ANALYSIS: Up until recently, the chances of our economy dropping back into recession again were fairly slim. Now, it’s a 50:50 call. There is new downward pressure on business profitability and confidence from Russia’s invasion of Ukraine and China’s pursuit of a failed Covid management strategy. Both factors are worsening supply chain functioning and pushing up materials costs.
There is also the soaring cost of living causing households to pull back on spending in non-grocery areas such as buying furniture, undertaking home renovations, and spending on eating and drinking outside of the home. We are also diverting some spending to offshore travel.
But if we do slip back into recession things will not be as they have been in the past. For a start, this is not a recession likely to cause much increase in the unemployment rate. That rate is currently at a post-1980s low of 3.2% and businesses across all sectors apart from maybe real estate cannot find the staff they need.
Things are so tight that even with staff shortages there has been zero net growth in the number of people in work over the past six months. People have simply shifted from one employer to another and those leaving the workforce have been replaced by those newly entering it.
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This is important because it means the usual extra depressing impact on household spending and housing from job insecurity will be absent. In particular, high job security will leave banks very happy with the mortgages they have extended to people as debt servicing will be a problem for very few people. There has not been and is unlikely to be a wave of distressed property sellers this cycle.
A second thing very different about this recession if it happens is that our commodity export prices are at high levels, on average one-third above pre-Covid levels. Food prices are being pushed higher partly due to the poor crops offshore and the war by Russia. Assisted by others subsidising their greenhouse gas emissions, the farming sector looks like it will continue to provide good support to our economy over the next couple of years.
Independent economist Tony Alexander: “There has not been and is unlikely to be a wave of distressed property sellers this cycle.” Photo / Fiona Goodall
Third, one thing which normally exacerbates a recession is businesses running down their inventories. But most are trying to do the opposite because of supply chain uncertainties. Hence strong demand for warehouse space around the country.
Fourth, this potential downturn is not being driven by a soaring NZ dollar. On a trade weighted basis, the NZ dollar is down around 6% from a year ago but near where it was two years back. So, it’s probably best to say the exchange rate is not making things worse rather than that it is providing a new economic fillip.
Fifth, many businesses have a backlog of orders to be satisfied. This means that as fewer new customers come through the doors activity levels will still remain relatively firm. The pandemic boom is being forcibly spread out over time for some because of shortages of staff and materials.
Sixth, the strong inflationary pressures which are causing some forecasters to increase their predicted peaks for interest rates in the coming year are acting as a strong drag on the ability of people to spend. In an environment where for three decades the wage-price cycle has failed to ignite, betting that it will now in response to one-off jumps in many input costs is a long shot.
The chances are that late this year interest rate commentary will be a lot more sanguine than it is now and attention will have shifted to picking when mortgage rates start going back down.
All up, the negatives for sure are in the ascendancy at the moment. But should a recession come it isn’t likely to generate the new extra weakness in house prices traditionally associated with recessions of our past.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
