Why is NZ in recession?

The GDP data is bad – very bad. The economy has shrunk in the last two quarters. The question is why. There are two broad arguments. They are:

• This is due to the austerity regime of Nicola Willis and her savage public sector cuts
• This is due to the high interest rates imposed by the Reserve Bank to bring inflation down under control which skyrocketed under Grant Robertson.

Let’s examine the claim that Nicola Willis has imposed an austerity regime on NZ. The 2023 Budget forecast core crown spending of $141.3b in 2024/25 which is 32.3% of GDP.

The 2024 Budget forecast core crown spending of $143.9b in 2024/25 which is 33.4% of GDP.

So spending in National’s first year is actually $2.6b higher than Labour were forecasting. To claim this is austerity means you are either a moron, or you think Grant Robertson practised austerity.

And the savage public sector cuts? Well the EFTS headcount is only 296 less than in June 2023. Is it credible that 296 fewer public servants can lead to a 2% drop in GDP?

So it is fairly easy to conclude that Argument 1 is about as solid as a puddle. Sadly this has not stopped Chris Hipkins and Helen Clark trying to argue this. They really should be arrested by the misinformation police.

How about argument 2. Well the Reserve Bank says the average floating mortgage rate until a couple of months ago was 8.6%, almost double that of three years ago. On the average mortgage of $550,000 this means weekly repayments of $985 a week, compared to $628 a week. So that is $357 more a week or over $18,000 a year.

In April Canstar found our mortgage rates were 1.4% higher than in Australia and their cheapest rates were 2.1% lower than NZ. In the UK rates appear to be around 5.5%., Canada is a bit lower than that. So interest rates in UK and Canada are 3% lower than in NZ.

This is the reality that the antidote to inflation is harsh. High interest rates do cause recessions. The solution is of course not to let inflation continue. The solution is to not let inflation get out of control in the first place.