At the end of a parliamentary select committee on Thursday, Reserve Bank Governor Adrian Orr was asked by National MP Cameron Brewer to sum up: “How Should New Zealanders be feeling as we go into 2025”.
Orr answered in typical Orr style.
“There is light ahead and it is not an oncoming train.”
“We have positive GDP growth. Employment growth on the way and low, stable inflation,” he said.
The RBNZ’s long-term forecasts and those of our major bank economists have this scenario pencilled in for at least the next couple of years.
Orr went on to say we might expect to see less of the RBNZ in the headlines and on TV screens — the implication being that we’ll be seeing fewer dramatic ups and downs with the Official Cash Rate.
Here’s hoping. A bit of stability is exactly what New Zealand needs.
Unfortunately, there is a very big caveat about any forecasts thanks to the wild economic policies US President Donald Trump has unleashed... or has said he’s going to unleash.
Economists can draw up a framework of potential outcomes for New Zealand — the RBNZ has one in the latest Monetary Policy Statement that is well worth a read — but they can’t pick it.
We don’t know what the final inputs to any equation are. And also, a bit like the pandemic, it’s an equation that hasn’t been played out in the real world for decades.
The world itself has changed so much since we last saw this kind of tariff war that it is effectively a giant economic experiment.
Aren’t we lucky to live in such interesting times (feel free to put that on a billboard, Tui).
Anyway, so we have to park that stuff and hope.
Not much of a strategy I know, but that’s what the RBNZ and most local economists are doing for now. That’s what I’m doing this week.
So what would this new normal look like?
Our economy lacks the capacity to grow rapidly without becoming inflationary.
The RBNZ estimates we can’t grow the economy by more than 2.4% a year without creating more inflation.
The fact that we’re only growing at about 1% this year is what gives them confidence that inflation will remain under control.
It currently has forecasts for GDP to grow at 1.8% and 2.4% for the next two years (to March 31).
But we need to lift the capacity (or speed limit) of the economy so we can grow faster and generate the kind of wealth we need to improve to fund the lifestyle we aspire to.
An extended period of low and stable growth offers us a chance to gradually improve the economic framework.
Yes, exciting transformative economic policy is the stuff guys like me are always banging on about.
But ideally, we want policy decisions, whether they are incremental or dramatic, to be well signalled and enacted without the kind of urgency that was required during the pandemic.
If we can grow the economy at capacity for an extended period, while keeping inflation in check, we allow businesses to get on with creating jobs.
Combining that with a steady and moderate immigration rate we can sweat the economy into shape by putting gentle upward pressure on capacity limits.
It’s not a sexy headline-grabbing approach. It’s a bit like a weight loss strategy that advocates a healthy diet and regular walks rather than cross-fit, protein shakes and crash dieting.
I’m not suggesting that Governments — of any stripe — can afford to lose focus on policies that drive productivity.
In fact, they need to make the most of the opportunity to implement them while this stable period lasts.
It would be nice if we could power-walk New Zealand into shape with a decade of gentle growth and stable monetary policy settings.
But history suggests we’re unlikely to get that long before we face a “black swan” event that throws the Reserve Bank into emergency mode and further tests the Crown’s fiscal capacity.
Remember when I said we needed to park US tariff policies and trade wars to one side in this benign scenario?
Well, we also need to park: pandemics, wars, earthquakes, floods and global stock market crashes.
Unfortunately “black swans” (or what central bankers often call “external shocks”) don’t stay parked where we want them for long.
So far this decade we’ve had a global pandemic and some pretty catastrophic floods.
Last decade we had earthquakes in Christchurch and Kaikōura.
Before that, we had a Global Financial Crisis and, in the late 1990s, an Asian financial crisis.
A decade earlier, New Zealand was rocked by the 1987 Wall Street crash. In the 1970s we had a trade shock and two oil shocks.
Many remember the 1950s and 60s as a golden era for New Zealand precisely because we had such a long period without a major economic shock.
From 1952 the New Zealand economy grew for 52 quarters in a row. It contracted briefly in 1967 with a wool price crash that doesn’t register in any history books as a particularly traumatic event.
We resumed growing through to the 1976 oil shock, but with increasingly unsustainable government spending and rising inflation.
Regardless of the policy failings at the end of the era, it was a lucky run that allowed the productive economy to build momentum.
Call me a pessimist but I can’t see any evidence that we are entering an era to rival that level of stability.
Quite the opposite, I suspect.
So, however long we do get, we can’t afford to waste it.
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.
