The Treasury’s Half Year Economic Update or HYEFU (popularly pronounced hi-ee-fu) is expected to show a significant deterioration in the accounts compared to forecasts.
It will mean the government will have to borrow more, implement its plans for a return to surplus and continue to focus on cost cutting for another year.
Darren Gibbs, senior economist at Westpac, expects, based on comments already made by the Treasury, that a forecast return to an operating surplus is likely to be delayed until 2028/2029.
He expects the bond program to increase by around $6 billion for the four years to 2027/28, with a $20 billion program expected in 2028/29.
This deterioration is largely due to lower tax revenues, with economic growth being weaker than previously forecast.
Thursday’s GDP data is expected to show that we are back in a recession. Economists expect the economy to have shrunk by about 0.4% in the third quarter, after a contraction of 0.2% in the second quarter.
Optimists will point out that this is historic and that the worst is hopefully behind us. Pessimists will want to add that we have been in a “GDP per capita” recession for about two years and will likely remain so until our rapidly declining net migration rate puts an end to that.
Either way, it still provides another “recession” headline, reminding us how bleak 2024 has been – as if we need that.
In between, we will receive the balance of payments on Tuesday, including an update on the size of the current account deficit.
The deficit is expected to have fallen fractionally – perhaps from around 6.7% of GDP to 6.35%. But, as ANZ economist Henry Russell says, that’s still far too big to be sustainable.
There’s some jargon around the components of the current account… and its place as part of New Zealand’s overall balance of payments.
The easiest thing to understand is the inflow of foreign exchange we earn from exports and the outflow we spend on imports. This is a part of the current account that is also described as the trade balance.
That will start to bring some benefits from the good dairy export season we are having now, although we won’t see the bulk of that until the fourth quarter.
However, we are still suffering from a tourism recovery that is largely missing. Data on Friday showed another increase in annual visitor numbers for the year to October, but only returned the sector to around 2015 or 2016 levels. In short, the economy is still missing out on billions of dollars in export revenue from tourism .
The current account also includes things like corporate profits and investments flowing in and out of the country. For example, the fact that New Zealand’s banks are largely foreign-owned means that their billions of dollars in profits are a major drain on our current account.
It’s one of the reasons why New Zealand always takes a back seat when it comes to trying to run current account surpluses (i.e. take in more money than we spend).
The stark reality is that we have generally run deficits – at least since we opened the economy in the 1980s. In June 2020 we recorded a large surplus (the largest since 1971), but that was just a strange symptom of closing the borders and locking everyone at home. We didn’t buy gasoline and total imports fell.
So that’s the trifecta of bad news that no one really looks forward to before we head away for a much-needed summer vacation.
There will still be time to make the season crazy, I hope. Next week I’ll write something more festive and reflective.
But the data coming in cannot be easily ignored and should provide food for thought for policymakers, economists and commentators as they consider how to transform this economy from the shores and beaches across the country.
Finally, I think it’s worth recognizing that the government has taken some important policy steps in the past week that could potentially unlock real value in tough areas like banking and infrastructure.
Plans to raise $500 million in private capital to strengthen Kiwibank, and a policy measure that would allow KiwiSaver funds to invest in major infrastructure projects, appear to offer a sensible, locally focused path to more “public-private cooperation” in the coming years.
We cannot continue with the source of public debt, but we must continue and build a more productive economy.
I hope more things like this happen in the new year.
Liam Dann is editor-in-chief of the New Zealand Herald. He is a senior writer and columnist, and also hosts and produces videos and podcasts. In 2003 he became a member of the Herald.