Photo source: Flickr
The recently released Half Year Economic and Fiscal Update (HYEFU) 2024 for New Zealand paints a picture of an economy slowly emerging from a protracted recession. Signs of recovery are on the horizon, but the path forward is fraught with challenges and uncertainties.
Gradual Economic Recovery Expected in 2025
Treasury forecasts indicate that economic recovery will begin in early 2025, with real GDP growth projected to reach 0.5% in 2024/25 and accelerate to 3.3% in 2025/26.
The upturn is expected to be supported by lower interest rates and improved export conditions. However, the pace of recovery is constrained by several factors, including sluggish productivity growth, lingering domestic inflation pressures, and global trade uncertainties.
Fiscal Challenges and Controversial Measures
The fiscal outlook displays a more challenging picture, as the government faces larger deficits and a delayed return to surplus. The new headline fiscal indicator, OBEGALx, is expected to widen to a deficit of $12.9 billion in 2024/25, with net core Crown debt projected to rise to $192.8 billion. The anticipated return to surplus has now been pushed back to 2028/29, a year later than previously forecast.
Adding to the complexity of the fiscal landscape is the controversy surrounding Finance Minister Nicola Willis’s introduction of the new budget indicator OBEGALx. This measure excludes revenue and expenses from the Accident Compensation Corporation (ACC), which has led opposition parties to accuse Willis of “creative accounting.”
In defense of this new approach, Willis stated that the government aimed to focus on short-term spending and revenue decisions rather than being distracted by the self-funded nature of entities like ACC.
However, opposition leaders have criticised this move as an attempt to obscure the reality of the deteriorating financial situation. Labour leader Chris Hipkins said that Willis was adopting a measure “entirely of her own creation” to make the financial outlook appear less dire.
Global Uncertainties
With 2025 fast approaching, the economic outlook is cautiously optimistic, despite ongoing challenges. The return of Donald Trump to the U.S. presidency raises concerns about international trade, as his protectionist policies could negatively impact Kiwi exporters through potential tariff increases. Additionally, the Middle East crisis may affect global oil supplies, but New Zealand’s reduced reliance on oil lessens the risk of disruptions.
The unemployment rate has risen to 4.8%, yet it remains lower than initial forecasts and is an improvement compared to post-Global Financial Crisis levels. Easing inflation and interest rates are expected to improve household spending power, while the minimum wage will increase to $23.50 starting April 1, 2025.
New Zealand still faces challenges in the housing market, skilled labour shortages, and pressures on infrastructure and healthcare systems. Addressing these issues will be essential for sustaining economic growth as the country moves forward into 2025.