Kiyota.
I'm Chelsea Daniels and this is the Front Page, a daily podcast presented by the New Zealand Herald. New Zealand's economic outlook for twenty twenty five is expected to be a recovery from the previous two years of weakness. With inflation stagnant and the number of kiwis leaving the country
appearing to have peaked. Economists are predicting we will see an uptick, yet it could be a long road to get to the light of the end of the tunnel, with the government's books at the end of December painting a grim picture for the years ahead and the impacts of job cuts likely to still be felt this year. But the government has the economy on its hit list, with Prime Minister Christopher Luxen focusing on it in his State of the Nation's speech, saying that economic growth is
the key to better days ahead. So how long do we have to wait for some good news and what are the government's plans to get on top of things today? On the Front Page ends at Herald Business Editor at Large Liam dan Is with us to dig into the economic outlook for twenty twenty five. Liam, Let's start with a trip back to twenty twenty four. The half year economic fiscal update at the end of last year revealed some pretty bleak figures, didn't it.
Yeah.
What it basically showed was that the economy has been in such bad shape that the government isn't taking enough tax or as much tax as it's expected to take, which means that they have an even bigger challenge in front of them in terms of getting the country's books back into surplus or back in good shape. That means they have to make some really hard choices about either cutting back on spending or you know, what they do to promote growth, and sometimes those two things.
Sort of Is that why we're anticipating the most boring budget ever come May?
I hope it isn't. I know, I'm going to have to be I'm going to be one of the people having to sort of make something exciting out of it whatever they say. I guess there's not going to be a lot of spending. But at the same time, I don't think they want to do a big slash and burn, so I guess you could say it might be quite boring in the sense that hopefully it's not a sort of a nineteen ninety one Mother of All budgets, So they're not panicking that badly yet, so that would of
course be interesting. And they really are not going to have a lot of money to splash around, so it's not going to be that interesting in terms of, you know, what's in it for people's pockets or for even many of the industries looking for expansion and that sort of thing.
But for all that, they're going to have to think very creatively, and I expect we'll see some policy stuff in the next couple of weeks or so, because there's got to be something coming from government to sort of try and improve the pace at which the economy is improving. I mean, I think we can say the economy is going through the cyclical recovery, but it's looking a bit lackluster at the moment and needs some sort of fuel injection from the government.
I read Keaweibank's commentary around twenty twenty five. Their economists are picking this year should be better than last, but it'll be a year of two halves.
Would you agree with that?
Yeah, I mean, I guess it's how long it takes to actually feel better. So we know the interest rates have come down and inflations more or less back under control. Now, that doesn't necessarily mean people are feeling a lot better suddenly, because some people are still stuck on fixed rates for a while and will still be paying higher rates until
they get off those inflations cumulative. You know, even though that's back at two percent or whatever, it's still on top of all the inflation we've had for the past few years. So people still feel the cost of living if it's a crisis, but they still feel that that acutely, the high cost of living and until wages catch up.
And on top of that, we know that the employment stuff, so unemployment and job losses tends to be at the tail end of an economic cycle, so we're expecting to see unemployment continue to rise through the first half of
the year, which which adds another layer of pressure. So I guess the point that Kiwibank is making there is that it's probably while you'll hear a lot of talk about recovery and have done really since those first interest rate cuts last year, a lot of people won't really be feeling like the economy is that much better for a while yet.
And I want New Zealand to be a country of aspiration, of ambition, and of opportunity. But to meet that moment and to make that vision of reality, we have to go for growth. And it's just not up for negotiation anymore. If we want a better standard of living, we have to go out and we have to make it happen. Now, I tell your change isn't easy, but it is so worth it to once again allow us to take on the best in the world and to win. But that
change is already underway. We've already got a year of substantive structural change under our belts.
Now you mentioned inflation, and that's finally down to I think two point two percent after three years of being above three and it was that seven points something at one point as well. But what is keeping it stagnated at this point? Do you think?
Yeah? Well, inflation tends to get looked at in two parts, and one is the cost of all the stuff that we import into the economy, and some really basic stuff we don't have a lot of control over it, so like petrol prices or oil prices. And also a big factor there is the value of the Kiwi dollar, which has been heading down against the US dollar. So those things we don't have much control over, so they all came off. They all got very very high during COVID,
and that was what was sort of the trigger. One of the triggers for the high inflation was suddenly the spiking commodity prices and oil prices. The other one, of course, was the stimulus that was unleashed in the extra money that was printed. So there's that part, the international costs, and then there's the domestic part, which really was stimulated more by the money printing and the low interist rates.
What we're seeing now is last year we saw the international commodity costs, oil prices and things come down a lot, and that really helped get inflation back under control. Of course, we had the interest rates go up and that slowed the New Zealand economy, but that took a bit takes a bit longer, so we're starting to see the New Zealand domestic inflation come down quite a bit now. The worry is that, you know what's happening in the rest of the world and whether we start to see prices
for oil and imported goods rising again. So it remains pretty crucial for the Reserve Bank to watch it closely. And to make sure that it's not going to flare up on us again. But I think you know the latest starter we've seen that New Zealand component of the inflation, and that's the domestic stuff that's like what you're paying to get someone into I don't know who you're plumbing or fix your deck, or what you're paying for a
haircut or all of the local costs. That's starting to come down, not quickly, but at a fairly steady pace, which is what you'd expect when the economy's slowing so much.
The largest contributor, you wrote in an article I read this week to the annual inflation rate was rent. So that's up four point two percent according to stats and Z figures. How worrying is this. It feels like non homeowners or already have a tough go of it at the best of times.
Yeah, I hope that is trending down too. So it gets complicated because the way we measure it. Rent was the biggest contributor when we looked at the annual inflation rate, and it has been one of the really high rising sort of costs for people over the past few years. And that's still spilled over into the twenty twenty four numbers, but it is slowly easing a little bit. That rate of growth is easing, and you'd expect that because the property market is lowing and there's not the high rate
of net migration that we had seen previously. So hopefully there's some good news there. When we just looked at the last quarter of the year and the inflation there, it was actually some more discretionary stuff that was pushing that up, like international travel, for example, really went up
on that last quarter of twenty twenty four. So I think while rents played a big part in the twenty twenty four inflation number, that was across the whole year, and I'm hopeful that we'll see that sort of mitigate over this year.
How are banks responding to the current state of the economy. What sort of mortgage cuts and the like have there been recently?
Noticed them moving again a little bit last week or so, so you know, there's an expectation that the Reserve Bank will keep cutting the official cash rate for a while yet, that we probably should get another fifty basis point cut. We've had two of those, and you know, so that
they're bringing the official cash rate down quite quickly. Initially we saw a pretty sizeable drop in mortgage rates, and then it sort of stalled for a bit and people started to get a bit grumpy about that, and the banks said, oh, well, that's you know, there's there's international costs to worry about as well, and there's also some issues with the terms that people are taking in the pricing.
So there's it's taking a while for the rates to come down at that sort of one year level where a lot of people tend to pick their fixed rate to. But there's been a little bit of movement on that. So I think they are starting to expect that we're going to get another fifty basis point cut and that they see the pathway to the ocr coming down to around three point twenty five something like that. I don't think we'll see, you know, all those fifty basis points
passed through either. You know, it'll be a slow and steady thing for mortgage rates through this year, but they should have fair winds from the Reserve Bank. It will again be a little bit of an issue, and I'm sure we're going to get onto this, but around what happens internationally and the huge variable around the United.
States are you going to say the T word.
Well, the man who's in charge of the United States now, he tends to keep everyone guessing around what his policy is going to be until it actually drop. And so in the build up to Trump arriving, markets have been pricing in this Trump effect and making assumptions about what's going to happen. And they've been assuming that if he does the tariff stuff and stimulates the economy with tax cuts,
that some of that could be inflationary. And if that's inflationary again in the U, yes, then their interest rates don't come down so fast, and that has implications for the rest of the world. It means that their dollar stays stronger and our dollar probably gets weaker, and we've already seen that in the past couple of months, and it means that probably keeps up the international borrowing costs
for our local banks. And so I guess we have to wait and see on that because we don't know what he's going to deliver, and it's really a game of what the market expects versus what actually happens. And if he doesn't deliver as much as he says he's going to deliver, then the markets might be quietly happy, and we might see a positive reaction. We might see
sheer markets go up and interest rates come down. But if he really goes to town on the tariffs, boy, then you know it's sort of all bets are off.
When it comes to tariffs. Though, So if we're thinking New Zealand exports, he has floated every number under the sun on the election trial, but anywhere between ten to fifteen, right, the ones on China that everyone expects him to bring through are going to be significantly higher. Would we see any kickback from that? If China were to divert their exporto and would they have to lower their prices? Would we get a better deal so to speak?
It could do Yeah. I mean the same with any of the European Union as well, if if they copp tariffs. So there is a chance, you know, it would be in specific goods that we need. But yeah, there's absolutely a chance that we could see some weird knock on effects like cheaper goods for countries that become targets who don't have tariffs. So the Chinese, the Canadians, the Mexicans, European Union might all start pushing you know, it might make their goods cheaper around the rest of the world.
It's still not really clear, you know, it really isn't clear what he's going to do. He talked about fifty or sixty percent tariffs on China on the campaign trail, and so somewhere the markets priced in some expectations. He's now said, well, there's a ten percent tariff coming on February one, probably, he always says probably, So we don't know that for sure yet either, but you know, ten percent might actually be a pleasant surprise to the markets,
even to the Chinese. And then from there, you know, it's also possible that he puts tariffs on and then starts working out a whole bunch of carve outs for specific goods and things that the US needs, because it's been pointed out by many people that the US is reliant on a whole bunch of cheap stuff that comes out of Mexico and China and even Canada, and then if you put tariff's on it, it really makes huge problems for even for US manufacturers because they're getting secondary
parts or the parts that they then use to build stuff come from these places. So you know, it's very difficult to see how he can do it in a way that he's talked about on the campaign trail, and from what I've seen so far in the first few days of his term, he's said some stuff that sounds like he's, you know, he's going to take it slowly, and then he said some other stuff saying, oh, this is happening, twenty five percent tariffs for Canada. Yeah, who knows.
Very bicking on tariffs on Mexico's given the action through siding on the border.
Well, we're thinking in terms of twenty five percent on Mexico and Canada because they're allowing vast numbers of people. Canada is a very bad abuser of the vast numbers of people to come in and fantanol to come in. When I think bl've worry first, funny, I think I think we'll do it about work for it.
Back to New Zealand, Treasury forecasts that real GDP will grow zero point five percent in twenty twenty four to twenty twenty five and three point three percent in twenty twenty five twenty twenty six. What does this mean, Well, it.
Goes back to that point about the two halves of the year, so we know recessionary really in twenty twenty four and then twenty twenty four to twenty five. Well, that means that it's still pretty marginal going into this year. For the first part of this year the growth, we might not be in recession anymore, but we're really just ticking along with it with a marginal amount of growth.
That suggests that there'd be a fair old bump of growth coming off the back of that in the years ahead of that, because you know, there's there's some things that are going well, are in our favor. So it's not the thing that's going to transform our economy and make all those people who want New Zealand to be the tech capital of the South Pacific happy. But the dairy industry is having a fantastic season, and that is
a very big variable in our economy. So the kind of season they're having, with the really good prices for dairy products around the world, and the bumper season they're having in terms of production, I've seen numbers up to four billion dollars extra into the economy. So that's like, you know, adding a whole wine industry plus the film industry all in one hit of extra money coming to
the country. Just because the dairy's going well, it's a reminder of that our economy is still very, very reliant on dairy and well.
It's almost like back to basics.
You wouldn't want to be having a bad season right now, that's for sure, but you know, if we're getting lucky on that, we'll take it.
The government's appointed Nikola Willis to be the Minister of Economic Growth, with a big emphasis on driving investment in this country. What do you make of this way of approaching the economy.
Oh well, I mean I think it's a good idea. This National has been talking about it to Luxe and Nicola Willis has been talking about it since before the election. I think we just need to see what they're planning to do, and hopefully in the next few weeks I think we might actually see some policy around foreign direct investment and various you know, visa changes and all that sort of stuff that I don't know. You know, the governments can only encourage investment, but the idea is to
make New Zealand attractive place to invest. Now, what was the reason that it went the other way? Well, I guess we had a big boom under John Key of money coming in and we had a housing boom, and the previous labor led governments felt that, you know, it was causing price asset price growth that was disadvantaging Kiwis who already here. And so you know one of the big ones obviously around that is the foreign buyer ban
on housing. So we might I think, you know, there's been a lot of talk about possibly a change there at the top level. They have to get this past Winston Peters. They've got ACT as one coalition partner that absolutely just would love to open New Zealand up to foreign capital and see how much wealth that could generate. Believes it would trickle down, I guess is the way of talking about it. And then the other coalition partner is Winston and New Zealand First, who utterly opposed to that.
You know, so National has got to find a pathway through there. I think they sort of want to do it. They wouldn't be as extreme as ACT. They would definitely have some checks and balances around it. I don't think they'd be talking about it unless they'd found a way to keep mister Peters and the New Zealand First Party happy.
And finally, Liam, what would be your big prediction for the economy this year.
Well, my big prediction, or my big hope is things just progressively improve, And so I would say, all things being equal, there is no reason why we shouldn't be expecting to see unemployment peak and the end of the sort of recessionary cycle. In twenty twenty five. We should
start to see some real growth again. And I hope the government can, you know, continue with some policy changes that sort of push that along, and that New Zealand with those fear winds of a strong, strong dairy season and maybe a bit of life in the housing market. I know these are old faithfuls that kind of people like me off and say we can't rely on forever,
but I hope they do their job. My prediction is that those parts of the New Zealand economy do their job and get us back into good enough shape that we can really focus on some of the longer term challenges and get some thinking going about all the productivity stuff and all that. But I do think the fundamentals of the New Zealand economy are still there to see us coming right over the next six or eight months.
If I had a negative or a pessimistic prediction that I might just throw in there an outside chance that it all gets thrown up. It's that I am a bit concerned about the US share market and cryptocurrencies because they are already by whatever you might call an ordinary ordinary, the metrics we used to use in the financial world. They are overvalued already, and Donald Trump is going to pump and pump those and I think we'll see a strong share market run and a strong cryptocurrency run for
several months. I just hope that doesn't all go pop, because the world does not need a massive sheer market meltdown and financial crisis in twenty twenty five.
Thanks for joining us, Liam, Thank you. That's it for this episode of The Front Page. You can read more about today's stories and extensive news coverage at enzadherld dot co dot nz. The Front Page is produced by Ethan Sills and Richard Martin, who is also our sound engineer. I'm Chelsea Daniels. Subscribe to The Front Page on iHeartRadio or where can you get your podcasts, and tune in on Monday for another look behind the headlines.