September 18, 2025 • 10 mins
How much blame for the GDP drop can be placed at the feet of the Reserve Bank?
GDP's fallen 0.9 percent in the June quarter – a much sharper drop than economists had been expecting.
NZ Initiative Chief Economist Eric Crampton told Kerre Woodham what we’re feeling is an effect of getting inflation back in line, but he wouldn’t necessarily blame the Reserve Bank for the drop.
He says it’s one big job is keeping inflation in the 1-3% band, and it largely forgot what it’s job was in 2020 and 2021, and went overboard with the spending.
Crampton says he wouldn’t blame the bank’s current round of tightening, but rather the prior round of exuberance that required it.
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Episode Transcript
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Speaker 1 (00:06):
You're listening to the carry woodem Morning's podcast from News
Talks headb As.
Speaker 2 (00:12):
We've been discussing our economy has shrunk zero point nine
percent in the June quarter, far worse outcome than any
economists had been forecasting. Everyone's having a reckon, from the
Finance Minister, to economists, to former finance ministers and prime ministers,
specifically Sir Roger Douglass and Sir John Key, and a
lot of blame has been laid at the feet of
the Reserve Bank. The New Zealand Initiatives Chief economist, Doctor
(00:35):
Eric Crampton joins me. Now, very good morning to you, and.
Speaker 3 (00:39):
Good morning to you.
Speaker 2 (00:41):
Did you think it would be this bad?
Speaker 3 (00:44):
Well, I am not one of the ones that reads
entrails in the latest GDP figures. That's more of a
bank economist job. But the results were well out of
line with all of their forecasts. So I tend to
rely on those who make those forecasts in the absence
of I predict. I really miss I predict where we
get that on these things, but it's well out of line.
(01:05):
It's what the bank economists to watch this for a living,
we're expecting I think they were looking at reductions about
point three or point four of a percent, and instead
we got to point.
Speaker 2 (01:15):
Nine, which I think just sums up a lot of
the pain that a lot of people were feeling, and
we're telling me they were feeling. It just confirms it,
but none of the want of says it was that
was then, and we've got to look at them now.
Is she right?
Speaker 3 (01:33):
Well, the current figures are likely a combination of things,
so she's not wrong that there will have been some
effect from international messes. I don't think it's a big
contributor because most of the drivers seem to be domestics.
So reductions of manufacturing and construction and ways that go
beyond what you'd expected out of export changes and international
(01:57):
turmoil does not look like it's going to be changing much.
So that seems like it's going to be a constant.
We shouldn't expect that to change what I think we're
mainly feeling here. And I wouldn't blame the RBNZ as
so much as say this is an effect of getting
inflation back in line. So remember that the reserve banks
one big job is keeping inflation between one and three percent.
(02:19):
It forgot what its job was, largely in twenty twenty
and twenty twenty one, it kind of went. It went
incredibly overboard. Getting things back on track from that is
really hard. They didn't just have to convince everybody. They
didn't just have to get inflation back down. They had
to get everyone convinced again that they actually cared about
(02:42):
the main job in inflation. Inflation expectations. During the height
of COVID they were running north of five percent as
the two year ahead expectation of what inflation was going
to be looking like. Sorry, on the one year it
was hit above five and it was past three and
a half on the two year out expectations, so it
(03:03):
had lost credibility. When the bank loses credibility, it is
much more expensive for everyone to get inflation back down,
but if you don't do it, the long term costs
are even higher. So I wouldn't blame the rbnza's current
round of tightening. I would blame more its prior round
of exuberance that required the tightening, And so Willis would
(03:30):
be right in pointing to interest rate effects there. But
the other part that's frustrating is the government keeps framing
everything as though they've been helping the Reserve Bank to
be able to bring in interest rates down. Every OCR
announcement has come with a statement from the Prime Minister
or the Minister of Finance saying that our new path
(03:51):
of fiscal responsibility has helped the Reserve Bank cut interest rates.
That's simply not true. The government's budgets have remained incredibly stimulatory.
We're having massive structural deficits. If they had, I've even
gotten spending back down to where it was in twenty
nineteen as a fraction of economic activity. That like a
(04:12):
great big Robertson budget, the well being budget, that it's
going to solve everything in the country. If they brought
spending back down to that level, the RBNZ would have
had far more room to cut interest rates even further.
Speaker 2 (04:27):
But they would argue and have argued that they can't
stop spending because that would cause even more pain.
Speaker 3 (04:35):
Well, ultimately, on all of this, the Reserve Bank moves last.
So what do I mean by that? Macroeconomists will say
central banks move last, and that means that the Reserve
Bank its job is inflation. Inflation depends a bit on
whether there's a lot of unemployed people around, whether there's
just massive labor market shortages, that sort of thing. Right,
(04:57):
whatever Parliament is doing on the fiscal side, whatever it's
doing on spending, the Reserve Bank is supposed to take
a look at that incorporated into a forecasts and target
the medium term forecast to keep inflation in line. So
if the central government had reduced fiscal spending considerably, the
Reserve Bank would have had more room to reduce interest
(05:20):
rates by even more, taking up the slack. So if
you look at construction, for example, dramatically lower interest rates
would have enabled more construction projects to get over the line.
I think, yep, there's another minor bit in there. It's
a little bit frustrating, but it's a minor but it
annoys me. In particular, we're seeing construction slack. Some construction
(05:45):
slack you can understand as a response to uncertainty around zoning.
So Auckland and christ Church have punted out their finalizing
their plans. Now, suppose that you've got a block of
land and you're not sure whether you're going to be
allowed to build the six stories or twenty stories on it.
Would you start progressing all of your plans now to
start building or would you wait the I out what
(06:06):
you're going to be allowed to do. So it's going
to be some natural hesitance because of these delays.
Speaker 2 (06:11):
Yeah, God, what a mess.
Speaker 3 (06:14):
It's a mess exactly.
Speaker 2 (06:18):
I'm good. Yeah. So when they say things are going
to get better, and when las Nichola Willis said that
she wants to see a more hands off approach from
government to the recovery, that she wants to see businesses
doing it on their own, is she right.
Speaker 3 (06:37):
I would love to see the government leaving more space
for business and everybody else to be getting on with
things by leaving that room in the budget, so pulling back,
getting spending back on track. We are still running massive deficits.
The if you look carefully at the ratings agencies reports,
they are giving warnings in there like they maintain New
(06:59):
Zealand's rating, but if you read between a line on it, yeah, yeah,
they gave the warning that, well, you're rating is in
part because New Zealand has, in prior instances of big
structural deficits, had the political courage to do what was
needed to fix things and they were kind of trusting
that that was going to happen. If it doesn't happen,
we get the ratings down, great industrates go up.
Speaker 2 (07:21):
Yeah, and it's gonna it's going to be our great grandchildren,
not just our grandchildren who end up paying for it.
We can we mount a recovery, a grassroots, ground up recovery.
While we've got the issue with the gas fields running
out and manufacturing businesses, big plants not having certainty of supply,
(07:45):
because that was the big scare for me this week.
Speaker 3 (07:49):
Yeah, that's that's another complicating, horrible mess.
Speaker 2 (07:55):
Maybe maybe we just do one at a time.
Speaker 3 (07:59):
Yeah, Okay, if you're old enough, you remember the oil
price shocks, right, and how those would just hammer economic activity.
Energy prices are critical. Now there has been a bit
of delinking that economic activity hasn't been as energy intensive
as it used to be, but energy prices still matter.
(08:22):
Creating shortages through policy decisions that make it risky to
sink pipes to drill for natural gas isn't a great idea,
particularly climate change matters. Every ton of gas that you
burn requires surrendering ETS credits. We've already got that accounted for.
(08:43):
Oil and gas exploration bands wind up creating a mess
that is hard to undo because if you're going to
be spending huge amounts of money exploring and sinking wells.
You have to trust that the next government isn't going
to just ban further exploration, so they'd be unlikely to
expropriate whale wells that have already been drilled. But if
(09:06):
your plan requires an ongoing path of drilling, then it
can be a bit frustrating. And I can see sort
of second best reasons around that for what some of
what the government has been trying to do and encouraging
drilling again. But what I do hope we are able
to get a little more quickly, like gas would take
a little bit while a little while to come back in.
(09:27):
There has been a lot of solar exploration and that's good,
and solar field's going up, but we are still getting
in spots where it's just hard to turn a paddock
into solar panels. Our lakes are great batteries for backup
for solar panel for when the sun isn't shining. It
means that more water can hold in the lakes when
the sun is shining, and then it flows through when
(09:48):
the sun isn't shining. They are very good natural compliments
to each other, and a lot of the prior worries
around solar not being able to maintain grid stability. That
that's largely solved down. We need to make it not
so hard to put up darn solar fields. Some of
that's kind of crazy. It's great to see the government's
(10:08):
sort of long term vision in pushing for super critical geothermal,
but that's still going to be a few years a
few years away at best.
Speaker 2 (10:16):
I thank you very much, as always for your expertise,
doctor Eric Crampton from the New Zealand Initiative.
Speaker 1 (10:21):
For more from Kerry Wooden Mornings, listen live to news
talks it'd be from nine am weekdays, or follow the
podcast on iHeartRadio
You're listening to the carry woodem Morning's podcast from News
Talks headb As.
Speaker 2 (00:12):
We've been discussing our economy has shrunk zero point nine
percent in the June quarter, far worse outcome than any
economists had been forecasting. Everyone's having a reckon, from the
Finance Minister, to economists, to former finance ministers and prime ministers,
specifically Sir Roger Douglass and Sir John Key, and a
lot of blame has been laid at the feet of
the Reserve Bank. The New Zealand Initiatives Chief economist, Doctor
(00:35):
Eric Crampton joins me. Now, very good morning to you, and.
Speaker 3 (00:39):
Good morning to you.
Speaker 2 (00:41):
Did you think it would be this bad?
Speaker 3 (00:44):
Well, I am not one of the ones that reads
entrails in the latest GDP figures. That's more of a
bank economist job. But the results were well out of
line with all of their forecasts. So I tend to
rely on those who make those forecasts in the absence
of I predict. I really miss I predict where we
get that on these things, but it's well out of line.
(01:05):
It's what the bank economists to watch this for a living,
we're expecting I think they were looking at reductions about
point three or point four of a percent, and instead
we got to point.
Speaker 2 (01:15):
Nine, which I think just sums up a lot of
the pain that a lot of people were feeling, and
we're telling me they were feeling. It just confirms it,
but none of the want of says it was that
was then, and we've got to look at them now.
Is she right?
Speaker 3 (01:33):
Well, the current figures are likely a combination of things,
so she's not wrong that there will have been some
effect from international messes. I don't think it's a big
contributor because most of the drivers seem to be domestics.
So reductions of manufacturing and construction and ways that go
beyond what you'd expected out of export changes and international
(01:57):
turmoil does not look like it's going to be changing much.
So that seems like it's going to be a constant.
We shouldn't expect that to change what I think we're
mainly feeling here. And I wouldn't blame the RBNZ as
so much as say this is an effect of getting
inflation back in line. So remember that the reserve banks
one big job is keeping inflation between one and three percent.
(02:19):
It forgot what its job was, largely in twenty twenty
and twenty twenty one, it kind of went. It went
incredibly overboard. Getting things back on track from that is
really hard. They didn't just have to convince everybody. They
didn't just have to get inflation back down. They had
to get everyone convinced again that they actually cared about
(02:42):
the main job in inflation. Inflation expectations. During the height
of COVID they were running north of five percent as
the two year ahead expectation of what inflation was going
to be looking like. Sorry, on the one year it
was hit above five and it was past three and
a half on the two year out expectations, so it
(03:03):
had lost credibility. When the bank loses credibility, it is
much more expensive for everyone to get inflation back down,
but if you don't do it, the long term costs
are even higher. So I wouldn't blame the rbnza's current
round of tightening. I would blame more its prior round
of exuberance that required the tightening, And so Willis would
(03:30):
be right in pointing to interest rate effects there. But
the other part that's frustrating is the government keeps framing
everything as though they've been helping the Reserve Bank to
be able to bring in interest rates down. Every OCR
announcement has come with a statement from the Prime Minister
or the Minister of Finance saying that our new path
(03:51):
of fiscal responsibility has helped the Reserve Bank cut interest rates.
That's simply not true. The government's budgets have remained incredibly stimulatory.
We're having massive structural deficits. If they had, I've even
gotten spending back down to where it was in twenty
nineteen as a fraction of economic activity. That like a
(04:12):
great big Robertson budget, the well being budget, that it's
going to solve everything in the country. If they brought
spending back down to that level, the RBNZ would have
had far more room to cut interest rates even further.
Speaker 2 (04:27):
But they would argue and have argued that they can't
stop spending because that would cause even more pain.
Speaker 3 (04:35):
Well, ultimately, on all of this, the Reserve Bank moves last.
So what do I mean by that? Macroeconomists will say
central banks move last, and that means that the Reserve
Bank its job is inflation. Inflation depends a bit on
whether there's a lot of unemployed people around, whether there's
just massive labor market shortages, that sort of thing. Right,
(04:57):
whatever Parliament is doing on the fiscal side, whatever it's
doing on spending, the Reserve Bank is supposed to take
a look at that incorporated into a forecasts and target
the medium term forecast to keep inflation in line. So
if the central government had reduced fiscal spending considerably, the
Reserve Bank would have had more room to reduce interest
(05:20):
rates by even more, taking up the slack. So if
you look at construction, for example, dramatically lower interest rates
would have enabled more construction projects to get over the line.
I think, yep, there's another minor bit in there. It's
a little bit frustrating, but it's a minor but it
annoys me. In particular, we're seeing construction slack. Some construction
(05:45):
slack you can understand as a response to uncertainty around zoning.
So Auckland and christ Church have punted out their finalizing
their plans. Now, suppose that you've got a block of
land and you're not sure whether you're going to be
allowed to build the six stories or twenty stories on it.
Would you start progressing all of your plans now to
start building or would you wait the I out what
(06:06):
you're going to be allowed to do. So it's going
to be some natural hesitance because of these delays.
Speaker 2 (06:11):
Yeah, God, what a mess.
Speaker 3 (06:14):
It's a mess exactly.
Speaker 2 (06:18):
I'm good. Yeah. So when they say things are going
to get better, and when las Nichola Willis said that
she wants to see a more hands off approach from
government to the recovery, that she wants to see businesses
doing it on their own, is she right.
Speaker 3 (06:37):
I would love to see the government leaving more space
for business and everybody else to be getting on with
things by leaving that room in the budget, so pulling back,
getting spending back on track. We are still running massive deficits.
The if you look carefully at the ratings agencies reports,
they are giving warnings in there like they maintain New
(06:59):
Zealand's rating, but if you read between a line on it, yeah, yeah,
they gave the warning that, well, you're rating is in
part because New Zealand has, in prior instances of big
structural deficits, had the political courage to do what was
needed to fix things and they were kind of trusting
that that was going to happen. If it doesn't happen,
we get the ratings down, great industrates go up.
Speaker 2 (07:21):
Yeah, and it's gonna it's going to be our great grandchildren,
not just our grandchildren who end up paying for it.
We can we mount a recovery, a grassroots, ground up recovery.
While we've got the issue with the gas fields running
out and manufacturing businesses, big plants not having certainty of supply,
(07:45):
because that was the big scare for me this week.
Speaker 3 (07:49):
Yeah, that's that's another complicating, horrible mess.
Speaker 2 (07:55):
Maybe maybe we just do one at a time.
Speaker 3 (07:59):
Yeah, Okay, if you're old enough, you remember the oil
price shocks, right, and how those would just hammer economic activity.
Energy prices are critical. Now there has been a bit
of delinking that economic activity hasn't been as energy intensive
as it used to be, but energy prices still matter.
(08:22):
Creating shortages through policy decisions that make it risky to
sink pipes to drill for natural gas isn't a great idea,
particularly climate change matters. Every ton of gas that you
burn requires surrendering ETS credits. We've already got that accounted for.
(08:43):
Oil and gas exploration bands wind up creating a mess
that is hard to undo because if you're going to
be spending huge amounts of money exploring and sinking wells.
You have to trust that the next government isn't going
to just ban further exploration, so they'd be unlikely to
expropriate whale wells that have already been drilled. But if
(09:06):
your plan requires an ongoing path of drilling, then it
can be a bit frustrating. And I can see sort
of second best reasons around that for what some of
what the government has been trying to do and encouraging
drilling again. But what I do hope we are able
to get a little more quickly, like gas would take
a little bit while a little while to come back in.
(09:27):
There has been a lot of solar exploration and that's good,
and solar field's going up, but we are still getting
in spots where it's just hard to turn a paddock
into solar panels. Our lakes are great batteries for backup
for solar panel for when the sun isn't shining. It
means that more water can hold in the lakes when
the sun is shining, and then it flows through when
(09:48):
the sun isn't shining. They are very good natural compliments
to each other, and a lot of the prior worries
around solar not being able to maintain grid stability. That
that's largely solved down. We need to make it not
so hard to put up darn solar fields. Some of
that's kind of crazy. It's great to see the government's
(10:08):
sort of long term vision in pushing for super critical geothermal,
but that's still going to be a few years a
few years away at best.
Speaker 2 (10:16):
I thank you very much, as always for your expertise,
doctor Eric Crampton from the New Zealand Initiative.
Speaker 1 (10:21):
For more from Kerry Wooden Mornings, listen live to news
talks it'd be from nine am weekdays, or follow the
podcast on iHeartRadio
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