New Zealand would be the
"rockstar economy of 2014".


But now he says times are tough, and the picture is a lot different.


"I described it as a rockstar 10 years ago when lots of things were going in
a positive direction," he said.


"You were a big exporter of dairy and meat products, getting a big influx of
tourists promoting growth as well."


Now, rockstar status was something the country would have to aspire to, he
said. Households in particular had borne the brunt of getting the economy in
balance again post-Covid.


All the focus of battling inflation had gone on denting demand, but
policy-makers would also need to work on improving the supply side of the
economy to beat the country's inflation problem, he said.


There needed to be a focus on looking for the things that New Zealand did
best to grow the economy, he said.


"A clearer focus on what the growth engines are and how to best make use of
those to grow the economy. Deregulation ought to play a role, making labour
markets as flexible as possible ought to play a role."


Where NZ finds itself
He said times were tough for New Zealand, with unemployment rising, the
economy tipping into recession and four of the past five GDP updates showing
declines.


Bloxham said that situation had been created because when New Zealand emerged
from lockdowns, demand picked up, but the supply side of the economy was not
ready to deliver enough goods and services to meet that demand.


"What you had was a big pickup in inflation, policy-makers responded, central
banks responded by lifting interest rates.


"The Reserve Bank has lifted its policy rate by 525 basis points. it was one
of the earliest central banks to lift interest rates. The intention was to
lift interest rates, slow down the economy and get inflation to come back to
target. In doing that they've delivered a recession."


Higher interest rates were weighing on households, he said. The impact of
that could be seen in consumption figures, which had been weak and falling
over the past year.


He said it did not necessarily have to be that way.


Where NZ went wrong
"A better way to get inflation to come down would be at the same time to be
seeing a large improvement on the supply side - not just weakened demand but
an improvement in supply. Some countries have had that. America has had quite
a large pickup in productivity which has helped to bring inflation down."


He said New Zealand's supply response had been "dismal" compared to the rest
of the world.


"Inflation has been coming down very, very slowly. Inflation isn't yet back
where the Reserve Bank needs it to be."


He said the biggest risk to the economy was that inflation continued to
persist and remained sticky at elevated levels. That would mean a longer
period of weak demand could be seen to be needed.


"It's a really tough spot to be in. The Reserve Bank has lifted interest
rates to get inflation to come down and it has pushed the economy into a
downturn but you've still got inflation that's sticky and elevated."


He said he did not expect the Reserve Bank to be able to lower the cash rate
until the end of the year.


"We think ahead of Christmas there might be a bit of rate relief coming
through."


So, what now?
Bloxham said improving productivity and flexibility of the supply side of the
economy would be a big question for the upcoming Budget to address.


"Are the policy settings going to help to improve the supply side of the
economy? Will there be measures taken by Government that aim at lifting
productivity? That's what ought to be in focus. The Reserve Bank has lifted a
lot and that has had a big effect on slowing down consumers but it still
hasn't got inflation down quickly."


New Zealand's closed borders had been very disruptive to supply, he said.

"The first thing that happened [when borders reopened] was a net outflow and
that tightened the labour market even more. that has gummed up the supply
side of the economy. Even with a weakening in demand and slowdown in the
economy overall."


By Susan Edmunds of rnz.co.nz

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