ANALYSIS: If you are having difficulty trying to make sense of all the things happening around you which are relevant to your business, your investments, your house purchase, and your work, then don’t fret. You’re not alone. We are passing through one of the most unique environments I have ever seen. It’s not a shock like the early days of the pandemic or the 2008-09 Global Financial Crisis. Instead, there are many shocks in play.
Here are a few of this moment in time’s unique characteristics which you might want to take note of and drag out a year from now when challenged about your spreadsheet projections, which have all turned out wrong.
First, there is a record migration boom underway (excluding the early pandemic months) of a net 73,000 inflow in the year to April. This 1.4% boost to our population means extra pressure on rental accommodation, which we were not expecting. It means some support for consumer spending, which will offset the effects of high interest rates, and it means extra availability of labour, which will constrain wage and non-wage labour costs.
Balancing out the net implications for the likes of inflation and interest rates is impossible. Speaking of which, we have just seen the fastest pace of increase in fixed mortgage rates that anyone here has experienced. How quickly will the jump from rates below 3% to over 6% cause householders to rein in their spending? And is the negative impact on the housing market over with or does it still have a ways to run?
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Third, we are living through a post-pandemic period. None of us has done this before and this at a minimum is good enough reason not to believe anyone’s forecast of just about anything. After all, the pandemic was unique also to all of us and our forecasts made back in the first half of 2020 proved more wide of the mark than any I have ever seen before.
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Fourth, after rising strongly for 12 years there is a downward correction in house building activity underway. Many people entered the sector with insufficient capital, experience, and realism to recognise the signs of a downturn 18 months ago. Many of these unfortunates will now get weeded out, and firms and individuals with credit exposure to these failing optimists are going to lose money – as the media have been reporting already for the past year.
We can only guess at the extent to which house building will decline over the next 2-3 years because of the excesses built up since 2011, and therefore can only guess at how much the interplay of falling supply growth and rising housing demand pushes rents then house prices higher over 2023-26.
Fifth, there is the biggest cost of living shock in three decades underway. Many people have not seen this before and the fact that there is a binge on offshore travel underway and continued strong levels of eating out being recorded suggests to me that hundreds of thousands of people have yet to cut their cloth to suit this higher cost environment. How much will most areas of retailing decline as this reality sets in? Impossible to know.
Independent economist Tony Alexander: “This 1.4% boost to our population means extra pressure on rental accommodation.” Photo / Fiona Goodall
Sixth, this is an election year. My monthly survey of businesses alongside Mint Design has revealed a high level of discontent with the government and its relationship with the business sector. This is going to cause potentially greater than usual postponing of projects ahead of the October election.
Seventh, labour is uniquely in short supply and despite high levels of business pessimism and plans to cut staff numbers there is strong hoarding of labour occurring both here and offshore. This is producing a profit squeeze which will underpin inflation while depressing spending in areas like advertising, capital works, and research to degrees we cannot know.
Now, lets add in pure guesswork surrounding the impact of AI, climate change (effects and mitigation), world trade retrenchment away from China, geo-political issues in the South China Sea and eastern Europe, a record NZ current account deficit, which may or may not scare offshore investors, and other factors.
The upshot is that the last thing you should assume when contemplating the next 1-3 years is stability. And the last thing you should expect is that your and my numerical forecasts and cash flow projections will be correct.
Focus on recognising when the ground is shifting under you as quickly as possible, being able to adapt at fast speed, and paying more than usual attention to your credit exposure to organisations which perhaps are less aware of the uncertainties and risks of this environment than you are.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
