The economy has been a key focus for the 2023 Election, dominated by the cost of living after inflation spiked to its strongest reading in three decades during the last electoral cycle. But at the same time, New Zealand’s unemployment rate of below 4% has seen record labour force participation and employment.

As the 2023 edition of the Infometrics Misery Index shows, the high cost of living is a key reason that the government’s recently economic performance will be viewed poorly by the electorate.

The Infometrics Misery Index examines the changes in economic trends in the most recent electoral cycle and helps determine how these changes might influence voting perceptions. Usually, stronger economic changes would suggest an incumbent government would be retained, and worse economic changes would suggest the incumbent is removed.

Overall, changes in economic trends over the 2020-2023 period have seen a moderate score of 0.6 – a weakly positive result within the +5 to -5 range in the Misery Index. The moderate overall score highlights a wide range of economic outcomes in the last few years.

Although the aggregate Misery Index score is positive, the result has one of the wider ranges in scores. Despite various sides of the political divide either glossing up or drumming down economic trends, the reality shows that economic outcomes have been decidedly mixed.

The high cost of living has been ranked as the most important issue for New Zealanders in several public polls.

Infometrics analysis shows that, since June 2020, average household costs (excluding mortgage repayments) have increased by around $240 per week, according to average household spending and the consumers price index (CPI).

With one of the worst changes in inflation observed in the last half century, and strong public sentiment about the cost of living being top of mind, the Misery Index also suggests a more difficult economic environment for the incumbent government to retain power.

The unemployment rate fell to a record low in 2021/22, and it remains close to that low at present. The current rate of 3.6% is in sharp contrast to the 5.2% unemployment rate peak in the September 2020 quarter, which was the start of the comparison period. Economic activity has also been stronger in recent years as the economy has accelerated after the challenges of the pandemic.

However, the rapid rise in inflation has been the third-worst inflationary change since the 1970s during a period of government. Although there was a period of high inflation in the early 1990s (peaking at around 7.6%pa), this high inflation came after a period of even higher inflation throughout the 1980s. In comparison, the inflation peak of 7.3%pa in 2022 came after more than a decade of price stability with much more lower price increases.

The deterioration in the current account balance (as a share of GDP) has been similarly rapid, expanding from -0.9% of GDP at the end of the 2020 term of government to a peak of -8.8% at the end of 2022. It has recovered only slightly, to -7.5% of GDP, in the most recent data to June 2023. The only worse current account position was under the Kirk-Rowling administration in the mid-1970s, due to oil shocks and Britian’s switch away from New Zealand toward the European Economic Community.

The 2023 Infometrics Misery Index1 looks at economic performance over the last electoral term to highlight how economic trends have changed, and how they might influence how households feel ahead of casting their vote.

The Index, which Infometrics has published ahead of the 1999, 2002, 2005, 2017, and 2020 elections, assumes that a positive economic performance will favour the incumbent government winning again, and that a negative showing will see the incumbent fall out of favour.

In 2017, the Index incorrectly picked that the National-led incumbent government would be returned (although National was the largest party by seats in Parliament). Assessing when the Index has picked wrong, three elements emerge.

• A third-term government is likely to depart, with no four-term administrations since 1969 (and a maximum of three-term governments since 1975).
• Muldoon’s personal popularity was seemingly enough to counter actual economic performance.
• First-term governments facing an economic shock (high unemployment during the 1990-93 term, and the GFC and Christchurch Earthquakes during the 2008-11 term) are often given the chance to respond.

The Misery Index is a relative performance indicator and looks at whether several economic variables have improved during the tenure of a particular government compared to the previous administration. The variables considered are:

• the change in inflation
• the change in the unemployment rate
• the change in long-term real interest rates
• real GDP growth
• the change in the current account balance

The performance of each government with regards to each variable is rated between 5 and –5 (best to worst), with the sum of all five ratings giving the final Misery Index value.

The Misery Index table above shows that the current Labour government has overseen a mixed bag of economic results over the last 2½ years, although it’s clear that the COVID-19 pandemic, monetary policy, and other external shocks have also been key drivers of these economic outcomes.

• Unemployment has fallen from an average of 4.3% over the previous term (2017-2020) to 3.7% over the current electoral term so far, with nearly every quarter of the 2020-2023 term seeing an unemployment rate below 4%.
• Real long-term interest rates have fallen from -0.7% at the end of 2020 to -1.7% by June 2023 (and a peak of -4% in 2022), with inflation currently higher than wholesale interest rates, causing a negative real rate. For households, retail lending costs were low at the start of the electoral term but have risen rapidly as the Reserve Bank has struggled to get inflation under control.
• Real GDP growth has averaged 3.6%pa over the last 2½ years, above the long-term average of 2.5%pa, and quite a bit higher than the 1.9%pa growth seen during the previous electoral term.
• The current account deficit has blown out to a current position of -7.5% of GDP over the year to June 2023, and has averaged -5.7% of GDP over the current term so far. In the last term, the current account deficit averaged around -3.0% of GDP.
• Inflation has increased from an average of 1.7%pa in the last electoral term to 5.3%pa over the last 2½ years. For comparison, inflation was around 11%pa on average throughout the 1980s, but just 1.6%pa on average during the 2010s.

2 Adapted from a similar index constructed by Harvard professor Robert Barro for the US.