State of the Economy 2025

Dominick Stephens:

[Dominick speaking in te reo Māori 00:00:03] Kō Dominick Stephens tōku ingoa. Nau mai, haere mai ki Te Tai Ōhanga.

I'm Dominick Stephens, Chief Economic Advisor at the Treasury. Welcome to everybody in the room, and welcome to those online to our half-year post-HYEFU State of the Economy and fiscal books update.

So let me just start with a really quick health and safety briefing for those in the room. In the event of a fire alarm, please follow Treasury staff to the nearest exit, and progress down the stairwell to evacuate the building. Do not use the lifts. In the event of an earthquake, you know what to do, drop, cover and hold, stay in the building until instructed by a warden. And bathrooms are up at the kitchen just to the left of the kitchenette.

So, this is a second edition or the second time we've done this. Over the years, we prepare detailed economic and fiscal updates for government. We have IMF people roll through and sort of give updates on how they're seeing the economy, and we thought, after budget last year, why not be out there and give an update to colleagues across the public sector and indeed across the wider community in New Zealand.

So, we did this post-Budget last year through this forum, and we did one up in Auckland to a more business-oriented community. And I think I said if it goes well, we'll do it again. And I think actually it was the highest turnout for our Treasury guest lectures. So, people very interested in what's happening in the economy and the fiscal books at the moment. There is a lot going on. So, we're happy just to continue the conversation and continue keeping people updated.

Just to let you know that this seminar is being recorded. So, most of our audience is actually online. I'm planning to speak for 40 minutes or so. We'll have a Q&A session at the end. I'll be joined by Kamlesh Patel, our Deputy Chief Government Accountant for any curly questions on the fiscal side, and Peter Gardiner, our manager of Forecasting at Treasury for forecasting side questions. But we'll have a Q&A session both through online and through raising your hand internally.

Just for those online, if you can put your question in the Q&A function in Teams rather than in the chat, we'll sort of curate the questions and collate them from there.

So, let's get underway. And I guess for those who are in a hurry, I've only got a few. I can summarise the presentation in a couple of minutes, and it does actually have echoes of the presentation I gave at post-Budget last year.

So, as we came into the half year update this year, we do continue to expect an economic recovery over 2025. The economy has been in recession, expected to recover over 2025. However, the data quite clearly indicated that that recovery will be later and a little slower than we anticipated at the Budget economic and fiscal update.

There was also a further downward revision to our expectations of economic growth over four years, a little bit smaller than we delivered at Budget, but it's still there and a downward revision to the amount of tax we were expecting to receive relative to the size of the economy.

And that naturally meant that we delivered the government a downside revenue surprise of about 13 billion dollars. This being a half year update, it's not really the time for the government to sort of make knee-jerk reactions to that forecast change. So, they're sticking the course with the $2.4 billion budget allowances which will, over time, deliver a fiscal consolidation. And over time, return is a structural surplus at present into closer to surplus territory.

So that's the HYEFU in a nutshell. But, of course, the interest is all in the detail. So, let's get into that. And I guess the first question you've rightly asked is, especially given that it's been delayed, do we continue to expect a recovery at all in 2025.

And I think that goes back to the reasons that the economy entered recession. This economy overheated. We hit 7% inflation. Naturally, the Reserve Bank was required to lift the OCR, bring economic activity down to a less overheated level, a level of economic activity that is more sustainable over time and more consistent with 2% inflation.

They duly did that, lifted the OCR very sharply. That slowed the economy over time. What we're seeing now is that inflation is coming well under control. It's actually very close now to the Reserve Bank's target of 2%. And the Reserve Bank is seeing fit to reduce interest rates.

So, the very forces that led us into this period of slower economic growth are going into reverse, and that's a good reason to expect activity to lift. You can see actually probably the surprising thing that's happened is that tradables inflation size, the price of goods and services that are traded across the border has fallen faster than anticipated, aided and abetted by oil prices, global shipping costs, and the like. And that's really helped the Reserve Bank out.

Non-tradables inflation, so the price of things determined in New Zealand is falling more slowly. It is falling but a little bit more slowly than previously forecast. And look, it is normal for non-tradables to only slowly decline. A lot of the prices there, they have a lag on them. So local body rates or some administrative prices such as alcohol and tobacco excise are actually based on the previous year's inflation. So, you sort of do get a lag effect with non-tradables inflation. It moves more slowly.

But as I say, we and the Reserve Bank are comfortable that it is in decline. And you can see actually in the half-year update for reasons I'll go into, we anticipated that the OCR would start falling more rapidly than we had forecast back at the Budget update. And the Reserve Bank came out recently with much the same conclusion.

The other slightly less talked about, at least in the cities, reason to expect a recovery during 2025 is what's happening in rural New Zealand. So, commodity prices, prices for many of our key exports, are actually doing really well at the moment.

Last year, Fonterra dairy farmers received, I think, it was $7.38 per kilogramme of milk solids for their production. Expectations are for an over $10 per kilogramme of milk solids payout for the coming season. So, a really big price lift. It's not just dairy. It's across most agricultural products, not so much forestry but other horticulture, meat, other agricultural products, and it hasn't been a bad growing season either.

So, production's been reasonably strong on the export front. And I think in my travels around New Zealand and conversations I've had with people, I've detected a little bit of an urban - rural divide. It is pretty dour still in the cities, particularly in Wellington actually. But actually, the vibe in rural New Zealand is starting to lift on the back of these really good returns.

Probably, the other thing happening is the exchange rates falling. So, I'm sure you've noticed it against the US dollar. It's also happening on a trade weighted basis. So again, that's not necessarily great if you're an urbanite who'd like to travel overseas or you'd like to purchase goods and services that are produced overseas. But if you're an exporter, well, that means more New Zealand dollars for every overseas dollar that you're earning.

Summing it all up, I think it would be really unusual to see a big drop in interest rates, big lift in commodity prices to near record levels, decline in the exchange rate, and to not have some form of improvement in the economy over the coming year or two. And I think it's very reasonable to continue expecting a recovery.

That said, when it came to producing the half-year update, we keep our finger on the pulse, and we have a look at how quickly the ship is actually turning. You get more data on it. And quite simply, the data that we were seeing towards the end of last year was south of the expectation that we laid out at the Budget economic and fiscal update.

So yes, the ship is turning, but it was turning more slowly than previously anticipated. And just to run you through some of the things there, most interestingly, the performance of manufacturing index and performance of services index where you ask people, "What's happening in your business," a number below 50 means their business is contracting, their sales are contracting. And a number above 50 means expansion.

Performance of manufacturing index in New Zealand was a standout week around the world and was below 50 for 22 consecutive months.

Performance of services index was a shorter period, but it was throughout most of 2024 below 50. So definitely, we were hearing from businesses that things were still really quite soft at the end of 2024. The numbers have ticked up on the chart there. That's actually the January number. So, it's something we received quite recently, and you've got to remember it's still close to 50.

Quarterly Survey of Business Opinion from the New Zealand Institute of Economic Research, it's a fantastic survey that gives you its broad coverage, great sense of what's happening to businesses around the country. And probably, it's a statistic. So, it's a collection of anecdotes, if you like. When they asked businesses, what do you expect for the year ahead, they shared our expectation for an improvement.

But when you actually said, what's your trading activity been in the past three months, it was very, very low and consistent with ongoing declines in GDP right through to the end of 2024 actually.

So again, evidence that, look, the ship just hadn't turned. You can look at the number of people employed on a full-time basis, that was declining. The number of hours that firms are paying people to work declining. The housing market, it showed a few signs of perking up a little bit at the Budget update. We weren't getting too excited. But what's actually happened is a return to falling prices over much of the latter part of 2024. And again, that was a little bit south of our prior expectations. So, it was built into our forecast.

Just as an aside on that, I think people are getting... There's a little bit of excitement out there about the housing market, people sort of thinking that, well, interest rates are falling now. Then house prices must go up. Look, I absolutely am completely convinced there's a very strong relationship between interest rates and house prices, but I don't think it works quite that simply.

So, for a start, the longer-term interest rates, the longer-term fixed rates haven't actually... the five-year rates barely fallen at all. So those haven't really, really changed. When we run our housing market models, what they actually tell us is that the level of interest rates that prevailed during the peak of the OCR had that been sustained, there would've been a lot more downside in-house prices. They would've fallen a lot further.

So, when the expected drop-in interest rates occurred, that eliminates the downside really for the housing market. But it did not, and according to our models, did not really suggest a huge, huge upside.

And I think you've just got go back to, just got to to keep this in perspective, I guess, the really big picture for the housing market is the late-2010s and early-2020s, there was a bit of euphoria around a bit of a sense that interest rates, they dropped to very low levels. And perhaps some people in the market thought that they could stay at those very low levels for a long time.

And the big picture is that that expectation has changed, and the market is now largely of the view that interest rates will be a bit higher than perhaps they thought in that late 2010s, early 2020s period.

And, therefore, what people are willing to pay for an asset is a little bit different now to perhaps what it was at the peak of that slightly euphoric period. So, I think this is actually something that we emphasised with the Housing Technical Working Group paper we released a few years ago that it's not really the short-term ups and downs of the Reserve Bank that matter. It's those longer-term expectations of where interest rates will settle. That's why Treasury's had a less off-to-the-races house price forecast for some time, and we've still got low single-digit type numbers.

When house prices are flat, you tend to get less housing construction. A lot of people got their renovation done during COVID and didn't have anything or didn't have the money for a renewed renovation, I guess. So, the construction sector has really borne the brunt as it always does or usually does during the recession.

And, again, data, we have finger on the pulses, how many consents are being issued? And it just hadn't turned. So again, our expectation of when that turn in construction will happened just a little bit delayed, a little bit further south.

Tourism, it's been a relative good news story in the sense that it was near zero during COVID, and it's been recovering rapidly. But relative to previous expectations, the recovery has not been as fulsome as we had previously forecast or would have liked. US visitor arrivals are actually back to pre-COVID levels and are really very strong indeed.

But you can see from the chart, Chinese visitor arrivals are lingering around half of pre-COVID levels, and that recovery just hasn't been as fulsome as we might've expected. And it seems to be levelling out at this level. So that was another reason that the economy just wasn't looking quite as strong as we'd forecast back at Budget.

And the last one I'll talk about is net migration. So normally, it's a background factor, but the numbers and the swings in net migration have been so large. I actually think they've been a very important part of the ups and downs in the economy over the past few years.

When you have 133,000 net migrants coming in a single year as we did at the peak, there are just more people walking up and down shop aisles, and it really just makes a difference to how much activity you've got. Net migration turned around really sharply as anticipated, but it turned around more sharply than we'd previously forecast and has gone further south.

Now, in terms of what's going on, it's good to sort of break it down into what non-New Zealanders are doing and what New Zealanders are doing. So, for non-New Zealanders, there was this enormous surge, basically as soon as the borders opened. There was a couple of reasons for that.

First, there's a pent-up demand of people who had permission to move to New Zealand, weren't able to because the border was closed and then found themselves able to and thus entered the country. But you also had really acute, you'll remember it, really acute demand for labour, and it's easier to migrate to New Zealand if you have a job opening.

There were plenty of those. So, it's another reason that a lot of people moved in. Actually, Connor Gavin, one of the staff at Treasury, is writing a paper on this. I'm really looking forward to details of that going out. But some of the interesting details are that huge surge was, we normally get a mix of people from Asia, Europe, Oceania primarily, but the huge surge was really out of Asia.

We normally have quite a mix of skill levels come into New Zealand, but the really big surge and subsequent drop back was more low skilled people. And interestingly, they were a little bit older than more in the 30 to 39 category than the 20 to 29 category this time around.

So yeah, the surge has finished. Some of the pent-up demand has been sated. There's less job openings, so less ability to sponsor a migrant into New Zealand. A lot of the people who come in, they're on a time limited visa and the time is up. So, what you're starting to see is departures of non-New Zealand citizens is lifting, thus reducing that net number.

So, look, it looks as though things have normalised back to a more normal level of non-New Zealand net immigration, and we do expect as the labour market recovers, that that thing can at least stabilise from here.

As far as New Zealanders are concerned, the other phenomenon that's happening, it was slower to occur. But New Zealanders with a pent-up demand to leave started doing so. Probably, just people who wanted to go and couldn't because borders were closed around the world are able to now.

But secondly, there is a strong outflux of New Zealanders, and it is at cyclical highs now. And there's a really strong relationship between the strength of the New Zealand labour market and the number of people who immigrate each year, particularly vis-a-vis Australia.

So we are seeing a high number of New Zealanders leaving due to that weak labour market. Interestingly, where people are going, the number going to Australia is lifted. But the really interesting thing is that people going not to Australia to other places has lifted a long way. That is not something we've seen before. And I think really speaks to that pent-up demand side actually.

Again, I hear all sorts of assertions about the skill levels of the people leaving, and I'd really like to know where people are getting their data from on that, because we haven't been able to find really good data on what the skill level is of people leaving. So, I'm not willing to make any assertions there. We can say that they're a little bit, again, the 30 to 39 categories lifted more than other categories. So, it's a little bit older actually than it's usually the 20 to 29 category that's most common.

And again, as we expect the economic improvement over 2025, we would expect this to play out normally, that strong relationship to continue perhaps the pent-up demand to run out of steam. Perhaps as the labour market improves, you'll see a few more people staying in New Zealand, and I would expect that line to start turning.

And indeed, the latest data is showing that it is turning. As I say, this net migration, it had two implications for us. First, it had that short term, okay, look, with fewer people around that might explain why the economy's a little bit weaker. But secondly, just with fewer people, you can see our forecast is not for a recovery, and we're not going to get these people back. Relative to our previous forecast, we are still forecasting a return to 40,000. And that means fewer people in New Zealand in four years' time, which means a smaller economy in four years' time.

So that's the first leg of the longer run, slight downgrade to our forecast. As I say on the left-hand chart here, the GDP, you can see that we had, okay, it's going to take a little bit longer to turn around. So, we've got a bit of a downgrade in our forecast, the black line moving to the blue. We don't have a corresponding sort of forecast upgrade later.

So again, the overall size of the economy, let me show you a different picture, the overall size of the economy over four years, a little bit smaller than we'd previously forecast. First reason, as I say, was that net migration. But second is something I talked about last year, and that's productivity growth.

And I think I did cover this in a lot of detail at the post-Budget event last year. But just to summarise for those who didn't see that. Basically, Treasury has been steadily downgrading its forecast of productivity growth in New Zealand. I'm talking about labour productivity, which measures the amount that we produce per hour worked.

Labour productivity grew at 1.4% per annum from 1993 to 2013. But from 2014 to '19, it was zero. During the COVID period, productivity surged. And so, Treasury took a conservative approach to its forecast. We assumed that some of that was temporary. But we did in Budget 2023 forecast to return to the pre-2015 rates of productivity growth.

The reality that has emerged is that productivity has dropped all the way back to the pre-COVID level, leaving us with at the time we did HYEFU, a decade average of 0.2% for the last decade for productivity.

And as this data has slowly been revealed to us, we have been successively reducing our forecast of how much productivity is going to grow over the four years. And that has been successively reducing our forecast of economic activity over the longer run, not just the cycle.

Completely independently, the Reserve Bank of Australia issued a really similar chart to this late last year. So, they've had exactly the same experience, a revelation that productivity, really, there was some volatility during COVID. But really, the big thing that's happened is mid last decade, it slowed. So, they're experiencing the same thing.

Reserve Bank of New Zealand's been talking about the same thing, but they talk about it in terms of aggregate supply across the entire economy. We don't just look at these lines and draw new ones. We really think and dig deep into the issues. So, we issued a paper almost a year ago now on what's going on, what are the possible causes.

First thing to note is that this is international. So right around the world, a lot of countries actually a little bit earlier than New Zealand, it was post-GFC. But right around the world, we've seen slowing rates of productivity growth over the past decade.

One possibility is that it's to do with mismeasurement, statistician having trouble keeping up with economic activity. That can't really explain the whole lot. Another thing that's happened, and I'll talk more about this later, is slobalisation, a change in international connectedness or the growth rate of international connectedness around the world.

So, deepening supply chains perhaps less of a thing over the last 10 years than they were over the preceding 25 or so. In New Zealand's case, we've had investment, but it hasn't been enough to really deepen our capital stock. So, we remain capital shallow. And again in New Zealand, we're quite slow.

There's obviously new technologies coming along, but we're quite slow to diffuse them through our firms, and that holds our productivity growth backwards and could be a reason for this slowdown. So, when we did this work, we didn't see any real reason to forecast productivity growth to return to those 1,5% type rates that we used to see in days of yore.

And at the half-year update, actually, the evidence has just continued in the same direction. So, there was a further small downgrade to our forecast of productivity growth over time, and there was one little technicality in there. We make an assumption about where productivity growth is going to go over the long run, and we need to base that on objective measures.

We use a 30-year average. The 30-year average has dropped from 1% to 0.9. So, we've implemented that in our forecasts. And again, we are forecasting 0.9% growth in productivity going forward.

Week before last, the secretary, Iain, gave a speech on bending the economic curve upwards and the fiscal curve downwards. We talked about, sort of noted that the government does have a programme of is really focused on trying to lift productivity growth, particularly point to RMA reform, reforming the science sector and educational reform.

But Iain actually outlined a few other areas that the Treasury thinks warrants focus over time. So, in terms of those connections to the world, we should always be looking to keep trade as free as possible, but it's actually also about what's coming into New Zealand to compete with New Zealand firms to ensure competition.

So, Overseas Investment Act reform is an area that we could look at there, making sure that our tax settings remain competitive in order to attract foreign capital, stable macro environment, and a regulatory environment that is conducive to foreign firms operating in New Zealand.

On our capital shallowness and investment, again, that's been a long-standing issue in New Zealand, levers the government can pull do relate to again tax settings and regulatory settings, a regulatory system and tax system that create incentives for firms to invest in the capital that we need to see.

Innovation, so productivity growth really happens in hubs of innovation and places where firms can exchange knowledge. So, nurturing those hubs, making your cities work well is something we can continue to work on and good infrastructure is really important there. And then regulatory and competition settings are really important to productivity growth over time.

So, your market settings, a regulatory system that is fit for purpose, modern up-to-date and infrastructure that's going to allow competition over time. So, forecasts are not destiny. There are levers New Zealand can pull to try to bend that curve upwards and to improve productivity growth to the extent we can.

So, the other thing that, as I say, our forecast of GDP was pulled down a little bit. The other thing happened independent of what was happening in the economy, we lowered our forecast a little bit of the tax-to-GDP ratio. So, we anticipate receiving less tax revenue per dollar of GDP than we anticipated at Budget.

There's a couple of things going on there. One, GST, it's a funny thing, but the amount of GST that we collect relative to Stats New Zealand's estimate of... So, we really know how much GST we collect, we estimate how many sales there are around the country, and that ratio actually changes over time. And it changed a lot and was mysteriously high during COVID.

And again, we anticipated that, look, some of that's got to be temporary. We assumed a return to something more normal. Instead, what's happened is a complete return to the pre-COVID level, which we have now built into our forecast and wasn't there at Budget. So, we've lowered that forecast of the ratio of GST collected to actual sales in the economy.

The second thing that happening here is our wage forecast is a little bit lower. When wage growth is higher, you get more fiscal drag. So a lower wage forecast translates to a lower tax-to-GDP ratio. And then thirdly, throughout 2024, and this happened at Budget as well, but we kept hearing that firms were proving less profitable and therefore paying less corporate tax than previously anticipated.

And there was something of a downgrade there that contributed to this. So, actually, we delivered a 0.7% of GDP reduction in our revenue forecast. About half of it was actually on this side on the tax-to-GDP ratio.

And for those who observe the monthly numbers, you will have actually seen that revenue overall has been broadly in line with Treasury forecasts. And the tax-to-GDP ratio was quite high in the June 2024 year. But that related to some one-offs. There was real strength in dividend withholding tax and portfolio investment entity tax to do with really strong markets which we didn't expect to continue. So, beneath the hood, the upsides weren't going to continue and the downsides probably were. So, our forecast came down a little bit.

So, yeah, recovery is still expected. Tax-to-GDP ratio is still expected to rise. But both a little bit slower than previously forecast meant our forecast of revenue, which is on the left-hand side of this chart, we still expect revenue to grow strongly over the forecast period, but just a little less strongly than we had at the Budget.

And actually, on the expense side, there was also a bit of an upside surprise on there. The interest expense, which I'll talk more about soon, there’s health sector overspends $1.3 billion. And then the forecast of the education sector depreciation expense was higher.

So, these relatively small, the pie chart here shows the reasons for the change in the deficit and the big one is our revenue forecast reduction. But there were actually a few things on the expenditure side that also contributed.

And what that meant is that while we are in a deficit at present and it's a structural deficit, we are forecasting a return closer to surplus over time. But that return was slower and later than previously forecast.

As I mentioned, this being a half-year update, the government didn't necessarily want to respond immediately to this forecast change. So, they stuck to their 2.4 billion budget allowance over time. So, government's plans for expenditure haven't changed. And, obviously, details will be revealed at Budget itself. And again, that meant Treasury came out with a forecast of a return to surplus that's a bit later.

Probably, just one thing really to emphasise is those $2.4 billion allowances will deliver a fiscal consolidation, and it really is quite a fiscal consolidation. So, if you consider what it's going to cost the Crown just to keep up with inflation and the increasing cost of delivering goods and services and to keep up with population growth, it is more than the $2.4 billion allowance for future budgets, meaning that ongoing savings and reprioritization will be required to stick to that $2.4 billion over time.

And indeed, if government wants new initiatives that are costly, it's going to have to find even greater savings and reprioritization to fit within that 2.4. So, it's important to emphasise that this is quite a fiscal consolidation, and it will deliver a return to surplus over time.

Government also made the decision to use OBEGALx as its headline measure of the budget balance. So that's operating balance excluding gains and losses excluding ACC. ACC is meant to be self-funding over time, but it can be quite volatile year to year. They chose to exclude that from the measure because you don't really want governments receiving a surprise on ACC and reacting in other meaningful areas of the government books to try to produce a surplus over time.

Treasury will continue to publish OBEGAL for purposes of comparison and consistency. And we just note that there's no perfect measure of the surplus or deficit. So, for transparency we’ll continue to publish both.

Again, the government strategy, we're running a consistent and government deficit. We have an ageing population. We have climate change, possibly other pressures on budget over time. And so, a fiscal consolidation is really, really necessary. The government's strategy at the moment, as I say, is mostly through savings and reprioritization. So Budget, last year, we assisted the government to deliver $5.9 billion worth of reprioritization and savings. And we're obviously working on more going forward.

But one thing the Secretary mentioned in the speech last year is given the ageing population, if we're going to render New Zealand's fiscal accounts sustainable over time, more is going to be required. So, a review of fiscal consolidations in New Zealand and overseas has revealed they take time. They play out over nine years on average based on that review.

The most successful ones, actually, they involve sustained action over a long period of time and involve a mix of revenue measures, action on transfers and subsidies, efficient use of the balance sheet and efficient use of government or reduction in government consumption relative to GDP.

And then the successful consolidations occur during periods of economic growth. So, if consolidation can occur or be done in a way that's conducive to economic growth, it's more likely to be successful.

And then probably just the last thing to mention, the government's short-term intentions under its fiscal strategy are to return to surplus under OBEGALx in 2027/2028. That's a small change from its previous short-term intention, which was to return to surplus under OBEGAL in '27/'28. So, it amounts to about a one-year delay. And our actual forecast was a $300 million deficit in '27/'28. So close but work to do at Budget.

Just one thing I'm always really keen to remind people of, I give these updates, and we sort of talk about, okay, this is what we forecast last time, this is the new information we have, and this is how our forecasts have changed. So, economists don't make forecasts because they have crystal balls and can see the future. They make them because they're asked to, and we do our best. But the only thing we can really be sure of is that we'll be wrong. We just don't know which side will be wrong.

And actually, this fan chart shows us over time if you compare what actually happened to revenue relative to what the forecast was, it basically shows us that 70% of the time will be within $12 billion four years out. It slightly exaggerates the uncertainty because it includes policy changes. So, I'd like to work on an ex-policy change measure of those fan charts, which will be a little bit tighter. But I just want to illustrate that there is lots of uncertainty in the size of the population and how productive it'll be and how much revenue we'll collect, and that uncertainty will continue.

And in fact, again, something I'll talk about soon, but with what's going on globally, I would argue that now is really quite an uncertain time for what's going to happen, at least on the economic side and that's heightened uncertainty going forward.

So that's pretty much the story of the half-year update. Bit of time has ticked since the half-year update. So, I'll take the chance to just update you on a few things that we've observed since we issued the half-year update last year and how we are thinking about them going forward.

The number one question I get is what did you incorporate for Trump's election in the half-year update forecast. Now, Trump was elected on the 5th of November, and we finalised our forecast on the 8th of November. So hopefully, we'll be forgiven for not incorporating that in our forecast at the time.

But actually, over time, there has been a bigger picture referred to slobalisation earlier. So there has been a global shift away from international integration and towards economic nationalism underway for a long time. I would date the start of it really at Brexit is when the penny dropped for me. Trump mark one from 2016 to 2020 was absolutely a further move in this direction.

It goes far further and across many countries. It's actually global trade has been stagnating for a decade. And Treasury has long explicitly incorporated this in its forecast. So, I've already mentioned the productivity. So, one of the reasons we've been downgrading that productivity forecast is the less deep international connections and the effect that that has on the efficiency with which we operate our economy.

But secondly, we've also taken the explicit view that over 30 years, New Zealand's terms of trade were steadily improving. Partly, the price of stuff we export was going up, but the bigger part actually was the price of stuff we import was going down rapidly. We've taken the explicit view that that trend will change now.

So, we have a flatter forecast for the terms of trade rather than this ongoing upward trend. So that's been incorporated in our forecasting for a long time and remains in there. Now, admittedly, the election of Trump is a further step and possibly a step change in this continuation really of this trend that we've been seeing.

To be clear, should the tariffs that are mooted emerge, the effect will be towards slower global growth over time. Less trade globally will mean slower growth over time and that will affect New Zealand as much as anybody else.

So that is a really clear long run prediction, if you like, of the effect of this. But the path we take to get there from here to that end point is wildly uncertain. So, to start with, we really don't know exactly what tariffs will be applied and what won't. We do not know what counter tariffs will be applied.

Secondly, even when they are applied, it's really hard to predict how that's going to play out for markets. I could imagine all sorts of paths to get to that end point of a more negative end point. We could have tariffs directly applied to us. The US accounts for 12% of New Zealand's exports.

So, if that happened, it would have an effect. We're pretty good, and we've shown an ability to redirect our exports when that tends to happen, and the exchange rate does tend to adjust. So, there are adjustment mechanisms, but that would have obviously a bit of a negative effect on New Zealand.

We could have tariffs applied to a competitor and not us, in which case we would have preferential access. And again, it would probably mostly just change who exports what to whom. But that would be a mild positive for New Zealand in the short run.

Big tariffs could be applied on China, our largest trading partner, and that could slow growth in China and really affect the price of the products that we sell to China and thus have a negative effect on our economy. On the other hand, tariffs applied to third countries could result in goods arriving on New Zealand shores at lower prices because they're no longer going to the United States. And that would be a mild positive in the short run.

So, there are all sorts of getting to that more negative end point is clear, but how we get there? And it's really wildly uncertain. And I don't think it's appropriate really for the Treasury to have a guess at that. I'd rather wait until we see actually what's going to be applied and then hear from experts on roughly what effect that's going to have in their market.

So, what we will do as we head into producing our Budget forecasts is pay close attention to what forecasters in the relevant countries are saying. So, consensus forecasts for Chinese economic growth are going down because economists there and who watch China closely are seeing the risk of slower growth in China.

Consensus forecasts for the US are actually going up. So, we'll also pay attention to that. And I think that's a good way for Treasury to incorporate this over time in our forecasts.

The other thing that's happened recently, so we've got wild trade uncertainty. One thing that's more in the bag is there's been a really big lift in global bond rates. So, in the US 10 year, the interest rate that the US government pays on its debt for 10-year terms has risen 100 basis points since September, despite short-term interest rate reductions in the United States.

The UK had got clobbered even worse with a bigger lift. And for New Zealand, it's about a 40 basis point increase, although we haven't actually surpassed the peaks recently. And this is all happening despite central banks reducing interest rates. A few possible explanations, people are talking about inflation risk. Maybe, the tariffs will create inflation. Maybe, Trump will put a little bit less emphasis on keeping inflation under control. That's only a partial explanation because, actually, it's government bonds... On the right-hand chart, this is for New Zealand, but it's the same in all countries.

This is the government bond rate relative to swaps. So, swaps are a relatively risk-free financial instrument for exchanges between banks. Government bonds used to trade at 20-basis points under swap, but now 40 basis points over. And this is happening everywhere.

So, it's something specific to governments rather than inflation risk, which would also be reflected in swaps. More likely, it's just the sheer volume of government bonds on the market. So, around the world, governments are in deficit. Central banks are actually also selling the stock of bonds that they built up during quantitative easing. They're now quantitative tightening and selling those bonds back into the market.

So, there's just this absolute cascade of bonds on the market, and we've got work showing that the volume of bonds on the left-hand chart entering the New Zealand market is having an effect on the bond rate in New Zealand.

And then thirdly, it could be an element particularly for the UK on this one, that just the fiscal outlook could well be affecting what markets demand as compensation for lending to a government. They're seeing these really large deficits in the United States and the UK and elsewhere. And they're saying, well, gosh, I want you to pay me a bit more interest before I'll lend to you.

In New Zealand's case, I have the pleasure of meeting frequently with market participants from around the world who come through. Basically, the gist that I get is that they're watching. So fiscal policies on the radar for markets, it's something that people are really clearly focused on. But they're not worried about New Zealand. Actually, I had one quote was, well, there's an acknowledgement that there's an issue in New Zealand, and there's a plan to turn it around.

And then, of course, debt has risen, but it's still lower than a lot of countries that we can compare ourselves to. So, they're not worried, but they are watching. And I think that's another important reason for New Zealanders to keep its fiscal books in good order.

There are a few implications for this that we will work through ahead of our Budget forecasts. Firstly, if bond rates are higher, the government's paying more interest on its debt than we previously forecast. So that's going to affect our forecast of the interest servicing cost.

Secondly, as government has to pay more for its debt, that's going to affect what other actors in the market are going to have to pay for their debt. So particularly, local government and corporates who are kind of a little bit more in competition with government debt are likely to feel a bit of an effect, a bit of a lift in interest rates or the margin over swap that they're going have to pay for their debt.

Mortgage rates themselves, I think at the long end, we could see this putting upward pressure on longer term mortgage rates, not so much at the short end because the Reserve Bank can step in and offset this if it becomes big enough. So, they can produce the short-term mortgage rates that we want, but it will change the yield curve for mortgage rates. So, this is a little bit of independent upward pressure on New Zealand interest rates that will have an effect.

Another thing that we saw after we delivered HYEFU was big revisions to GDP. Stats New Zealand came out and revised its estimates of where GDP was at over time really quite substantially, and really changed the picture of where the economy had been. There was actually almost, I think it was 2% lift in the level of GDP by the end of 2023. And then they estimated that during 2024, there really was a much sharper decline than previously estimated, 2.1% drop in GDP over that period.

I would say actually the revisions made sense. They seemed to mimic more closely how the economy felt through time. So, yeah, things were dire in 2022 and 2023, but it was early '24 when we really felt a change and detected it through a wide range of measures, and that matches what we're seeing in GDP. The Reserve Bank observed last week that this explains better what happened with inflation, the persistence of inflation over that period followed by its retreat in 2024.

When we look at those tax-to-GDP ratios, it doesn't completely explain some of the weird things that happened during COVID, but it does change the tax to GDP ratios a little bit and make them a little bit easier to explain. What's going to happen, of course, over time is the fiscal aggregates. When the Budget comes out, GDP being 2% bigger in 2023 is going to affect things like the debt-to-GDP ratio, the deficit-to-GDP ratio over time.

So that's all going to have an effect. In terms of what it means over the longer run, actually, the level of GDP at the end of the estimates has only revised 0.5% higher. So, it's not actually that much different. The big thing for the Treasury is what does this mean for our productivity growth forecast, which has had such an effect on our revenue forecasts over time.

It is good news. So, this upward revision to GDP does indicate that productivity growth hasn't been quite as bad as we thought over the past decade. Previously, the average was 0.22%. Now, it's 0.35%. So good news on what's happened to productivity over the past decade. But when we come to think about our forecast where we're forecasting acceleration to 0.9, actually, when we developed that forecast, the likelihood of revisions to GDP was explicitly one of the things we discussed, and we felt justified our forecast of a higher growth rate going forward than was measured in the data in the past.

So, this was really the sort of thing that we had to see just to justify our forecast of an acceleration to 0.9% productivity growth over time. So, it's not likely to lead to a large change in our forecasts there.

And then lastly, just how's the economy evolved since the half-year update? I think it is fair to say things are still relatively subdued, but there are better signs in the data now that long-awaited turnaround is at least happening.

So, the chart I've got in front of you shows retail sales. We just had some data earlier this week showing a 0.9% lift for the quarter over the past year. It's still been less than inflation, but retail sales appear to have turned around. That quarterly survey of business opinion, I already mentioned, showed a big lift in confidence about the future. Already mentioned the performance of manufacturing and service in indexes which have lifted inflation and labour market data. We're pretty much in line with our forecasts. The housing market has a few straws in the wind. Prices are at least sort of flat now.

Sales are starting to pick up. Importantly, banks are reporting quite a lift in the number of new loans or new loan applications that they're receiving. Tourism seems to have picked up a little bit, and there's net migration figures have at least bottomed out and started to turn.

So, I think it's not to say that our forecasts for Budget are going to be exactly the same, but it does seem like the data is showing something of a turnaround in there. And again, that 2025 recovery probably is looking at the moment as though it's on track.

Okay. So, I will stop there having taken 50 minutes rather my 40. I hope that's okay, but I think that still does leave us for some time for Q&A, which we should have some coming through online. I think Peter Gardiner was going to moderate the Q&A and also answer the curliest questions on the forecasts if needed.

Peter Gardiner:

Thanks, Dom. Yeah. I have a range of questions online, but before we get to those, just to reiterate if there are any deep questions, don't go too deep because I do want Dom to answer them rather than me. So why don't we just throw it open the room at the moment just to see if there are any questions from the room? And if not, we can certainly get to a number of good questions that have come through from those that are enjoying the presentation online. Got one over here. Hi.

Speaker 3:

[inaudible 00:52:24] of real GDP per capita and because that really drives our economy, because you've had a big drop in the last couple of years, what are your thoughts about the future direction of that?

Dominick Stephens:

Yeah. That's a really good point to raise. Basically, the recession that New Zealand has had has actually been really quite severe on a per capita basis. I think even with the revised stats, it's still more severe than we experienced during the global financial crisis. Get the nod from the expert.

Yeah, whereas for businesses, we had this huge influx of people and more people walking up and down the shop aisles. So, they really felt it more when the net migration slowed, and it makes sense. During COVID, we had very low interest rates. We had the big lift in house prices. We had big fiscal deficits that some of which were transfers, and that really, really changed and had a really big effect on quote, GDP per capita for households down.

Absolutely, our forecast is for a lift. In fact, I think we had the picture of it there on a per capita basis because, again, the thing that... Let's see if I can find the chart. Yeah. We are expecting a lift in per capita GDP growth basically going forward. And our forecasts of population growth are not nearly as wild as recent history. So, our expectation of a recovery and growth is mostly based on per capita growth rather than population growth.

Peter Gardiner:

Yeah. Yeah.

Speaker 4:

Kia ora. Thank you, Dominic, for a really interesting presentation. I have a few questions, but I'll stick to just one as a follow-up to the previous question. I'm wondering how the net migration rate affects per capita GDP? Do we have any knowledge or background on this? For instance, does the per capita GDP tend to go up or down when our net migration rate is higher? And as a supplementary question, I found what you said really interesting that the overall size of the economy may be smaller in four years' time. But if this corresponds with a lower population, will that necessarily impact on living standards?

Dominick Stephens:

So, the research indicates that it's an area of great contention actually in economics, the impact of migration over time on living standards for locals. I think the most recent Productivity Commission's conclusion was a mild positive, a mild and uncertain positive effect over time. And there's a wide range of studies out there. So that's the best summary of the impact on living standards over time.

One thing that is an important part of our forecast is there is a short-term relationship between productivity and migration. But you can clearly observe in the data. Now, basically, if you chuck a whole load of people at the economy, it takes time to integrate them. And so, you see productivity dropping away.

So actually, some of the very negative productivity growth that we saw during 2022 and 2023 was probably associated with the big influx of lower skilled labour that we had at that time. And that's one of the key reasons that our forecast is as net migration drops, again. We would expect that shorter term correlation to remain in place. And so, we have a recovery in productivity. So that's over the short term, and it's relevant to forecasting. But, yeah, the longer term, you'd have to defer to the evidence, which is mixed, but perhaps mildly positive is the answer.

Peter Gardiner:

There was a question at the back here, which we'll go to, and then we've got a question at the front.

Geoff King:

Thanks. Geoff King here from Ministry of Foreign Affairs and Trade. I'm glad you left that chart up. Noting that you're talking about the risks, the outlook being balanced right now and noting that you've been through quite a difficult period in terms of forecasting with sort of very unusual things happening in the economy and readjustments, my question is in terms of that uncertainty in your forecasts or the risks, do you think we're in a stage where we're returning to a more traditional cone of certainty in terms of those parameters? Or given the nature of where the global economy is in New Zealand domestic factors, and you talk about productivity being one of them, is that uncertainty level higher now than it traditionally was for you when you normally do your forecasts?

Dominick Stephens:

I think that the cone of uncertainty relative is wide. It's always wide. The cone of uncertainty at the time of COVID was much wider. There's a pandemic happening, and we've never seen one of those before. I haven't seen one for 100 years. It's going to be really difficult to see how this plays out. We're not in that world.

So, I would argue that the cone of uncertainty is, I really like that phrase by the way, Geoff, thanks for that, is more normal. But you can always point to, first of all, there are unknown unknowns that could come along. But the two really big things on my mind are the tariffs and the retreat from globalisation and what that does to a country that really has benefited over time from an integrating world. That's the big downside risk that I'm worried about.

The obvious upside one is AI and the impact that that has on productivity growth. The internet played out in a really surprising ways and didn't actually produce as much of a productivity burst as we would've expected, at least at first. But I don't know how AI is going to play out.

And actually, it's really interesting. The one I noted that productivity growth slowed around the world basically after the global financial crisis at various points in time. In New Zealand it was a little bit later. And a lot of countries experienced this burst during COVID and then a subsequent decline.

The exception is the United States and looking at their really through the roof productivity growth at the moment does give a bit of pause for uncertainty. One possibility is they had quite a different labour market strategy to others during the pandemic.

With the benefit of hindsight, we now know that there was a lot of change. A lot of things changed permanently after the pandemic, and we needed to reorganise labour markets. And the United States took the strategy of essentially allowing really high unemployment, and then reshuffled people into different jobs. They tend to do that quite well.

And given what happened, that sort of post-recession productivity burst, that often happens when you get a reorganisation of firms and labour, has been supercharged in the United States. So that's one possibility.

I've also seen research indicating that industries experiencing the greatest adoption of telework, or new technologies are experiencing the greatest productivity gains in the US. Is that the US gathering its first mover advantage on AI and snaffling up productivity, or is this something that's going to radiate out around the world and impact us positively as well?

That actually is a really big uncertainty, as well as what's happening geopolitically. And you're the expert on that, Geoff, coming from MFAT, but what's happening geopolitically on the negative side.

Peter Gardiner:

Thank you. There was another question up the front here. Yeah. Yeah.

Patricia Saxton:

Hi there. I'm curious what the fiscal consolidation impact might be on the defence capability plan if you're able to discuss your thoughts on that. Patricia Saxton. Thank you.

Dominick Stephens:

I am not sufficiently expert to discuss that, I'm afraid. And I don't know. I'm not sure. Yeah. Sorry. I don't have sufficient expertise to answer that question well.

Peter Gardiner:

All right. Any final questions in the room? Okay. We'll just go to one there, and then I might jump on to some of the online questions, which I think are quite interesting as well.

Speaker 8:

Thanks, Dominic. I'm just wondering if you had anything to add on Chinese tourism? Is that a Chinese domestic economy story, or has there been a step change because of COVID?

Peter Gardiner:

Yeah. I can answer that quickly. What we've seen with Chinese outbound tourism is it slowed all over the globe. So, it's not just a New Zealand phenomenon.

New Zealand arrivals from Chinese visitors is only back to about 60, 70% of what they were pre-COVID. And I think the expectation is that it's just a slower transition back to where we were pre-COVID.

And the nature of Chinese tourism has changed quite a lot as well. So, we're getting fewer tourist operators coming in. Chinese tourists tend to be more self-sufficient where they would, in the past, be going in buses around on organised tours and that sort of thing. So, it's quite a different post-COVID tourist market now for Chinese arrivals. Yeah.

All right. We might just jump onto some of the online questions. So, Hamish Pepper's got a question just about the nature of interest rates and whether or not they're stimulatory or not. And do we think about them being the stimulatory over the forecast period?

Dominick Stephens:

So, it's a really good question and thanks. Hi, Hamish. So, interest rates are not currently stimulatory in the sense that mortgage rates are above neutral. The official cash rates also above neutral at the moment.

So, we are still in an environment where there are still inflation pressures in the economy and slightly above neutral interest rates although rapidly retreating the right prescription at present to ensure that we settle at that 2%.

Now, in our forecast, Hamish, we've got interest rates retreating to a neutral level. So, one where they're neither stimulating nor contracting the economy. Obviously, if there's change in the future, that cone of uncertainty that Geoff talks about, yeah, that could change. But no, we're slightly tight returning to neutral.

And that's a really important point that it's a difficult thing to say, but the pullback in economic activity, we got ahead of what was a sustainable level of economic activity. And the reduction in the level of economic activity was a pullback to something more sustainable.

So, it was a solution to an issue. It was a solution to the inflation issue. It's not something that we like to see, and it has real effects on the people who were banking on that higher level of activity. But over the past couple of years, what New Zealand has experienced has been a pullback to something more sustainable.

We have not been in an environment where something external has come along, knocked us below the sustainable level of activity, and we've needed stimulus to help us out. I think that's the thrust of your question, Hamish. We have not been in that environment and we are still not in that environment at present, and that's not part of the Treasury's forecast that HYEFU did not involve a need for stimulus.

Peter Gardiner:

Thank you. Kay asks for a little bit more detail about the employment outlook. So, we've had a situation where economic activity has slowed, demand for labour has slowed, the unemployment rate has gone up. At the same time, we've seen some shrinkage in the public sector. So as economic activity picks up, where might we likely see growth in employment in the economy?

Dominick Stephens:

Okay. Well, I wonder if that's another good one for you having asked the question, how about you answer the question and I'll put up our slide of the unemployment rate forecast.

Peter Gardiner:

Yeah. Thanks very much, Dom. Yeah. So, the way I guess we think about it, and it came through very clearly in the business talks that we've done over the past year, is that we have seen some of those interest rate sectors or those sectors of the economy that are exposed to interest rates contract more so than other sectors.

So, construction has been a big sector, and we've seen quite a sharp downturn in that, and that reflects what's happened at the housing market, and that's tied to what's happened to interest rates. And also, some of the agricultural sectors are probably a little bit more exposed to what's happening internationally.

So, I guess as the economic activity starts to pick up and interest rates are lower, that are some of the areas that we do expect a little bit more of a pickup in interest rate and employment. I guess, that's probably my broad answer.

Dominick Stephens:

Yeah. Excellent answer. Another thing, just something quite interesting that I saw yesterday, is if you look in detail of what's happening in housing markets, you see a lot more life in the South Island than the North. Particularly, Wellington is the one where construction activity, rents and house prices have been particularly downbeat. But Christchurch is a place where construction activity is really quite strong or stronger than elsewhere. Rent inflation is a little bit higher. So, I think there's evidence of a little bit of a shift. You've talked about the industry shift, but also evidence of a little bit of a shift in where in the country the growth is strongest.

Peter Gardiner:

I think the other sector that will probably pick up a little bit more strongly too as household incomes increase, and that's in retail and the hospitality industry, which again, a couple of industries that have suffered over the last couple of years with higher interest rates.

Another question from Hamish, and I think we've talked about the increased uncertainty into the international outlook, but I think this comes back to some of your earlier comments around maybe the two-paced economy that we're seeing, the urban-rural divide. I think Hamish was asking how are we thinking about the cost side? So, we've seen commodity prices increase, and production increase on one hand. But what's going to happen to the rural sector? And we've seen increased costs there. So how does that sort of play out in terms of overall profitability, and how does that support growth?

Dominick Stephens:

So, it's a really good question. With the falling exchange rate, that does basically lift the cost of imported goods and services for New Zealand. So as part of the rural-urban divide, I'd sort of point to that, and I'd also point to the risk that the exchange rate has fallen quite away, and that could mean our forecast of tradables inflation, for example, is a little bit higher.

I know the Reserve Bank talked about a little bit of a spike in inflation in the near term in its forecast as something that's about to happen, and that it will essentially look through. Specifically on rural, what I'm hearing is that overall profitability is up. So, interest servicing costs are a really big part of any rural ledger. So those are starting to come off. The lift in prices for most things other than forestry has exceeded the lift in costs. So, profitability overall is up, and we're seeing a little more positivity in rural regions than urban ones, despite cost increases.

Peter Gardiner:

Excellent. Now, going back to the productivity story, why do you think productivity lifted during the pandemic? Are there anything or general things that you can sort of point to?

Dominick Stephens:

Yes. You've got to remember that this is a measure of average productivity across the economy. And just think back to the pandemic when the borders were closed, other than during the lockdown phases, we were really, really short of labour. Just think about the things that we didn't do at that time.

I tried to get a window cleaner. That was impossible. A thousand buses a day were cancelled in Auckland for quite a period because they just couldn't get the bus drivers. So, when an economy, it's not a thing that decides, but markets produce outcomes. Which jobs are you just going to not do when you're short of labour? Well, it's the lowest productivity ones. It's the ones that, all jobs are really important, but it is the lowest productivity ones that didn't get done. So, the types of jobs, the work that we didn't do was lower productivity.

And then just quite simply, this economy found ways to get stuff done despite being short of people during that period. And again, that's productivity. But it didn't have to do that once we had the people available. So, we were able to employ people to do jobs that are lower productivity, which is profitable for firms and the right way to do things.

So, simply, the shortage of people was greater than the shortage of GDP during the pandemic period. And that lifted productivity growth, and we saw a return to the underlying normal, if you like, in the post-pandemic period. And it actually goes to productivity growth is really important fundamental to living standards over time.

So, if we can do the jobs that we do more efficiently, that is unambiguously a good thing. It will either give us more free time or more goods and services. But it's not actually quite as simple just to say oh, well, in that case, we should maximise the average productivity level for the economy.

We could replace a worker with a machine, but that might actually be less profitable for the firm. It would lift the level of average productivity. But it would reduce living standards. So, productivity is an absolutely fundamental thing to chase. But the average level of productivity in the economy is not necessarily a number that should be maximised or thought about in a really simple way. You have to think a little bit more deeply before you figure out whether we're lifting living standards or not.

Peter Gardiner:

How are we going for time?

Dominick Stephens:

I think we're getting close.

Peter Gardiner:

Okay. So, we've still got time. Are there any more questions in the room? I thought there might be. So, we'll go a couple of questions on the room, and then I've got a couple more online if we still have time.

Guy Beatson:

Thanks for a really great presentation, Dominic. Really good, and really enjoyed it. I'm Guy Beatson from the Institute of Directors. I'm curious about your observations about the link between interest rates and house prices and just wondering whether you could talk a bit more about other pieces of the policy puzzle there that might've contributed to what you're seeing.

Dominick Stephens:

So, there is a strong link between interest rates and house prices. As I observed, it's a link. It's not really the short-term ups and downs of the OCR. It's basically over 30 years. There was a really long-term decline in global interest rates that New Zealand partook in.

Now, if you thought, if housing and land was just as abundant as you wanted and there was heaps of it around, well, eventually, what that would've meant is lower interest rates essentially makes it cheaper to own housing. People choose to own more of it. You would get a supply response, and rents would go down rather than prices rising.

I don't think that's New Zealand's reality. Actually, land supply is quite constrained in practice. In part, that's just a physical reality of what land is. But it's also a reality of the way our planning laws work, and all the rest of it.

When land is really constrained in supply, what you tend to find is interest rate reductions lead to a lift in the price of the asset rather than producing much of a supply response. So, what happened over those 30 years, the combination of constrained land supply and a decline in interest rates, the decline in interest rates needed to lead to a change in the price-to-rent ratio on houses. But it resulted in higher prices rather than lower rents because of the environment of restricted land supply.

So, I chair the Housing Technical Working Group, which is a collaboration between Treasury, Reserve Bank and the Ministry of Housing and Urban Development. And this is a key message that we've put out there.

So, we put out there the basic point that land supply really matters for how a housing market responds to interest rate changes and, by the way, tax changes as well, whether rents and supply will respond or whether prices will respond.

Second thing we've done is look at, okay, well, what's happened in New Zealand to land supply? Land is not completely fixed in supply, and neither is it completely abundant. We are on that spectrum, are we? And how has it changed? And we think New Zealand is sort of more towards the constrained end.

But there's evidence that the Auckland Unitary Plan resulted in something of a loosening over time. So, rents in Auckland clearly underperformed. And they rose less than other places in New Zealand following the Unitary Plan. Reasonable evidence that price differentials at the rural urban boundary were less than they would've otherwise been or tentative evidence in that regard.

I think there's the discussion about housing policy has moved on. 10 years ago, we might've been talking about, well, just build more houses. And I think that missed the point because it's not the price of houses, the actual dwelling that lifted. Well, that doubled, but only once. It was land prices quadrupled over 20 or 30 years. And it's land supply really that is key to house prices over time. And potentially the more that you loosen land supply, the response over time to an interest rate change could be different. Instead of a big house price response, you could get a response on the supply side and, therefore, rents.

Peter Gardiner:

Excellent. We'll go to one final question from Geoff at the frontier, and then we might have to wrap things up. Sorry, a little

Dominick Stephens:

Bit expansive on the housing market.

Geoff:

Yeah, thanks for granting the last question. Just going back to your interesting observation of how in COVID we had a blip in productivity upwards because we didn't have low productivity jobs because we didn't have the people, the low skilled people to do them.

Surely, the country has been facilitating low productivity jobs by the large influx of low skilled people. You referred to that. And it seems to be a policy choice. We have one of the largest rates of net migration. And as you said, it's dominated by low skilled people. So, of course, from a firm's point of view, as you said, if it's got a person, it may be more expensive to invest in a machine to make the work more productive, to automate things or to innovate.

But if that supply isn't there, then firms work harder to say, well, we just have to innovate, and we have to invest to make the best use of the labour resources we've got. And that perhaps is a root to our productivity.

Dominick Stephens:

Yeah. That's a fair point. So, the point I was making is that the average productivity level does not necessarily correspond to the living standards, which you would agree with. I think what you are referring to is the possibility of hysteresis type effects or network effects where we learn to work better with machinery after different policy choices. And look, yeah, so you're suggesting that that's a route to higher productivity growth..

Speaker 9:

Perhaps a change in the composition of our net migrants too, higher skill where there's more of a complementarity to higher productivity jobs. Yeah.

Dominick Stephens:

Yeah. That's a fair thing worth thinking about. I would ensure there's a wide range of things that we need to be thinking about in terms of lifting productivity. The point I was making is we should be thinking about it in terms of lifting the efficiency with which we do the jobs across the economy. The regulatory framework is another thing to be looking at. Infrastructure that we're working with is another thing that we could be looking at.

But I certainly take your point that it's possible that if you nudge firms into using capital rather than labour, that you could have network effects that cascade to higher productivity later. That's a fair point. All right.

Peter Gardiner:

Just before we wrap up, well, there are a few questions online that we haven't got to. What we'll try and do is get back with a response where we can. I think that's all I wanted to say there. So, I think it's just closing now.

Dominick Stephens:

Yeah. Thanks very much, Peter. Thanks for everybody in the room, and thanks to those online. I hope you've enjoyed it. And if you did, let us know, and we'll just sort of continue rolling out with these. So, I really enjoyed the conversation. And thanks very much for your questions. I'll just close with a quick karakia.

[speaking in te reo Māori 01:21:05] Piki te kaha. Piki te Ora. Piki te Wairua. Hui e, tāiki e!

Peter Gardiner:

Thank you. [inaudible 01:21:16]