Significant Challenges Ahead For New Minister For Economic Growth

A recovering economy is likely to give the new Minister for Economic Growth some momentum through 2025, but there are concerns about the longer-term outlook.

Prime Minister Christopher Luxon confirmed a reshuffle on Sunday that handed Nicola Willis the rebranded economic portfolio.

"In 2024, Nicola did a fantastic job delivering tax relief for hardworking Kiwis and restoring a culture of fiscal discipline - with New Zealanders now seeing the benefits in the form of lower inflation and interest rates. In 2025, I'm confident she will bring that same focus and dedication to the task of unleashing Kiwi businesses to grow at pace," he said.

Economists say there are factors on her side, but significant challenges, too.

Infometrics chief executive Brad Olsen said much of the economic growth over the next two years was expected to come from private households.

"About 43 percent of economic activity growth between the end of 2024 and end of 2026 is expected to come from private consumption."

He said Willis could take some credit for some of that due to tax cuts, and the Reserve Bank's interest rate reductions had also helped.

"Where I think there's greater ability to provide more long-term economic growth potential is through private investment, business investment and activity. GDP data out at the end of last year suggested business investment into plant machinery and equipment was at its lowest since the end of 2020.

"That highlights that with higher interest rates recently and lower spending by households there hasn't been that demand or ability to finance further business investments."

He said more investment would mean more spending on other businesses in the other economy and more tools to enhance productivity over time.

Olsen said Treasury expected a 9.4 percent increase over the two years to 2026 in business investment.

"I think as the Minister for Economic Growth, alongside Chris Penk, who has increased his portfolios - he previously had building and construction and he's now got manufacturing and small business - that all pulls together a pretty important part of the economic conversation."

The government had limited funds to directly support activity, he said, and some of what it had to do would be to get out of the way.

"More structural reforms and regulatory reforms rather than anyone turning up with a cheque book saying 'how can we buy some of this growth ourselves'."

Olsen said New Zealand should look to use its trade deals more strongly to its advantage this year. "The outlook for trade is quite troubling at present. A lot of people are talking about how important it is to grow exports but we also need to spend a bit of time locking down current exports to make sure we shore up what we've already got.'

An economic growth portfolio should be able to be a bit more strategic and targeted than its economic development predecessor, he said.

Salt Funds economist Bevan Graham said Willis would need to focus on creating economic capacity.

"It's very much about the long term and making sure getting right sort of growth, that our resourcing is coming from the right areas."

Growth could come from having more people or higher productivity, he said.

"If we go down the path of having more people then we also need more investment into unproductive assets like houses and housing-related infrastructure, there's more pressure on schools, hospitals. If growth is begin driven by being more productive we can have higher wages and we can be more competitive. That means we have better quality schools and hospitals and stronger infrastructure.

"The main thing out of that is that those wage increases are more sustainable, they won't generate higher inflation."

It would require getting skills and training, the regulatory environment, innovation and the labour market aligned.

"There's a whole lot of stuff that really matters but needs to be coordinated so it's all pointing in the same direction.

"We think we're at the bottom of this cycle right now. Through 2025 we are going to hit a bit of a sweet spot in the economy for 12 to 18 months. The recession has opened up spare capacity. But that spare capacity will eventually get absorbed, and eventually what happens is you hit the constraints of lower growth in the working age population and weak productivity. If the Reserve Bank cuts too much now, it could be back to hiking interest rates as early as 2026. If the economy is more productive, maybe that gets pushed out a bit."

Kiwibank chief economist Jarrod Kerr said the economy would recover this year and sectors that had been through tough times in the past few years would be in a better place.

"Inflation is back below wage growth which is nice - people won't feel it right now but they will feel it over the year as they get pay rises and inflation remains around 2 percent. The consumer is going to be healthier this year, the household budget won't feel as stretched as it was."

But he said there were long-term issues, particularly around the ageing population and the potential for climate change responses to be inflationary.

"There are a lot of longer-term issues out there and we can't keep kicking the can down the road. What we tend to do is if it's not biting right here, right now, why prepare? That's not the right strategy."

That was evident in the infrastructure deficit, he said., "If we spent more on infrastructure over the last 30 years we wouldn't be sitting here with burst pipes in Wellington and an undersupply in housing.

"A large part of the productivity problem is we have mot built the infrastructure the economy requires. The Government is saying the right things but it's all about the execution."

Kerr said the signals of a true recovery would be when businesses were looking to invest and hire again. "That business investment intention has picked up a bit but it's still negative. When that turns positive we are in for some good growth."