The recent GDP numbers were met with a mixture of shock and disingenuous spin, with parties and pundits predictably framing the data to suit their narratives.
The government and opposition have effectively swapped places on how much international pressure can "knock the stuffing out" of our economy.
As before, it is evident that being a small, open economy in a rapidly shifting geopolitical, economic, and technological world makes us vulnerable.
However, it is also hard to deny that thousands of public sector job losses in Wellington have spillover effects on the domestic economy’s "stuffing."
The economy has shrunk in three out of the last five quarters, demonstrating the demand side of the economy remains damaged by post-Covid rate hikes.
Despite the government’s decision to return the RBNZ’s sole mandate to inflation, it’s hard to imagine a retracting economy won’t weigh heavily on its next policy statement for rate cuts in October.
Bond markets are likely factoring this in, making it more expensive to borrow from overseas.
Leaving us more dependent on domestic capital, coupled with lower interest rates, this is likely to breathe life back into the albatross hanging around New Zealand’s neck: housing.
A deeper look at last week’s numbers show how dependent we are on property. Productivity remains weak, and investment fell, especially in construction.
Our savings, which should finance productive investment, are overwhelmingly channelled into property.
Just a few weeks ago on Q&A, economist Cameron Bagrie noted that over 60% of bank credit goes to housing.
That is capital diverted away from manufacturing and future-facing industries into non-productive assets.
High housing costs ripple through the economy. Workers pay more in mortgages and rents, reducing spending in other sectors.
Businesses and industries, in turn, must raise wages and prices to meet higher costs, reducing firms’ ability to compete globally.
Perhaps the most destructive effect is the brain drain. Rising costs push young people across the Tasman to a neighbour whose resource endowment supports wages we cannot match.
By making the basics of housing so unaffordable, we undercut the other advantages of the Kiwi dream.
Despite thousands of empty homes, supply problems also exist that politics perpetuate.
As our upcoming local elections will show, ratepayers, often with their life savings tied up in property, are the only ones who reliably vote for those who set housing rules.
At the national level, lower interest rates will likely inflate house prices again, boosting GDP numbers just enough for the government of the day to sigh with relief.
But trading ever more expensive houses back and forth is not prosperity; it’s a flawed incentive structure.
Whether through a long-taboo capital gains tax or something else, we need to break the cycle; otherwise, we’ll keep replacing stuffing with hot air and calling it growth.
— Jack Buchan is a PhD candidate at the University of Otago.
