Weekly Economic Commentary 2 April 2024
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Return to fiscal surplus delayed again
Westpac New Zealand’s data on spending via Westpac issued debit and credit card data for the three months ending February confirm that household spending remains weak and that it’s a tough time for the retail sector.
Spending was particularly weak on discretionary items. For example, spending on furniture, clothing, and restaurants all show consumers are keeping the purse strings tight. Even in sectors like groceries, which have traditionally been more resilient to economic downturns, consumers have increasingly opted for value-for-money options over the nice-to-haves. We do see more resilience in the services sector as the past year has seen a sharp rise in spending on airfares and travel related services, reflecting a renewed appetite for travelling abroad as well as the ongoing recovery in inbound tourism.
Spending seems weak across most of the country. Wellington has been particularly hard hit, with ongoing nervousness about job prospects in the region a key driver. Spending in the top of the South Island has also been weak with a softer labour market and the effects of dry weather conditions on agriculture/horticulture production likely to be key factors. By contrast, spending in the Hawke’s Bay and Gisborne was strong, although most of that reflects positive base effects associated with Cyclone Gabrielle in early 2023.
A softer tone is also evident in ANZ’s business outlook survey for March. Business confidence in the economy and expectations relating to respondents’ own activity fell. A lower, but significant proportion of firms still expect to be able to increase their prices over the coming three months. However, firms’ expectations of year-ahead CPI inflation have moved lower and at 3.8% are now back to levels last seen in late 2021.
On a more positive note, the Westpac McDermott Miller employment confidence Index rose for a second consecutive quarter, with more New Zealanders feeling optimistic about the state of the labour market than those that are pessimistic. Not only are New Zealanders expecting better job prospects and improved job security, but they are also feeling more optimistic about a lift in earnings over the coming year as inflation recedes from recent highs. That said, perceptions about current job opportunities were again weaker, falling for a sixth straight quarter. This question is of particular interest to us because it tends to provide a good early read on unemployment, which in turn has implications for wage inflation and the future path of interest rates.
Meanwhile, the new Government’s first Budget Policy Statement (BPS) has confirmed that the upcoming Budget will signal a markedly weaker fiscal outlook as well as a likely increase in the government’s borrowing requirement. The BPS also reaffirmed government’s commitment to delivering “meaningful” personal income tax cuts in the Budget, although no new details were provided on the magnitude or timing of that relief.
Details on operating spending allowances were similarly light. While there was confirmation that the allowance to be announced in the Budget would be less than the $3.5bn for 2024/25 originally set out in last December’s Half-Year Economic and Fiscal Update (HYEFU), detail on operating spending allowances for subsequent years will only be revealed when the Budget is released at the end of May.
The Government has also committed itself to adding up to another $7bn to the Multi-Year Capital allowance, which is used to fund new capital investment over the four-year budget time horizon. This top-up alone will add to the HYEFU projections of the government borrowing requirement over this timeframe.
Meanwhile, the Treasury has revised its own economic growth forecasts. It now expects real GDP growth of 0.1% for the 2023/24 fiscal year, which is significantly down on the 1.5% growth that was forecast in the HYEFU. Real growth is forecast to rise by 2.1% in 2024/25 and 3.1% in 2025/26 which although firmer than shown in the HYEFU, is still not enough to offset the sharply lower growth forecast for 2023/24. That together with Treasury’s lower forecast trajectory for inflation, suggests that nominal GDP will come in significantly lower across the forecast horizon, reducing cumulative Crown tax revenue by $13.9bn. Treasury forecasts that Crown tax revenue will be reduced by about $1.2bn in 2023/24 and that will ratchet up to $4.2bn by 2027/28.
At first blush, these updated tax revenue forecasts suggests that the Government will not achieve an operating surplus in 2026/27 or 2027/28. It is important to note, however, that these updates do not include Government’s proposed personal income tax cuts or other possible sources of tax revenue. It also doesn’t include spending cuts and any reprioritisation of expenditures to be announced in the upcoming Budget, as well as any further changes to Treasury’s economic forecasts. All told, we expect Government will seek to forecast a small surplus in 2027/28, but it remains to be seen whether that will be achievable in Budget 2024.
The Government has also announced that it will adopt a narrower measure of net core Crown debt that excludes among other things investment assets held by the New Zealand Super Fund. It has also set itself the long-term goal of reducing this debt measure from around 44% of GDP forecast for 2023/24 – a level already relatively low compared to many advanced countries – to below 40%. Once there, the Government intends to maintain core net Crown debt in a range of 20-40% of GDP. The Government has set itself a long-term goal of achieving an operating (OBEGAL) surplus that is consistent with these net core Crown debt targets. In part it will do that by managing core Crown expenses down towards 30% of GDP from 33% at present.
In summary, the BPS confirms that the government borrowing programme is likely to be significantly increased when the Budget is released at the end of May. Given the extent of the downgrade to the tax revenue forecast, this could be as much as $15bn over the four-year budget time horizon. Much though will depend on decisions taken between now and the Budget in May, especially with regards to the magnitude and timing of tax cuts.
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