ANALYSIS: By the smallest of margins the New Zealand economy entered a technical recession at the end of last year, which may or may not get revised away in the next couple of years as Statistics NZ adjusts its initial readings of what went on. Although the economic weakness is consistent with the terrible survey results for business and consumer sentiment back then, if this is recession, then it lacks a key element of all previous ones - job loss worries.
If we go three recessions back to the start of 1991, we see the economy shrank two quarters in a row by 2.4% then 0.7%. Job numbers unsurprisingly fell 0.5% and then 0.4%. Two recessions back, late in 1997 the economy shrank by 0.2%, 0.2%, then 0.5%. Job numbers fell 0.1%, 0.1% and then 0.3%.
Our most recent recession was in 2008-2009. The quarterly economic activity contractions were 0.4%, 0.3%, 0.4%, 0.7% and then 0.9%. The job changes were +0.1%, -0.1%, 0.0%, +0.6% and then -1.8%.
This time around the economic shrinkage has been 0.7% and then 0.1%. Job changes have been +0.5% and then +0.8%. Having job numbers rise while the economy is in recession is something completely new for New Zealand. This doesn’t mean people with jobs are all doing OK. The cost of living has risen sharply and we all see many causes for concern around us.
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But feelings of job security are high and that has important implications. First, it means that once interest rates start coming down and house prices are seen to be firmly rising next year, retail spending will likely recover quite strongly. The challenge for retail operators is to slim down now, maintain their brand reputation, and get ready for the 2024 recovery.
Second, good job security means there is a greater than usual eye being kept on the housing market than would otherwise be the case by the tens of thousands of people who have been sitting back from buying since early-2021. For many the high bank test interest rates above 9% mean a purchase cannot currently be made. But once interest rates start falling next year, this two-year queue of delaying buyers is likely to get activated and the firm labour market suggests this may happen early rather than late in the year.
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Third, before then, those willing buyers with strong deposits built up over the pandemic years of continued employment and wages growth at least matching inflation, are likely to move. They may be the ones who have been entering the market since February and who, according to my latest survey of real estate agents, arrived in extra numbers in May. Calculating the inevitable house price impact of booming net immigration has likely contributed to this extra surge of first home buyer activity.
Fourth, the still firm labour market alongside house deposits not able yet to be put to use because of high mortgage rates is likely burning holes in the pockets of some young people. They may be devoting some of their unusable lump sums to offshore travel.
Independent economist Tony Alexander: “Once interest rates start falling next year, the two-year queue of delaying buyers is likely to get activated.” Photo / Fiona Goodall
Finally, for businesses, even though the immigration boom is taking some of the edge off, the need to hoard staff through the 2023 period of net cashflow compression means sacrifices are having to be made elsewhere. By the looks of it this includes investment in plant and machinery but might also include advertising and marketing.
Unfortunately this cashflow compression is happening at the same time as the IRD are catching up on assessments they’ve let slide during the pandemic years in the interests of not making things worse. Some businesses will have no choice other than to lay off staff this year into 2024 in order to remain solvent. That is why the unemployment rate is still likely to rise from the current 3.4% to above 4.5%. It’s also why the market for lifestyle properties and holiday homes may stay quiet until late in the housing recovery this cycle as they are aspirational purchases often made by business owners.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
