This opinion piece was first published on Stuff on 25 March 2024.

We economists can be a tactless bunch. Last week’s announcement that the economy had contracted for the fourth time in five quarters was greeted with comments about how the recession was necessary, and that the extent of the contraction only highlighted to serve how overheated the economy had got in the first place. Struggling households don’t care about the truth of these statements. The comments are as welcome as buying a gym membership for your significant other for Easter and telling them to stay away from the chocolate eggs.

The GDP figures show that households are hurting, even allowing for the crazy ups and downs caused by the pandemic and subsequent policy responses. Since the end of 2019, per-capita household spending has grown by an average of 0.6%pa, well below the 1.8%pa per-capita average throughout the economic cycle over the previous 12 years.

It would be naïve to expect the events of the last four years to be costless – you can’t shut down large parts of the economy for weeks, subsidise 1.8m workers, and expect that lost production and income to magically be recouped when things reopen. However, the costs were not really apparent 18 months ago when the effects of massively stimulatory monetary and fiscal policy were still sloshing through the economy. They are apparent now, and they’re hitting hard – firstly through intense inflation, and then through the high interest rates necessary as medicine for that inflation.

Since the end of 2022, per-capita spending on recreation and culture has dropped 6.3%, clothing and footwear has fallen 10.3%, and restaurants and hotels has plunged 11.4%. Of the 11 types of consumption spending captured by Stats NZ in its GDP data, there are now only two that have grown faster since 2020 on a per-capita basis than 2007-2019: housing and household utilities, and “imports of low value goods directly by households”. The fact that the latter category is the strongest performer compounds the tough conditions being experienced by retailers, hospitality, and other consumer-oriented businesses – people have been searching Temu for cheaper options where they can.

The bad news is that the worst isn’t over yet for households. People are still rolling off fixed mortgage rates up to four percentage points lower than today’s rates. Anecdotally, the lack of mortgagee sales to date is due to people building up savings buffers while mortgage rates were low, and then running the savings down when their repayments have skyrocketed. As those buffers are exhausted, more distressed properties could hit the market.

In some senses, population growth has mitigated how badly affected business sales have been hit. But firms are becoming more cautious as well, with the latest data showing a 13% decline in machinery and equipment investment over the last year. That caution must translate through into hiring decisions as well at some stage, and recently there have been more stories of job losses than since the cuts catalysed by the initial COVID-19 lockdown. The surprising resilience of the labour market during 2023 seems unlikely to persist throughout 2024.

Exacerbating the effects of the private sector caution on the labour market outlook is the government’s efficiency drive. It’s taken five months since the election, but Wellington is now definitely seeing spending cuts hit its public sector workforce.

Fiscal policy is not going to cushion the fall, even with the automatic stabilisers during an economic downturn of reduced tax revenue and increased welfare spending. The government’s drive to reduce spending and debt – recognising that the ballooning public sector has been partly responsible for the excesses of the last few years – will be the dominant fiscal trend in 2024 and 2025. Even the stimulatory effect of the promised tax cuts will be dampened by households’ focus on reducing debt, adding less to aggregate demand than has been lost due to the fiscal austerity drive.

Monetary policy will remain contractionary, with an official cash rate of over 4%, as long as inflation stays above the 2%pa midpoint of the Reserve Bank’s target band. Recent partial data has suggested that the lower-than-expected inflation results during the second half of 2023 might not be repeated in the current quarter, backing up the Reserve Bank’s view that cuts to the official cash rate might begin later than financial markets are currently expecting. Even when those cuts do occur, they are likely to be gradual, and will not translate through into fixed mortgage rates on a one-to-one basis.

That leaves the export sector to save the economy – an area we have already expressed concerns about in recent months. Tourist arrival numbers have stagnated since mid-2023 at about 82% of pre-COVID levels, as potential visitors from overseas struggle with weak conditions in their own economies and high airfares. Agricultural producers are faced with a stalling Chinese economy, lower commodity prices, and high input costs. Manufactured exports are also being hit by sluggish global demand.

We’ve previously hoped the economy might be achieving a soft landing, but we’ve got renewed worries that the full effects of higher interest rates are only now becoming apparent. Whatever the case, don’t be misled by the headline numbers and their indication of a mild recession. Underneath the rapid population growth, all is not well.