New Zealand economy out of balance

The New Zealand economy is all wonky, and the current account deficit arguably provides the most accurate representation of the nation’s economic imbalances, according to Gareth Kiernan (pictured above), chief forecaster at Infometrics.

In an opinion piece published on Stuff, Kiernan said the current account deficit is an indicator that seldom gets attention, but with the deficit recently swelling to 9% of GDP, its largest in nearly 50 years, “the alarm bells are ringing loudly.”

“The last time the deficit was bigger was back in 1975, when New Zealand was struggling with the twin shocks of oil prices more than tripling and the UK joining the European Economic Community, slashing its demand for our exports,” Kiernan said.

This time around, he said it would be easy – and quite valid – to put the blame on the pandemic’s effect on tourism and expect the deficit to dwindle down as visitor numbers recover – but just how quickly will the continuing recovery in tourism take place?

“After an initial surge when the borders reopened, visitor arrival numbers have plateaued over the last five months at about two-thirds of pre-COVID levels,” Kiernan said. “Higher airline ticket prices and a weak global economy look set to dampen any further recovery in tourism earnings. There must also be doubts about our ability to revive the Chinese market, which was declining in 2019 already before COVID-19 struck.”

Even more concerning, he said, was the goods balance, which was at its worst since the mid-1970s. Part of the problem was imports, the annual value of which surged 35% since the end of 2019, driven by strong, government-stimulated demand. By comparison, export values lifted by a “disappointing” 21% over the same period.

“Goods exports are feeling some of the same pressures as services exports, with the stuttering global economy dampening demand for our agricultural products and weighing on prices,” Kiernan said.

“Export volumes have also been constrained by international shipping disruptions during the pandemic. But these temporary factors are distractions from an emerging inability to further grow the value of our primary sector production.”

He said the farming sector is being compelled – and rightfully so – to more thoroughly consider its environmental costs, including carbon emissions and the effects on water quality.

“We cannot continue to grow our export incomes via the method of the last 40 years, so unless we find a way to do things differently, we won’t be able to afford an ever-increasing volume of imports,” Kiernan said.

With the gap between NZ exports and imports the worst in nearly half a century, Kiernan said it appeared the only way to grow the economy is by opening the migration tap.

Over the last six months, GDP per capita has fallen 2%, and could shrink by a further 2% over the next year. Declining GDP per capita means that, on average, real incomes are falling.

“New Zealand’s longstanding poor productivity performance is exemplified by our need to bring in people from overseas to facilitate economic growth,” Kiernan said. “Education and training outcomes continue to decline against global benchmarks, so we have to resort to bringing more people into the country to grow the economy. So much for working smarter, not harder.”

This influx of migrants could also potentially cause the housing market to bottom out sooner than it would have otherwise. Despite a 17% drop since late 2021, house prices were still up 21% from where they were at the end of 2019, and have been increasing noticeably faster than incomes for more than two decades.

“Housing might be cheaper than it was two years ago, but it certainly could not be described as affordable,” Kiernan said. “The breakdown of Labour and National’s bipartisan agreement provides little hope for any improvement in the supply of housing.”

He said the sustained housing unaffordability could worsen some of New Zealand’s other economic imbalances.

“Persistently high housing costs will continue to drive young New Zealanders overseas – higher incomes and more affordable housing making Australia an attractive option, for example,” Kiernan said. “High house prices also tie up an outsized amount of capital, reducing the scope for Kiwis to pursue more productive investments, such as starting and growing businesses.”

Kieran said it is difficult to be overly optimistic about New Zealand’s medium-term economic prospects, given the issues against the backdrop of slower Chinese economic growth.

“There have been positive facets to our economic performance over the last 40 years, but too often we have ignored problems and failed to plan for the future,” Kiernan said. “The emerging imbalances are now signalling that we’re not as well-off as we might have thought.”

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