Inside Economics: Where does New Zealand rate on misery index, plus weighing our recovery against the Aussies

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Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.

How is New Zealand’s recovery stacking up against the Aussies?

A bit of transtasman rivalry often helps to put things into focus for Kiwis.

Yes, our economy is only big enough to rank as a mid-tier Aussie state but we like to think we can keep up on many aspects of economic performance – even if the fundamental level of wealth is much deeper across the Ditch.

HSBC Australia and New Zealand chief economist Paul Bloxham took a look at the relative performance of the two economies in a new report titled: Trans-Tasman divergence ... and the winner is?

Bloxham, for those who don’t recall, was the economist who dubbed New Zealand “a rock star economy” back in 2014.

At that time, we were outperforming Australia on a whole list of macroeconomic indicators.

What makes the comparisons interesting this time around, says Bloxham, is that we can compare and contrast the two different approaches taken by the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA).

At the end of the pandemic, both Australia and New Zealand had similar-sized high inflation challenges, Bloxham says.

Paul Bloxham, HSBC chief economist for Australia and NZ.

However, the policy responses to these challenges were different enough that they drove different economic outcomes.

The RBNZ’s approach was to deliver more substantial monetary tightening – 525 basis points in total – accepting that this would likely tip the economy into a recession, Bloxham says.

GDP fell in 2024 and the unemployment rate rose by almost two percentage points but the approach did bring inflation back to the RBNZ’s “near 2%” target by the second half of 2024.

“Across the Tasman, the RBA delivered later and less tightening (425 basis points in total),” Bloxham says.

The aim was to “deliver a soft economic landing and get inflation to fall, but accepting that inflation would fall more slowly”.

GDP growth slowed to 1.1% in 2024 and the unemployment rate rose by only 0.6 percentage points.

Meanwhile, core inflation has fallen more slowly and is still above the RBA’s target band (year on year), although it is projected to ease further.

The RBA has just cut its cash rate by 25bps, the first cut in the easing phase, while the RBNZ has delivered 175bps of easing already since August 2024.

So how should we judge the results?

Bloxham notes that a lot hinges on how much weight people put on the relative economic pain of inflation versus unemployment.

“The question gets even trickier when we consider that there can be trade-offs between these choices,” he says.

“Should the policy maker seek to get inflation down fast, even if it drives the unemployment rate up more? Or take a more gradual approach to getting inflation down, but keep more workers employed?”

And there are deeper questions we can ask, he says.

“If, by taking longer to get inflation to fall back to target, the central bank is taking more risk that inflation won’t fall back to target at all (that is, inflation expectations will become unanchored), how should that risk be weighted against the possible job losses that occur to prevent it from happening?”

That’s a question that really goes to the heart of the monetary policy decision-making in the past few years.

It’s easy to argue with hindsight that New Zealand went too hard and fast at reducing inflation, but we shouldn’t forget the very real concerns raised (often by the RBNZ’s biggest critics) that inflation in New Zealand was at risk of spiralling out of control.

“How do we determine which approach is better – or in the economic parlance, which approaches maximises social welfare?" asks Bloxham.

That’s a question that needs some serious debate and consideration – ideally, while we actually have inflation in the right place and interest rates are stable.

One miserable measure

While the debate is unlikely to be resolved any time soon, Bloxham and his team have picked a measure that at least puts a result on the scoreboard.

They opted to use the cheerily titled Misery Index.

The original Misery Index was developed by economist Arthur Okun in the 1970s.

“The idea is to create an index that helps determine how the ‘average person’ in an economy is doing,” Bloxham says.

In its most basic form, a misery index is just the sum of the inflation rate and the unemployment rate, reflecting that a higher rate of unemployment and a worsening of inflation create economic and social costs for a country.

“If the misery index rises, then there is more misery – if it falls, there is less.”

Australia wins

Using that basic version of the Misery Index, Australia wins the transtasman battle. But it was pretty close until last year.

The misery indices for Australia and New Zealand have tracked closely together, Bloxham says.

“Both the respective misery indices peaked in the fourth quarter of 2022 and, on average, both Australia and New Zealand saw their respective misery indices peak at a similar level,” he says.

Currently, New Zealand’s combined unemployment rate (5.1%) and inflation rate (2.2%) give us an (unadjusted) score of 7.3. Australia has unemployment at 4.1% and inflation at 2.4% for a score of 6.5.

Bloxham makes a Duckworth-Lewis-Stern style downward adjustment to Australia’s inflation number to reflect a higher mid-point target for the RBA (it targets 2-3% inflation with a 2.5% target midpoint, while the RBNZ targets 1-3% with a 2% target midpoint).

But the Aussies don’t need it to get across the line.

Bloxham is also cautious to note that perhaps the final whistle hasn’t yet been blown. If Australian inflation remains sticky while New Zealand’s unemployment rate peaks and starts to ease, it’s possible things could look a bit different in six months’ time.

But then are we ever really going to call fulltime on this rivalry? I hope not.

Misery loves company

The original Misery Index has been criticised for oversimplifying people’s experience of the economy.

So it has been tweaked and developed by several economists over the years.

Steve Hanke, a prominent US economic commentator and professor of applied economics at Johns Hopkins University in Baltimore, has developed his own annual Misery Index, which he uses to publish international rankings every year.

It won’t surprise anyone that New Zealand’s place in the rankings hasn’t been flash in the past couple of years, so I’ll come back to that.

Hanke’s take on the Misery Index is the sum of year-end unemployment, inflation and bank lending rates, minus the change in real GDP per capita.

He also weights unemployment higher in his index, saying: “The intuition is that an additional percentage point of unemployment hits people a lot harder than an additional percentage point of inflation.“

Frankly, it’s nice to hear that articulated by an economist who is otherwise a prominent inflation hawk.

“Some might protest that the inflation rate and bank lending rate are correlated, and therefore the [index] double-counts the effective inflation,” he notes.

But as with the doubling of the unemployment weight, this is by design.

“The logic for this is rooted in loss aversion: people perceive losses as more significant than gains. That’s why the growth rate of real GDP per capita is not double-weighted.”

The result of all this is a more complex Misery Index (it’s the simplicity of the original version that appealed to HSBC’s Bloxham) but one that makes for interesting international comparisons.

So where does New Zealand rank and how have we been tracking?

Well, we wouldn’t be too happy if this was an Olympics medal table.

In the just-released league tables for 2024, New Zealand sits at No 88 on a list of 162 countries (where 1 is worst and 162 is best) with a misery score of 23.

That’s an improvement on 2023 at least, when we ranked at No 82 with a misery score of 24.7.

In both 2023 and 2024, Hanke highlights New Zealand’s lending rate as the major contributing factor to our misery score.

One would expect to see continued improvement this year.

Our negative GDP per capita will self-correct (thanks to low immigration as well as some mild economic growth). Our lending rates are already lower, as is inflation.

Unemployment is the last pain point in our misery score and while it is still rising, it’s expected to peak mid-year and ease – so hopefully it won’t be much worse by the end of the year than it was at the end of 2024.

For the record, war- and drought-ravaged Sudan ranks at number 1 on the list. Perhaps surprisingly, Thailand comes out on top (or perhaps not, I admit I haven’t followed its progress closely).

Political misery

As an aside, when you look at the Misery Index, it is not hard to see why the current Government is struggling to gain traction on the economy.

But the wheels are turning. While I don’t doubt that there are numerous operational issues adding to the Prime Minister’s polling woes (school lunches, ministerial departures, a struggling health sector), it’s not unreasonable for him to bet big on the economy.

Prime Minister Christopher Luxon. Photo / Mark Mitchell

The economy usually wins in the end and those other issues will start to fade into the background if and when people actually start to feel better off.

The problem is that right now the data is telling us that things have improved. But the gains are marginal or have just brought things back to neutral.

What’s needed is for momentum to build and confidence to return to the domestic economy.

Governor gone

Life moves fast. This time last week, Adrian Orr was still Reserve Bank Governor. For whatever reason (and it is still a mystery), Orr won’t be sticking around to see the economy complete its cycle of recovery.

His resignation – just a day before he was due to host a superstar central bank conference in Wellington (with former US Federal Reserve chair Ben Bernanke) – certainly has New Zealand’s economic community chattering.

Was it just bad timing? Or was there some political game-playing in bringing issues like the RBNZ funding and commercial bank capital requirement to a head on the eve of the big event?

Quite why these issues – which have been bubbling away for some time – required an immediate resignation is what’s perplexing many.

I shared some reflections on Orr’s tenure in my Herald on Sunday column – which you can read here: Liam Dann: Adrian Orr was never boring – perhaps that was his biggest problem.

Herald columnist Fran O’Sullivan also offered some reflections on his tenure in: Departing Reserve Bank Governor Adrian Orr made more memorable contributions than his Covid record - Fran O’Sullivan.

I have also talked to economists about who might be in line to replace him: Who could replace Adrian Orr as Reserve Bank Governor?

For a deeper dive into the contentious issue of bank capital rules, check out this take by Wellington business editor Jenée Tibshraeny: Nicola Willis gets advice on overriding Reserve Bank’s bank capital rules championed by Adrian Orr.

And of course, it was the Herald’s deputy political editor who broke the original story about the proposed RBNZ funding cuts: Reserve Bank funding cut? Finance Minister Nicola Willis says ‘there is room for savings’.

Coming Up

Not that it’s been boring, but it has been quiet on the economic data front for the past couple of weeks.

That’s about to change as we head into a new round of monthly updates this week. Then next week we get the last of the big quarterly updates for the 2024 year – GDP and the balance of payments (including the current account).

On Thursday, we’ll get migration data for the year to January.

Economists will be looking for signs of a slowing in the pace at which New Zealand’s net migration numbers gains are falling.

To put it another way, with record numbers departing in the past year and rapidly falling arrivals of new migrants, we can expect to the see the annual figures continue to look pretty grim.

But the most recent monthly figures have suggested the trend is starting to ease and we may soon find a steady rate of population growth.

That would be good because the lower rate of population growth is seen as an economic headwind, even prompting some revisions to expectations for house price growth. The latest was from ASB, which this week downgraded its residential price growth forecasts. ASB had predicted more than 9% but chief economist Nick Tuffley said that had been revised down to 3.4% for this year and 5.1% for 2026.

We’ll also get the latest tourist numbers on Thursday, which should hopefully show the recovery continuing to gather momentum.

Friday sees the monthly Selected Price Index for February released – a partial indicator of what’s to come on the Consumers Price Index for the quarter (due April 17).

We get the Balance of Payments next Wednesday, which should show a slowly improving current account deficit.

Then on Thursday, we’ll get GDP data for the full-year 2024 period, which should hopefully indicate that we moved out of recession – although I don’t think anyone is expecting to see much growth.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.