ANALYSIS: What will happen if we have a recession? Almost everyone considers it to be a bad thing, just as we consider having an accident to be a bad thing. But there is a world of difference between dropping the birthday cake on the way to the table and putting your car in a ditch just as there is between our economy pulling back 0.1% for two quarters in a row and shrinking 2.7% as we did over 2008-09.
If we have a recession in New Zealand, and it is not certain we will, then we are more talking about dropped cake rather than a road crash. The first thing to keep in mind is this. While costs for our farmers keep rising, incomes for most are booming. Fonterra has just announced a record projected payout for its suppliers for this season and prices are good for most of the things we ship overseas.
This partly reflects the fact that Russia’s invasion of Ukraine and port blockade has caused global food prices to rise sharply. We export food.
Second, a recession often feeds downwards on itself as businesses react to falling sales by laying off staff, they have previously hired in large numbers to handle firm growth. But apart from the real estate sector, hardly any sector in New Zealand is running excess staff.
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Employees are in very short supply and that means redundancies in the event of economic shrinkage will be very small. The same goes for business inventories. If our economy shrinks few firms will find themselves with excessively high stocks of raw materials and finished goods. Most firms are still trying to get stock levels to average. Having said that, watch for retailers having some big sales soon as the crunch in consumer spending already well underway hits retailers only now taking delivery of goods ordered from offshore a long time ago.
Third, our $17 billion international travel sector is kicking back into life and set to stimulate our economy even though consumers offshore will be feeling the cost of living pain as we are – probably more so given they have soaring home energy costs, which we are not experiencing here.
Fourth, from next year a good number of foreign students will be back in the country, hopefully bringing some positive life to Auckland’s CBD in particular.
Fifth, high job security and banks having used mortgage test interest rates of 6.5% or higher means that very few mortgagee sales of residential property will occur his time around. In addition, banks have not been lending willy-nilly for some time in this country. They did not do so ahead of the GFC (some finance companies did instead), and lending rules and capital requirements tightened further in the decade after 2008-09.
Independent economist Tony Alexander: “Banks have not been lending willy-nilly for some time in this country.” Photo / Fiona Goodall
Sixth, the NZ dollar has not been unusually strong for a great number of years and in fact has weakened slightly in the past year. This is helpful for our export sector.
Seventh, local and central governments have a lot of infrastructure work to do.
Eighth, if our economy shrinks by 1% that means 99% of normal activity is continuing. Just as not all businesses grow when the economy grows, not all suffer when the economy has a recession. Given the intensity of labour shortages there will be many businesses right now hoping that the economy does have a recession so they can hire people laid off from other sectors.
The trick for average people will be to remember these factors when everyone else starts running around like headless chooks in the event our economy does temporarily shrink. And once house building activity starts falling away potentially rapidly from early next year, remember that this will not mean the other 93% of our economy is going to do the same.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
