Kerre Woodham: Surely we've reached the bottom of the economic cycle

The news came in around quarter to 11 yesterday, and it was unwelcome confirmation of what many people had been experiencing, had been feeling. The economy had contracted, and worse, it had shrunk 0.9%, far worse than economists had been predicting.  

Economists at the Reserve Bank had forecast the economy would shrink just 0.3% during the June quarter. Retail banks said, "Oh, I don't think so. I think it'll be closer to 0.5." In fact, the figures released by Stats NZ yesterday showed GDP fell almost a full percentage point in the three months ended June, with declines in most industries.  

Manufacturing fell the hardest. It dropped 3.5% in the quarter, led by transport equipment, machinery, and equipment manufacturing, which fell 6.2%. Food, beverage, and tobacco manufacturing fell 2.2%. And that was reflected in the decreased export volumes of products such as meat, which we referred to yesterday when we were talking to Infometrics Chief Economist Gareth Kiernan. He was saying it was the drop in exports – if you haven't got the produce, you can't export it. Construction was down 1.8%, reversing a 1.2% increase in the three months ended March.  

So what does it all mean? Well, it means fewer jobs, it means fewer people earning, it means less money being earned. It means people scared of spending money if they do have money. It means less money sloshing around in the system. It means people doing it tough.  

Roger Douglas, he of Rogernomics fame or infamy, and the Finance Minister in the Fourth Labour Government, called for the head of Nicola Willis. He and Robert MacCulloch, the economist, released a statement yesterday that said Willis was sending New Zealand bankrupt by failing to get to grips with our ballooning fiscal deficits and public debt. Her own Treasury, they said, contradicts her claim that New Zealand is on a path to surplus. They say it is not. Treasury's long-term fiscal forecast showed out of control deficits due to pensions and healthcare spending from an aging population. Willis, they say, is not up to the job and is not levelling with the New Zealand public.  

Willis ignored that criticism, and looking at the GDP figures, says Trump's tariffs had an outsized impact on local business confidence, far out of proportion to what actually happened. She said yesterday's data is backward-looking. It's looking at what the economy was doing months ago, and she says that the economy is in fact improving.  

“I think when you think about your average Kiwi, they're saying, well, actually, I need to have confidence that I can pay my mortgage, maybe that I can buy a bigger house in future, that I can buy a house at all. And the biggest tailwind for that is lower interest rates. And we know that they are what has spurred previous recoveries. That's actually good economics. Our government has done everything we can to create the space for the Reserve Bank to do this, and they just have to keep doing that job.  

“For our part, we've chosen a balanced course of consolidating the books over a few years, which has been endorsed by international economists, by ratings agencies who say that our fiscal plan is a good one. We've delivered significant savings while investing in more infrastructure, in health services, and education services. I completely stand by that approach. And Roger Douglas may want me to slash spending overnight. That would be the wrong thing to do in terms of the commitment we've made to voters, but actually it would be the wrong thing economically.” 

So that was Nicola Willis holding the line. John Key, former Prime Minister, came on the Mike Hosking Breakfast this morning and put the blame squarely on the Reserve Bank.  

“This is a saying that Ruth Richardson once had, which was monetary policy needs mates, and that was her argument when she was really tightening up the economy, that the Reserve Bank needed that support because they were in tandem working with the government. I think what you've seen over the last 18 months or so is a government that has been working hard to get the economy straightened up after, frankly, the mess it inherited. But it hasn't had a mate in the Reserve Bank, and the Reserve Bank's job very clearly over time has been to say interest rates need to come down.  

“And I mean, look, two months ago, I got hammered for saying interest rates need to come down 100 basis points. Well, they came down 25, they're going to come down another 50. You can put a ring around it in the next monetary policy statement and they'll come down another 25 by Christmas. So the person that's not doing the job or the people that are not doing their job are the Reserve Bank, who frankly, if they just walked around Auckland and Wellington for five minutes, could have felt the fact that the government needed help through monetary policy.” 

So, the experts have had their reckons and I'd love to hear yours. Now they say, how often have you been hearing that there are green shoots growth coming? They say that things are getting better, that job vacancies are up, that business confidence is up slightly, that come Christmas most people will be off the big mortgage interest rates and onto lower ones, which will mean more money in your pocket? They're not relying on bringing in migrants to push up the housing market, give you the sugar rush that you get from basically a false economy. They're relying on the economy to rebuild itself, making it more resilient and stronger. That being said, this was a government, or the National Party was a party, that campaigned on better times ahead. We're the ones that can fix things. We're the ones that can turn the ship around. We're the ones that can fix the mess that Labour left us in.  

Either the mess was bigger than they thought, or the levers they're pulling aren't as effective as they thought, or we are a timorous lot. We've been knocked around too much, bashed around too much to feel particularly confident. When a lot of business has been suffering since 2022, probably, it's hard to feel confident. It's hard to feel optimistic. It's hard to feel confident about spending money or investing in capital, that sort of thing.  

I do think that better times are a-coming. It's just the way economies work. You know, there are cycles. And surely we've reached the bottom and now we're going to go up and then we'll reach the top and round we'll come again, no matter who's in power. So, you know, you can talk a big game, but I think what National has shown is that they are victims of the economic cycle. There were no magic levers they could pull. Could Labour have done any better? The answer to that is no. Absolutely not. That is a very hard no from me. 

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