ANALYSIS: Much as I believe there is a dose of reality running through the economy about how strong the rise will be in response to interest rates falling, there is nonetheless an improvement underway. We got an example of this last week.
While much was made of job numbers rising only 0.1% in the March quarter, this was better than the 0.2% fall in the December quarter and 0.7% decline in the September quarter. Similarly, the track for economic growth as measured by changes in GDP has improved.
The 1.1% fall in GDP during the June and then again in the September quarter of last year reversed to a 0.7% gain in the December quarter. Sentiment levels are better, with the ANZ’s Business Outlook survey showing a net 49% of firms expecting things to get better in the coming year, up from only 6% in the middle of 2024.
My monthly Spending Plans survey has improved from a net 42% of people in the middle of 2024 saying they planned to cut spending to 18% now. The issue, however, is that these measures, which we generally take as leading indicators of where the economy is headed, are currently worse than they were at the very end of 2024.
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The ANZ measure was a strong net 66% positive in December. My consumer spending measure was a net 10% positive back then. This is what I mean when I say that a dose of reality is running through the economy.
We are improving, but there is no boom underway. Some might think this strange considering the key part of our economy – exports – is showing strong growth. The average prices we receive for our commodity exports have improved 19% from a year ago, and strong payouts are predicted to dairy farmers in particular.
But a key ingredient present when New Zealand came out of the last three recessions, but missing now is a 10-15 cent decline in the NZ dollar. At just over US 58 cents, the NZ dollar is down just two cents from May 2024, and four cents from May 2023. The currency depreciation boost this time is minimal.
Along with this restraining impact on the rise in exporter incomes is the jump in their operating costs, which means the disposable income available to spend in local towns or cities is less than one might think. Drought and flooding are also key spending constraints in areas other than farm remediation.
Independent economist Tony Alexander: "The track for economic growth as measured by changes in GDP has improved." Photo / Fiona Goodall
Additional restraint on our upturn acting to blunt the impact of a 2% decline in interest rates is the cost-of-living pressures still facing families. Prices are high for butter and cheese, and still rising for electricity and council rates.
There is restraint from the Government having to cut back on spending to get debt growth back under control, underlying weakness in our biggest export destination of China, and an oversupply of townhouses in some parts of the country, which will initially limit the construction response to lower financing costs.
Add in the surge in world uncertainty caused by the US-initiated trade war, extra costs associated with climate change, and below recent average net migration flows, and we get just a mild upturn in prospect for our economy this year.
Why does that matter? It means restricted growth in cash inflows for most businesses at a time of highly compressed margins and still rising costs. As we pass through 2025 into 2026, those deficient cash flows will fuel the wave of business liquidations, which has been underway for some time now – assisted by the IRD chasing pandemic debts.
Business operators need to keep a close eye on their debtors and curb expectations that banks will be opening wide their business-lending spigots soon. Caution will be a dominating factor behind their lending decisions this year.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
