Finance Minister Nicola Willis during a press conference after her speech at the ANZ Annual Post Budget Briefing, Wellington, 31 May, 2024. New Zealand Herald photograph by Mark Mitchell
Finance Minister Nicola Willis during a press conference after her speech at the ANZ Annual Post Budget Briefing, Wellington, 31 May, 2024. New Zealand Herald photograph by Mark Mitchell
THREE KEY FACTS:
The consumers price index increased 4 per cent in the year to March 2024.
Non-tradeable or domestic inflation was at 5.8 per cent in the year to March 2024.
Richard Prebble is a former Labour Party minister and Act Party leader. He currently holds a number of directorships.
OPINION
At 10.45am on Thursday Stats NZ will release the latest Gross Domestic Product (GDP) data. Economists are divided on whether the data will reveal theeconomy is in a recession.
Immigration means our population has grown. Tomorrow’s release will confirm GDP per person has fallen. We, the people, are in a recession.
New Zealand has the double whammy, stagflation: Inflation and a recession. The latest inflation data revealed domestic (non-tradeable) inflation is running at 5.8 per cent, double the Reserve Bank’s inflation target. A spooked Reserve Bank is now saying it is unlikely to cut interest rates until next year.
The data is all historical. The GDP announcement is for the first three months of the year. It is annual growth that looks back a year. It is the report card of Labour’s economic performance.
Finance Minister Nicola Willis and officials will be poring over the GDP data. I have participated in such meetings. Using the March GDP data to make economic decisions is like trying to drive using Google Maps while it tells you where you were three months ago.
What matters is what is happening in the economy now.
I developed a reputation for the accuracy of my assessment of what was happening in the economy. Subsequent data would reveal that my assessment was correct.
I am not a guru. I was the Minister of Railways. Each week I received a report on how much freight railways had moved. I noticed the freight movement indicated what was happening in the economy. It figures. If there is less business happening, there is less freight moving.
Today there is an even better indicator of the state of the economy, the ANZ Truckometer. The heavy traffic index, which provides a steer on production GDP in real-time, was down 2.3 per cent in May. That is a lot. At the same time, our population has grown.
The only explanation is the economy is in recession. Another month like May and the country is in real trouble.
Even if the Reserve Bank were to lower the official cash rate tomorrow, interest rates take six months to start taking effect and 18 months for the full effect. We are in for a tough winter.
Willis may have been motivated by politics when promising tax cuts and the removal of the Auckland fuel tax charge, but the measures may prove to be inspired economics.
Finance Minister Nicola Willis may have been motivated by politics when promising tax cuts and the removal of the Auckland fuel tax charge. Photo / Mark Mitchell
The tax cuts will give a needed economic boost. Many households have no choice but to use their cars. The removal of the Auckland fuel tax will have an immediate impact on household budgets.
If we had current information, we might discover we have reached the inflection point for inflation. Even though business is being hit by a wave of extra costs, there comes a point when the costs cannot be passed on because customers cannot pay.
The ANZ Business Outlook survey indicates the proportion of businesses intending to raise prices is falling rapidly. Businesses are expecting wage increases to be 3.4 per cent, which ANZ notes is consistent with the Reserve Bank’s inflation target.
Picking when to lower interest rates is very difficult. Central banks usually get it wrong. In the last five years, our Reserve Bank has got every major decision wrong. Proposing to wait until 2025 before cutting interest rates is almost certainly another mistake.
While the Reserve Bank needs to be sure inflation is beaten, if the bank relies on out-of-date data, the economy will be smashed before it acts.
There is a lesson for the coalition, too. “Never waste a recession,” well-known economist Joseph Schumpeter once reportedly said. As unemployment rises, the public mood will alter. Those who are marching in the streets opposing change are the same people who by spring will be demanding Government action.
No country has ever taxed its way to prosperity - it can only be achieved by embracing improvement.
The coalition has a once-in-a-generation opportunity to make sweeping deregulation. Donald Trump, despite his convictions and horrible behaviour, is now leading in US electoral polls. The Trump deregulation rapidly transformed the US economy. The average American was better off.
Deregulation could do the same for New Zealand. We need fast-track approval for everyone. We need RMA reform yesterday.
Cutting red tape sector by sector is too slow. Every department should be asked for a list of regulations that do not meet any cost-benefit test. We need a bonfire of red tape.
Health, welfare and education all need to be significantly improved.
