Recession shows Govt hemmed in

It is neither here nor there, really, whether economic activity rose or fell by a very small fraction of a percent few months ago.

As it turns out, Stats NZ calculated that GDP fell 0.09% during the three months to the end of December, putting the country back into recession.

Had Stats NZ instead reported that GDP had risen by the same small amount, the country would not technically be in recession, but life wouldn’t feel much different.

And Stats NZ frequently revises its past estimates of economic activity.

So it is entirely possible it may retrospectively erase the latest reported recession some time later this year.

In terms of the political optics, the fact it is now thought New Zealand was in recession at the time the coalition government took over the reins from Labour helps it make the case that it inherited an economy that was heading in the wrong direction.

Finance Minister Nicola Willis milked that one again yesterday by labelling the GDP decline “a deep hangover from the big spending, big taxing period under the previous government”. But the headache for Willis is that it looks as though the economy has deteriorated further since December.

The Treasury warned in a fortnightly economic update on Tuesday that a range of indicators released over the previous two weeks confirmed the country was in the midst of “a severe economic slowdown”.

Westpac chief economist Kelly Eckhold noted the Treasury had previously reported a worrying drop in the tax take earlier this year. Tax revenue in the seven months to the end of January came in at just over $69b – $752m below the level the Treasury had forecast in December – whereas the previous month the tax take had been tracking $375m ahead of forecast.

Willis has yet to formally tear up a forecast that the Government’s accounts will be back in the black by the year ending June 2027.

But the New Zealand mission head of the International Monetary Fund, Evan Papageorgiou, revealed on Wednesday that the UN finance body had already pushed back its expectation of a return to surplus by a year from then.

Labour finance spokesperson Barbara Edmonds argued yesterday that the deteriorating economic and fiscal situation revealed in the latest GDP figures made the case for tax relief promised by the Government in the Budget “more irresponsible”.

Is tax relief a policy the Government would independently arrive at as a fantastic idea if it looked at its options afresh?

Or has it become a burden that the Government is grimly clinging on to through gritted teeth because of an election promise?

Willis did a spirited job in a speech to the Auckland Business Chamber last week defending the Government’s stance and arguing that “growth is the answer”.

The snag is that it is growth in productivity that is sorely lacking, while any economic growth that is led by consumer spending risks a delay in bringing down inflation, interest rates and the country’s $27 billion annual current account deficit. It remains to be seen whether many employers will simply view tax cuts as an alternative to offering their staff wage rise this year.

But in a climate of moribund economic growth, falling profits and rising unemployment, the latter may be how it pans out for at least some workers.

Meanwhile, the challenge of putting the economy on a fundamentally different track remains. What is perhaps remarkable is that economic activity dropped 0.6% in real terms over the 15 months to the end of last year, despite the number of people in employment rising by 84,000, to total 2,939,000, over the same period.