A report on New Zealand’s economic outlook by NZIER shows significant differences with the Treasury’s predictions released in the PREFU less than a week before.
The NZIER report, released on Tuesday, forecasts strong GDP growth of over 3 percent for the next three years, driven by high net migration, growth in tourism, and a healthy outlook for dairy prices.
The Treasury, by contrast, predicted that net migration would swiftly fall to around 15,000 migrants a year by 2022. It also doesn’t share NZIER’s optimism on dairy prices, which it predicted will fall, dragging GDP growth below 2.8 per cent, and 2.3 per cent in 2020 and 2021 respectively. NZIER sees GDP growth staying above 3 per cent in 2020, falling to 2.7 per cent only in 2021 and 2.3 per cent in 2022.
The PREFU shocked politicians last week when the Treasury downgraded its predictions for future surpluses, which parties were hoping to use to find election promises. Parties of all colours were forced to either can expensive policies or find alternative financing for them. The NZIER report could cast doubt on the Treasury’s less-optimistic GDP outlook, potentially putting those surpluses back in play.
The Treasury didn’t make its predictions without equivocation. In its notes on the PREFU, it was frank that net migration may buck predictions as it has done in the past and remain high. An ASB report from March predicted that the figure could remain as high as 60,000.
The NZIER report also raised some crucial questions about how New Zealand can adequately prepare for the arrival of migrants.
“Migrants need somewhere to live and work, and at a macroeconomic level, these demand effects can initially outweigh supply effects and lead to shortages [of] things such as housing, and cause congestion and price rises.”
With the PREFU causing parties to retreat into their shells, it’s important to remember that the slowdown in migration that will precipitate these smaller-than-expected surpluses is anything but certain.
There is a strong case made for the Government to invest in infrastructure to cope with increasing population before it is too late. For example, the report estimates that decongesting Auckland transport would reap benefits of between $900 million and $1.3 billion each year. With the PREFU’s pessimistic migration predictions putting a dampener on spending, essential infrastructure investment might be delayed or cancelled, which – if we continue to experience high migration – would put enormous strain on the country.
The other major discrepancy between the two reports was on milk prices — incredibly important for our dairy-dependent economy.
NZIER cites recent optimism from Fonterra on global milk prices as the cause for the positive outlook. On July 26, Fonterra revised its forecast farm gate price for 2018 upwards. This will now be $6.75 per kg of milk solids, up from an earlier prediction of $6.50 and up from $6.15, the price for the current season.
This upward movement in dairy prices was possibly not taken into account in the PREFU, which finalised its economic forecasts on the 21st of July, just days earlier. Again, however, it shows how quickly the global forces that shape these reports and their conclusions can shift, dramatically altering their conclusions
NZIER actually cites the PREFU and its prediction of declining surpluses, which it sees as mainly a result of government expenditure increasing more than predicted. With continued GDP growth, the picture is will be a little rosier. Core Crown Expenses will increase in nominal terms (as the PREFU predicted) but will decline as a percentage of GDP as the economy grows. GDP growth will increase tax revenue, giving the government greater means to pay its bills, in spite of them increasing in nominal terms.
With such different assessments on key economic drivers like migration, tourism, and dairy the PREFU and NZIER reports highlight the high stakes in this election. Neither party will want to eat the geese that lay our golden eggs, but they’re not exactly willing to foot the bill for keeping them alive either by planning for increased migration, tourism, and transitioning the dairy industry to a more sustainable model.
The PREFU, with its prediction of declining migration, soothes the contentious politics around this issue, but other reports, all predicting high migration, tourism and dairy prices suggest that big spending on infrastructure for migrants, tourists, and a more sustainable dairying industry is essential.