Sniffles but there are no calls for bed rest
prove better than expected, given the Reserve Bank’s monetary policy tightening seems to be working more swiftly.
Several high street banks have trimmed their fixed mortgage rates in response to that, and to international trends, so there may also be better news ahead for those paying mortgages, providing they keep their jobs as unemployment rises.
The outlook Treasury painted, while not exactly flash, is nowhere near the catastrophising rhetoric about economic vandalism National used during the election campaign, and which Finance Minister
Nicola Willis continued at the launch of the HYEFU. There were no unexpected blowouts nor surprisingly large deficits, and there was no adverse reaction from debt markets or credit rating agencies when they saw the figures.
So, with the proviso that the GDP picture is weaker and inflation is likely to track lower than at the time of Treasury’s forecasts, what are the economic and fiscal baselines we can use to judge Christopher Luxon and his crew over the next three years?
Treasury says growth will average an anaemic 1.5% over the next two years but rebound to 2.8% in election year, 2026. High immigration is buffing up the numbers, but the outlook for GDP per head is not good, suggesting our individual standards of living will fall.
Unemployment, at 3.9% now, is expected to peak at 5.2% in 2025 and then fall to 4.8% by mid-2026 – though that is before taking into account the unspecified job cuts the coalition is planning in the public sector.
The impact of rising prices is expected to ease, with inflation forecast to fall from the current 6% to 4.1% next year and to 2.2% by June 2026. That is inside the RBNZ’s 1-3 target range, and recent trends imply significant cuts to mortgage interest rates as early as mid-to-late 2024.
The big unknown is the impact the incoming government’s planned tax cuts will have on inflation, balanced against any contraction in spending it manages to achieve.
Many of the Government’s natural allies in the commentariat, and some bank economists, are calling for a pause to tax cuts to avoid extra inflationary pressure, bring debt down and deliver a more assured path to Budget surplus.
On the latter score, Treasury expects a Budget deficit of $3.5 billion in 2026 and a wafer-thin $140 million surplus by June 2027 – so deficits all the way in the current term before a surplus in the year after the next election.
Under pressure from those deficits, net debt is expected to rise from $71b at the May budget to $107b by June 2026.
There is better news forecast for the current account balance – the measure of our interactions with the world – which is tipped to fall from 7.5% of GDP at June 2023 to 4.1% by mid-2026. This is the major concern of credit rating agencies, and the improvement – if achieved – should buttress the country against any deterioration in our excellent rating.
All-in-all, on current settings the Government has inherited a soft economic outlook, falling inflation, a weakening job market and a struggle to balance the Governments books.
A few sniffles, certainly, but the patient is in reasonable health overall.