The PM will return to a country where the flagging economy is running out of the resources it needs to grow

Prime Minister Jacinda Ardern will almost  certainly  have  earned  a  bounce  upwards  in  her party’s  polling after  her mission  in  Europe, where,  as a  result of  her  “Captain’s  Call”,  New Zealand  has  accepted  the  terms  of  the  EU free  trade  deal.

The  outcome is   positive  for  some  sectors, though  not for  the  dairy  and  meat  producers. NZ’s  negotiating team,  led   by  the  redoubtable  Vangelis Vitalis,  did  a  remarkable  job in securing  as  much  as  they  did,  but  the  disappointment  over  the  lack of  any  significant gains  for the  dairy  and  meat  industries   could have  justified  the  government  flagging  it  away.

If   the  plaudits  for  the  government  are somewhat muted, it’s on the  home  front that black   clouds   have been  gathering.

Those  may dull  the  homecoming  for  Ardern after she engages in more trade-related talks in Australia.  The  reports   on  the  economy awaiting her are  downbeat, if not chilling.

Take  for   example  the latest  ANZ   Business Outlook   and   the  Q2 Quarterly Survey of Business Opinion (QSBO). They display similar themes:  activity indicators are weak; cost and pricing intentions are far too high, capacity constraints are acute (an inflation intensification story); employment intentions are faring a little better than most indicators.

The  ANZ Bank’s  team says that for broader economic momentum, it seems the only way from here is down.

“That’s not to say the economic fundamentals have suddenly broken; rather, the economy is running out of resource to grow (labour in particular). And while there’s bound to be an element of worry about the demand outlook too (given interest rates are on the rise and the housing market is in retreat), demand driven by a rapid increase in debt (both Government and household) was never going to be sustainable”.

They  say  in this environment, the only thing left for policy-makers to do is focus on withdrawing demand and boosting supply. Trying to boost growth by adding to demand will only exacerbate the inflation problem.

“For the RBNZ, we see nothing in these data to stand in the way of 50bp hikes in both July and August. The RBNZ needs to be convinced that inflation pressures are softening, and that’s not what these data are saying (yet).”

Back   home, Deputy PM Grant Robertson,  recovering  from  his Covid  bout,  can  still  see  silver  linings in  the  darkening  clouds.

He  takes pride in  the  latest  set  of  Crown accounts,  in  which he  detects  a solid result, despite “challenging” international conditions.  He  reckons these reflect  the  government’s  “careful management of  the  books”.

For the 11 months to the end of May, the Operating Balance before Gains and Losses (OBEGAL) deficit was $7.7 billion, $5.5 billion below the figure forecast in May’s Budget.

Core Crown expenses were $1.4 billion below forecast while core Crown tax revenue was three per cent above forecast.

The key drivers of this were higher than forecast corporate tax ($1.6 billion), net other individuals’ tax ($0.7 billion) and PAYE ($0.6 billion).

The Treasury anticipates that much of this improved result will be reflected in the books at the end of the financial year on June 30.  Hence the OBEGAL deficit will be less than had been forecast at the time of the May Budget.

Net debt was 16.6 per cent of GDP, $4.3 billion higher than forecast. This is primarily driven by weaker market conditions affecting the financial portfolio held by the New Zealand SuperFund and ACC derivatives. The Treasury has previously noted that the new net debt measure would be more volatile than the previous measure.

Robertson takes satisfaction from portraying this level of debt as still one of the lowest levels in the OECD.

He  adds  just  this cautionary riff to his  tune:

“While results at the aggregate level remain solid, we know that for many New Zealand households and businesses they are finding it tough going at the moment”.

The  problem   is  that “at the moment”  could stretch  far  longer  than  any Labour  politician anticipating  the  only poll  that  counts  would  like.

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