There’s no question that the economic pain is ongoing in 2025.
Business and consumer confidence dipped in January.
Next week we’ll get new labour market data which shows unemployment continues to rise.
None of this will be too surprising to economists. Employment is always one of the last economic measures to turn around after a downturn.
And (as per the example above) the same goes for business failures.
There is a lag effect to monetary policy which makes the economic pain slow to transmit and vice versa.
That means business and economic headlines often look the worst after the point at which economists see the recovery has begun.
It’s hard to stay upbeat though and no doubt there will be a good deal of psychological fatigue setting in.
Even the Reserve Bank, usually fairly upbeat about the structural resilience of the New Zealand economy, seems downbeat as we head into the new year.
Its chief economist Paul Conway delivered a sobering speech last week in which he highlighted an ongoing fall in the potential output or speed limit of the economy.
“Over the next three years, we currently expect potential output growth to range between 1.5% and 2% per year. This is a lower economic ‘speed limit’ than in the recent past. This subdued outlook stems from expected ongoing weakness in productivity growth and lower net immigration.”
Conway’s concern is about underlying issues that will prevent the economy from growing as we need it to, even if all the short-term factors required for a recovery fall into place.
The speed-limit analogy invites us to visualise the economy as an engine
We can put the accelerator to the floor and push the speedo into the red for a short period but not without risking long-term damage to the engine.
We did that during Covid.
But if you stimulate an economy to run above its potential output then you get inflation.
The Reserve Bank has since slammed on the brakes, the engine has cooled and we are now running below the speed limit.
Economists call that an output gap.
Hopefully, we’ll have a smooth and straight road ahead for a while and that gap between actual growth and potential growth will close.
If agricultural export earnings stay strong, if tourism numbers keep recovering and if lower mortgage rates stimulate the housing market and some domestic spending, then life should start to feel better for ordinary New Zealanders.
I remain optimistic about the cyclical recovery.
But 1.5% to 2% growth is not spectacular. At that rate, the Government will struggle to balance the books and pay for all the services Kiwis expect.
And that’s where the need for some policy magic from the Government comes in.
Ironically, the same day the RBNZ was talking about economic speed limits the Government was lifting the actual speed limits on many roads around New Zealand.
Speeding up the pace at which goods can be moved around the country is on the list of things the Government can do to boost productivity and lift an economy’s potential output.
But it is pretty marginal.
Improving transport infrastructure would be better but it costs a lot and takes time. Unfortunately, successive governments with different priorities have flip-flopped our infrastructure policy back and forth with little progress.
This is an example of policy failure by governments, across the political spectrum, that has contributed to New Zealand’s lower economic speed limit.
As I pointed out last week, this Government currently has limited options, politically and economically.
So it is doing what it can and trying to add some momentum to the recovery.
Economic Resources Minister Shane Jones is overhauling mining regulations in the hope of doubling mineral exports to be worth $3 billion by 2035.
That’s going to be controversial. I hope we can do it without too much environmental impact. It would be great if we could find beryllium, germanium, unobtainium and whatever else was on the new list of critical minerals somewhere out of the way.
Let’s be realistic though, to put that aspirational goal of an extra $1.5b in context, the dairy sector is on track to deliver an extra $4b in export earnings this year.
New Economic Development Minister Nicola Willis has announced plans to loosen remote working rules for tourists in the hope we’ll attract more young professionals to come to stay longer.
Tourist numbers are still just 86% of what they were pre-Covid. That deficit in numbers is in addition to the loss of annual growth during the past five years.
The Ministry of Business, Innovation and Employment in 2018 was expecting tourism growth at 4.6% a year in the five years to 2024.
Recovering those billions in lost earnings would be a big boost to the economy and – on the basis that we’ve done it before – seems more achievable.
Last week the Prime Minister announced plans to focus on better commercialising our science and technology as well as a new agency to target foreign direct investment.
Meanwhile, Act leader David Seymour has floated the prospect of more asset sales.
Recognising how unlikely that is with NZ First in the coalition, the PM has signalled that’s a debate for the next political term.
It is a debate worth having, although as Sir John Key pointed out last week, we haven’t got much left to sell.
Decisions around asset sales need to be about more than a short-term return – they have to be on assets that might actually deliver more value under private ownership.
Seymour thinks schools and hospitals fall in that category. Most Kiwis don’t.
I think a discussion about Kiwibank is worth having.
Whether all of this incremental stuff will be enough is another matter.
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.
