ANALYSIS: Since the start of the year there has been a decided shift for the worse in the tone of commentary regarding New Zealand’s economic growth prospects this year. I found the shift well encapsulated in a phrase doing the rounds of many businesses at the moment: “Survive to ‘25”.
This refers to the common view that this year will be very rough for many sectors but next year will be better. Why will this year be rough and in fact much rougher than earlier anticipated? There are a number of reasons.
First, we have the evidence in hand of far greater weakness in household spending than we thought was occurring, especially in light of the record net migration gain this past year of 134,000 people.
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Second, the recent prediction of further interest rate rises has scared people right when there was a feeling developing that maybe the worst of the interest rates pressure was behind us. There was never much chance of the Reserve Bank taking the Official Cash Rate up another 0.5 percentage points but the reaction in some quarters shows just how nervous many people are.
Third, we are seeing an increasing number of reports in the media of property developers facing difficulties – which always happens at this point in the cycle – and of labour hire businesses going into liquidation.
Fourth, the Government has been explicitly warning about a worsened economic outlook and the need for additional fiscal restraint at a time when redundancies are already rolling through the recently bloated public sector.
Fifth, there are no numbers to show this but in all probability people have used up the cash savings created during the pandemic and businesses perhaps have also reached the same position.
What about reasons for having greater optimism about 2025?
First, monetary policy is expected to be eased potentially before the end of the year and continue doing so at uncertain speed through 2025. When I say “uncertain” I mean that not a single one of us, including forecasters at the Reserve Bank, has the foggiest notion how much lower interest rates will be at the end of 2025 than they are now. But seeing as it is tight monetary policy primarily causing economic weakness, easing up will improve things.
Independent economist Tony Alexander: "Seeing as it is tight monetary policy primarily causing economic weakness, easing up will improve things." Photo / Fiona Goodall
Second, the world economy is expected to be stronger next year than this year and that suggests better inflows of tourists and some better demand for our commodity exports.
Third, house prices are likely to have stronger upward momentum from later this year and growth through 2025 will drive a positive wealth effect through the economy.
Fourth, surely by the end of this year the pullback in consumer spending from the pandemic binge on things like spas and home renovations will be over. Surely.
Fifth, there is a large amount of infrastructure work to be done all around the country and the Government is setting the posts in place to facilitate an early and solid lift in such activity.
Sixth, while booming net migration boosting our population 2.6% in the past year may not have had a noticeable upward impact on retail spending so far, at some stage this is expected to come, especially as flows are likely to remain firm in the coming year.
Some of these positives are articles of faith and perhaps that is why we feel reasonably dour in our thinking currently. It is hard to see the solidity of better economic times when cash flow pressures in particular on businesses and households are so strong at the moment.
Personally, I struggle to see that things will get a lot better until interest rates have fallen at least 1%. Maybe that will have happened by the middle of next year. All people have to do is, as noted above, survive to ‘25.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
