30 June 2023

Statistics NZ have just released data telling us that in technical terms New Zealand was in recession in the last quarter of 2022 and first quarter of this year. The definition is technical in nature because no-one in the country will notice if growth one quarter is 0.1% and the next -0.1%. Instead it is what is happening under the surface of the broad Gross Domestic Product numbers which matters.

We already knew that households were cutting their spending over these two quarters because the volume of retail spending fell by 1% in the December quarter and 1.4% in the March quarter. We also knew that house building was going down because construction volumes fell 1.6% in the December quarter and 0.8% in the March quarter.

Household spending usually makes up about 65% of our economy and house building another 6.5% or so, therefore the risk of a negative economic output change for the March quarter was already high. But as it turns out the quarterly decline was only 0.1% and the outcome would have been zero or above if not for strikes by teachers during the quarter and the cyclone which struck the east coast and Auckland.

I emphasise these special factors because if the outcome had been +0.1% then the media headlines would have read “Recession avoided” rather than noting how we had fallen into recession. The fact that we have had a recession – which could disappear when data are revised over the next couple of years – adds some extra pessimism into people’s assessment of the economy and their own personal fortunes.

In that regard the recession reinforces the negative impact on the economy of the Reserve Bank’s recession prediction on November 23 last year. Their words contributed to a strong decline in business and consumer sentiment and have gone some way towards getting the rate of inflation down in the economy. The latest recession talk will further the crunch on price rises.

The technical recession then is a good thing for those looking to take advantage of the period of weakness to purchase some discounted assets. These might include commercial property, maybe some shares, but not necessarily houses.

The negative commentary will help suppress spending and inflation and makes it very unlikely that the Reserve Bank will need to backtrack on their May 24 statement that no further official cash rate rises beyond the 5.5% reached that day will be necessary this cycle. Having said that, there is an offset to the improving inflation outlook in New Zealand which we can see in a range of indicators including easing labour market pressures, falls in some building materials prices, and dropping business pricing plans.

In other countries inflation outlooks are not looking as good as they were a few months ago. This is because businesses are hoarding scarce labour and the strong jobs growth still occurring implies that wage rate increases may remain at high levels for longer than earlier thought.

In fact, the general theme offshore is that inflation rates will reasonably comfortably fall from levels of 7% – 10% down towards 4%, but the extra step down to the desired 2% rate could be problematic.

What this means here is that while interest rates have probably peaked, it is not highly likely that they will fall all that much over the coming year. The first easing of monetary policy looks likely towards the middle of 2024 at best which means that falls in fixed borrowing costs may not start appearing with any solidity until the start of 2024, or maybe optimistically the post-election period before the end of 2023.

Uncertainty is high and for most borrowers a fixed term near 18 months may be optimal while for investors seeking a good yield perhaps a longer term would be wise. However, even with monetary policy having tightened more rapidly than any of us have seen before, the interest rates offered on fixed interest securities are not all that high by the standards of those who recall days before the GFC or even before inflation fell to settle around 2% from 1992.

Most investors are likely to be actively keeping an eye out for investments yielding potentially better returns than the banks are offering. For some this will mean equities and I can tell from a quarterly survey I run with Sharesies that there has been a fairly solid rise in people’s desires to purchases shares either directly, through a managed fund, or maybe an exchange traded fund.

There also seems to be plenty of demand from more skilled investors for commercial property exposure whether through listed vehicles, directly, or syndications. One area worth keeping an eye on is vehicles giving exposure to the residential property sector. While the volume of home building is likely to decline all through this year, 2024, and maybe much of 2025, there is a slight recovery underway in turnover of existing dwellings.

Average house prices are also showing signs of flattening out and there are some big supporting factors building up strength. These include booming net migration now at a gain of 72,300 in the year to April from a loss of 20,000 a year ago. Young first home buyers have been back in the market since February and are appearing in greater numbers. Investors however remain thin on the ground due to tax changes and numbers may not truly return unless we get a change of government in October and the tax rules change.

All up, we may have been in recession recently and there certainly are many businesses struggling in the retailing and residential construction sectors. Margins are also tight across most sectors with labour still somewhat difficult to source. But upturns are underway in tourism and export education, and the outlook for inflation is getting better. This year’s story is one of restraint for most. Next year is shaping up to be a period of interest rates falling and economic/business prospects improving with support from a newly lifting world economy – providing there are no new economic or geo-political shocks.

Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called “Tony’s View”, available for signup at www.tonyalexander.nz

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