On one hand, we’re hearing there are “reasons for optimism” over the economy. On the other, we’re hearing there’ll be a “sustained economic slowdown”.
So where does the truth lie? On today’s episode of The Detail, NZ Herald business editor at large Liam Dann talks about the state of New Zealand’s economy and whether we’re ignoring the real elephant in the room: China.
New Zealand’s current account – which measures the balance of trade, such as exports, imports and financial transactions – is not looking good.
“We had a large period with no tourists coming in and that’s one of the biggest ways we earn import dollars, and we managed to keep doing a pretty good job of buying stuff through the pandemic,” Dann tells The Detail.
“We didn’t earn as much, and the current account deficit has blown out to something like 8 percent of GDP.”
The pre-election economic and fiscal update (PREFU) opens the government’s financial books and provides forecasts so parties can fine-tune their policies. It was released last week.
Was it good news or bad news? Dann says “it depends a lot on your expectations”.
“I talked to a couple of international economists in the past week, and they both look at me and go ‘Your current account’s bad but at least your government debt is relatively low’.”
Both the main parties are promising tax cuts – Labour in the form of taking GST off fresh fruit and vegetables, and National pledging to help the “squeezed middle” through a “back pocket boost”.
But Dann says those policies will only make it harder to manage the economy.
“If you’re giving people money back right now and they spend it, it will go into the economy and it will be inflationary.
“If you’re looking at it from a nervous, fiscally-conservative economic position, you sort of think: ‘why is now the time for tax cuts?’ Maybe promise them in a year or so – let’s get the numbers around the debt and the current account heading in the right direction.”
But while we’re having this domestic debate, a bigger problem may be looming.
“All we’re hearing from all the business media is that ‘wow, China is not coming back to the kind of growth that was expected’,” Dann says.
“[China has] got some structural economic issues, and where in the past they’ve dealt with these slowdowns with massive stimulus campaigns themselves – just dropping interest rates and pumping up property spending – I think the leadership in China knows that they can’t keep doing it and they seem to be toughing it out this time.”
Dann says this is starting to affect New Zealand commodity prices.
“New Zealand is utterly reliant on exports to China for a huge part of its export earnings – mostly through dairy, but also logs and some meat. This is another reason that we’ve started to see some concerns.”
Dann says New Zealand could diversify its trade into places like India to help mitigate these risks in the long-term.
But it’s one thing for the government to tell businesses to do that, and another for them to sit up and take notice, especially if they’ve had a good run with their current partners.
Hear more about the state of the economy and what could be done to fix it by listening to the full podcast.
Check out how to listen to and follow The Detail here.