The world is covered in conflict and investors may be too optimistic about the year ahead. Here’s what a wartime economy may look like in 2025.
Opinion by Steven Joyce
Steven Joyce is a former National Party Minister of Finance and Minister of Transport. He is director at Joyce Advisory, and the author of the recently published book on his time in office, On the Record.
The Reserve Bank cut the Official Cash Rate (OCR) by 50 basis points in its February Monetary Policy Statement.
Agribusiness, tourism and technology sectors are expected to drive economic activity.
Risks remain if inflation rises due to a falling dollar, potentially leading to higher rates.
It’s been a while since I could be described as an economic optimist, yet here I am feeling positive about 2025, especially the second half of the year.
I have been bearish on the New Zealand economy for around five years, first based on some very pooreconomic policy settings and more recently on the policy mistakes around the Covid response and their aftermath.
So why more optimistic now, especially when the world as a whole is in a darker, more pessimistic place?
I put it down to three things. The first is our Reserve Bank.
No, I haven’t had a road of Damascus conversion to the virtues of the current Governor Adrian Orr, in fact quite the reverse. Attentive readers will know I have been unimpressed with his performance over a long period.
I found it particularly galling this week to hear him with (Newstalk ZB host) Mike Hosking upbraiding our country on its lack of capital investment, when in the last six years he’s done more than anyone to undermine the case for businesses to invest.
His heavy-handed jerks on the interest rate lever and quantitative easing have seen much more wild swings in the economic fortunes of this country than Australia, and that has destroyed business balance sheets and confidence.
The result has been an unemployment level significantly higher than Australia, a long recession while Australia hasn’t had one, and a resulting outflow of people that is the worst since the Canterbury earthquakes. And all this before we talk about his prudential settings and their impact on banking competition.
My view is that the Governor should declare victory over inflation and retire, and let a more steady and modest central banker take his place. Some say the Government should fire him, but that’s difficult for the precedent it would set. He should just go.
No, my positivity about the Reserve Bank is back-handed. At long last, our economy won’t be so driven by the Bank’s interest rate decisions. With inflation now back in the band and interest rates coming down, we are entering a period where sensible investment calls can be made without an overbearing central bank casting a shadow over every single call. This is positive and should be celebrated. It will also be growth-enhancing.
The second reason for positivity is the commodity cycle. We can be strangely negative about our biggest natural comparative advantage, the ability to grow quality and nutritious food in a cost-effective way. This year the agrarian sector is back and in a big way. Dairy and meat will be a big contributor to our economic recovery. A focus on growing tourism and international education is also positive, and our tech sector continues to grow.
The third reason I find to be positive is China. I’ve been one of those very worried about the Chinese economy as an engine of world growth, and the evidence for a while has supported that.
It is possible, however, that we have been too negative. China remains the second largest world economy and there are signs it is coming right economically after a prolonged post-Covid slump.
The turning point for me was the Deep-Seek AI release. Say what you like about security concerns, but the fact that it was built, despite China being cut off from the top international chipmakers, says that Chinese innovation is by no means dead. It will also give pause to America’s obsession with isolating China economically. China is far and away our largest trading partner, so if it recovers and grows this year, that is good for our growth.
So far so good, but there remains plenty to be worried about.
Domestically, New Zealand has lots of work to do if it is to recover strongly. There are large parts of our economy which are structurally underperforming.
Take the public sector. At the central government level it remains overstuffed and largely unable to get out of its own way. New Public Service Commissioner Brian Roche is talking the talk, but the trick will be if he can deliver. We need a slimmed-down more productive public sector focused on getting the job done.
A litmus test will be whether the Government can show up this year with truly investable infrastructure projects attractive to private funders. For a long time talk of PPPs (public private partnerships) was banned in favour of a chequebook of borrowed money. That is no longer an option. To get our infrastructure pipeline happening we need government agencies to have the skills to negotiate good deals.
Local government needs much work as well. Of our three main centres, Wellington’s messes have been well documented, while the Auckland mayor seems to spend much of his time railing ineffectively against things he doesn’t like while doing precious little to change it.
His apparent view that almost everyone apart from himself is an idiot might be part of the problem. Voters have the opportunity to get involved in local government later this year, and sharpen up the sector.
Our public company sector is also only part way through a rethink of what it is about. The current pretty dismal reporting season is in large part a reflection of the long recession we have been in, but there are also too many well-reported cases of poor governance amongst our largest companies.
We need a move from tick-box administrators to a more entrepreneurial culture in our listed company boardrooms if we are to really release the animal spirits of growth and a higher wage economy again.
President Trump is highly attuned to the state of the stockmarket. Photo / Getty Images
Internationally there is also plenty of risks. Both the world economy and geo-politics present a high risk of upsetting the New Zealand apple cart in the hands of the second Trump administration.
Like every other freedom-loving defender of the little guy I despair for the people of Ukraine under the Trumpian “might is right” political doctrine. However, in pure economic terms, there are two potential handbrakes that may prevent the worst excesses of the Trump economic philosophy. These are the US stock market and Congress.
President Trump is highly attuned to the state of the stock market as a barometer of his economic chops, and it is currently so fully priced that any destructive decisions will provide a fairly quick feedback loop.
The US Congress too will wake up at some point as we count down to the mid-term elections in just 20 months. If voters get grumpy as they find tariffs lifting inflation for example, congress members will start to question their fealty to a president with three years at most to run.
So there you have it for what it’s worth. Not a ringing endorsement of the economic year ahead, but more of a glass half full than half-empty feel. For the first time in a long time I’m feeling economically optimistic.
