Just briefly in our political economy today, two new surveys show both voters and business leaders are now blaming the current National-led Government, rather than the previous Labour Government, for an ongoing economic slump that worsened again in August.
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Voters & businesses now blame this Govt for stalling GDP
Today, I wanted to look at the economy part of the political economy, although they're very closely aligned, as you'll see in a moment.
To do that, I'm going to look at a couple of surveys that have come out in the last day and an opinion poll that has come out in the last couple of hours. In essence, for the last two years, there's been a debate about why the economy just can't seem to get going. When the government first came in, it blamed the previous government, the Labour government, for, it says, profligate spending, rising debt and rising interest rates, and not being able to control the cost of living or inflation. That was the narrative that dominated for the first year or so.
In that period, the government, particularly from November 2023 onwards, and more aggressively in early 2024, froze spending on investment in water networks, in various roads, railways, school buildings, new hospital plans, a whole bunch of things because the government was trying to restrict government spending growth and restrict government borrowing. The theory is this would allow the government to step back to shift the debt trajectory downwards from, it says, gross debt of over 40% of GDP, towards 30%, and also reducing the size of government from about 34 % of GDP towards that 30% mark again.
This is part of the overall fiscal strategy, which has been adopted by both sides of parliament over the last 20 to 30 years, of trying to get both the size of government and the size of gross debt down to around 30% of GDP. It is the North Star which dominates the government's actions in all sorts of ways. And in this case, the government chose to effectively tighten fiscal policy at the same time that the Reserve Bank had interest rates right at their highest point in nearly 20 years or so. And that is why the economy's in real strife.
But until now, the government's been able to blame the previous government and voters have on the whole blamed the previous government too. But that is changing. In the last few hours we've got a poll from RNZ through Reid Research asking the direct question, who do you think is responsible for the economy being so slow at the moment? And also we have two surveys from Business New Zealand showing that not only is the economy stalled again but that businesses themselves are starting to blame the government as well.
Voters now blame this Government, rather than the last one
So let's have a look at these surveys, starting with the RNZ Reid research survey that came out this morning. It asked the question: who do voters hold most responsible for New Zealand's struggling economy? And this found that 37.6 % found it was the current government that was responsible, while 30.8 % said it was the previous government. It mostly falls along party lines. If you look at who's blaming the current government, the Greens mostly, Labour and then Te Pāti Māori. Although interestingly, 9 % or so of National voters also blame the National-led government.
Who's blaming the previous Labour-led government? ACT and National voters. About 6.8% of Labour voters blame the Labour government. This means we are now seeing one particular measure that's taken in political opinion polls, the right track, wrong track measure, showing a significant worsening in the views about the government and the economy being on the wrong track. It happened through the winter.
A winter of discontent
You could call it a ‘winter of discontent’ as in the June quarter the economy went into contraction again after two quarters of somewhat rebounding growth. And that contraction in the June quarter has really undermined the government's narrative or view that the economy is bouncing back because of the government's actions.
And you can see correspondingly the right direction measure has dropped sharply. We're now at the point where the wrong direction measure is getting up towards the level seen before the 2023 election. And we also see in the actual polls that Labour is now ahead of National in this RNZ Reid research poll. That is in tune with what we've seen with other poll results recently, the Taxpayers Union Curia poll and also the Roy Morgan poll.
So what does this mean in Parliament? It all depends on whether or not Te Pāti Māori get all of their six electorate seats that they currently have. The party vote says they would only get five of their seats, not the six they currently have.
If they only got the five, Parliament would be completely evenly split down the middle, or 60-60. However, if Te Pāti Māori won all of their electorate seats, there'd be an overhang, and the grouping of Labour, Green and Te Pāti Māori would have a one seat majority.
Business survey finds Government policy being blamed
Now, let's look at the next survey that's come out this morning from Business New Zealand, a survey of 130 business leaders asking them what their top five concerns are about the economy generally, and what their top five concerns for their own businesses are. For the first time in this Parliament, business leaders themselves are blaming reversals of government policies after the election, affecting business certainty. So obviously the abrupt repealing of three waters of the RMA reforms and various other measures sort of unwinding government policies. Not necessarily surprisingly, because many of these things were promised at the election, but the way it was done so abruptly, as well as that freeze in government spending at the end of 2023 and early 2024, have really riled up businesses and caused uncertainty.
They've also talked about the international environment, and it's interesting to see the level of customer demand is another factor that people think is a problem for the rest of the business community. And when you look at what people were saying last year, last year they were saying it was the high OCR and a lack of consumer demand that were the problems.
Now they're saying it's the government that's the biggest problem and those reversals of policies. When you ask them about their own businesses, they are still saying it's those reversal of government policies, but secondly, it's level of customer demand. When you look at some of the other areas like resource management constraints or gas costs, some of the things that the government's talking about, they are not an issue for those people in business.
Both PMI & PSI in contractionary territory
The other survey that's come out in the last day or two is the Business New Zealand PSI survey. This is the Purchasing Managers Index survey for the services sector. The services sector makes up more than 60% of the economy. This survey is a companion to the PMI survey, the manufacturer's version of this survey, which asks purchasing managers, what are they seeing in terms of new orders? What are they seeing in terms of what are they doing with employment? What are they seeing with their stocks? And what are they seeing with production?
So this are quite granular, detailed questions, which are less about what you think is going to happen or how you think things are going more generally. It's more a question of what's happened to your orders. It's pretty hard to make that stuff up. And it's also a very good leading indicator of what's happening in the economy.
Let's look first at the PSI survey. And that shows another fall in the last month in the contractionary territory. Anything that's below 50 is seen as contractionary. Anything above 50 is seen as expansionary. And what you can see there, of course, is some ups and downs in 2020 and 2021 to do with COVID. And then a slide down from mid-2022 on, as the Reserve Bank’s rate hikes started to take effect and the housing market slowed down.
Then from mid to late 2023, we've seen it drop well below the line and it stayed there. There was a rebound, but that stalled out. A sort of a dead cat bounce. And we've certainly seen that again in August. Now, in June, a couple of these surveys, the PMI and the PSI survey, were surprisingly weak. And that was one of the factors in the Reserve Bank cited in cutting interest rates again.
But in July, one of the surveys was in expansion again. And this was pointed to by the government as signs that finally the green shoots were appearing. Well, those green shoots have been burnt off in August.
You can see here from what's happened with the monthly numbers for this PCI time series that we've been in contraction for most of the last three years. And when you look at the PSI numbers across the regions and in different areas, all of them are below 50 meaning in contraction. And when you look around the country, it's all in contraction except for Canterbury (and at 50.3, it's barely in expansion).
This is exceptional. In the wrong way
So you may hear some people say, oh, well, this is what's happening all around the world. And there's not much we can do about that. We're a cork floating on the tide.
Well, actually, no. When it comes to our major trading partners - the Eurozone, the UK, China, Japan, USA, and Australia - all are above 50. The Eurozone is just a little bit above 50, the UK, the US, Japan are at around 53/54, and Australia is at nearly 56. We're at 47 and a half.
We're different and the reason we're different is that our monetary policy (the OCR), fiscal policy, and the government's actions to restrain spending growth, have all been much more contractionary, tighter than the rest of the world, even though our debt is lower.
And when you look at the combination of the PMI and the PSI, grouping manufacturing and services together, you can see the yellow line drops down again and is still below the long term average. If you look at the three month average and match that up with GDP growth, it's a pretty close correlation. So this says we are still in recession going into the middle months of the third quarter.
We're going to get numbers from Stats NZ on Thursday for GDP growth in the June quarter and what it's going to show, according to the current consensus of economists, is a GDP contraction of about 0.4%.
The Reserve Bank in its last set of forecasts forecast a 0.3% GDP contraction and the Reserve Bank's Nowcast measure, which is a constantly updated measure, is currently predicting a 0.2% contraction.
That will push back against the narrative put forward by the government that the green shoots are coming and we just need to wait a little bit longer.
Like waiting for Godot
It's interesting that Business New Zealand is starting to say this now and release these surveys. They're saying that the services sector is in a slump, they're using the word slump, and that it persists. That's in the release that came out yesterday. And for the first time, they're pointing to government policy uncertainty as a factor in the economy's slowness. Doug Steel, senior economist at the BNZ, points out there's now a very real risk that any ensuing bounce in the economy, which everyone's been expecting for 18 months, takes longer than expected to arrive. And this is becoming a real issue. The government really expected the economy would be growing quite strongly by election year, and it really is like waiting for Godot, it's just not arriving.
Ka kite ano
Bernard
