Beware of self-fulfilling expectations

The future of the New Zealand economy is not a random event. But nor is it set in stone. It depends. It depends to an important, but not all-important, extent on what our governments actually do – the “policy settings” that left- and rightwing political parties bicker over.

But unfortunately, perhaps, the keys to whether 2024 and 2025 turn out to be rather good years, or rather bad years, swing on something much less tangible: they depend on what people think is going to happen – on “expectations”, as economists put it.

So many of the important decisions we make relate to unknowable future events. You’d like to plan a major renovation of your kitchen. But you are also going to have to renew your mortgage in six months. What will interest rates be then? Are you sure you will even have a job next year? If you’re confident, you will go ahead with the reno. If worried, you will sensibly postpone it.

Expectations are even more important for businesses, because there are almost no future markets existing for the goods and services they sell. A future market is where you can get a firm customer commitment now, to purchase, at an agreed price, a product to be supplied in the future. Such markets do exist for some commodities – for example, jet fuel – and for money (fixed-rate term mortgages), but if you are a business person planning to build a factory to process oats into oat-milk – well, you just have to do your market research and hope for the best.

The reader can probably see what is coming here. On the large scale of the whole economy, expectations can be selffulfilling.

If most people expect the economy to be strong, they will go ahead with spending, investment and employment plans that will actually make it strong.

But if they tend to be timid, and so draw in their horns; well, then the economy next year will be weak – the job losses they feared will be more likely to happen, thus apparently justifying their caution.

So, what is the state of expectations in our economy right now, and what could be done about it? The markers are mixed. The latest Westpac McDermott Miller polling has consumer confidence at its highest level for more than two years, but, still on balance negative – that is, still more pessimists than optimists. Consumers are particularly cautious about buying those big ticket items which are sensitive to long-run expectations.

Another poll of more 1000 New Zealanders by Talbot Mills had more respondents saying the country is “on the wrong track” than the reverse, with the cost of living being by far their biggest single concern.

Are there any objective triggers to explain a generally gloomy mood? Really, no. Interest rates are high – needlessly high, in my opinion – but they are widely expected to go down: future outlook positive. Unemployment remains at historically low levels. Cost of living? Yes, we have had Covid-hangover consumer price inflation, but this is falling too. And, overall, Statistics NZ reports that median weekly wages and salaries increased in 2023 by 7.1%, against a consumer price index increase of just 4%.

That is, most income-earning households in New Zealand saw their real purchasing power go up. And women’s earnings went up more than men’s. Yet the Westpac McDermott Miller polling found women generally more pessimistic than men, and more likely to report being worse off now than one year ago.

Perhaps we are really facing a more existential crisis -- a psychological, not economic depression. There is plenty of genuinely bad news out there: the war in Ukraine, slaughter in Gaza, global warming, the prospect of Trump redux, crumbling infrastructure; even, people we love or admire getting cancer.

But none of this will be helped if we let bad expectations take down the economy as well. So, what can our elected government do to help?

First, it must stop making matters worse by bad-mouthing the economy. To an outsider, it seems that the coalition is piling on the woe to soften us up for when it withdraws from some of its unwise preelection promises, such as tax cuts. If so, this is seriously irresponsible governance.

Second – and not saying this too loudly – a little irresponsibility in the other direction would be useful. Given the self-fulfilling nature of expectations, the coalition should stop dissing its predecessors and focus on emphasising the positives of our future prospects even, rather over-emphasising them. “We don’t know how lucky we are” in peaceful Aotearoa New Zealand, and, in the economy, good luck is not a random event.

... the coalition should stop dissing its predecessors and focus on emphasising the positives of our future prospects – even, rather over-emphasising them.

Tim Hazledine