Is The New Zealand Economy Heading Into A Recession?

Monday, 30 May 2022, 3:01 pm
Press Release: Kalkine

Summary

• The New Zealand economy is facing recessionary fears as demand dampens against rising price pressures.
• The pandemic has fundamentally re-shaped the global supply-chain mechanism, with most countries developing resilient domestic ecosystems.
• Rising interest rates have increased the borrowing costs, removing some of the existing momenta from the economy.

The New Zealand economy seems to have entered a precarious phase, where many experts believe that a recession may be closer than expected. Fears of a slowdown in economic growth in 2023 have emerged amidst rising prices and interest rate hikes, which have hit consumer demand harder. Even as pandemic related uncertainty is receding, increasing costs of living have left many New Zealanders in a vulnerable state, with some even without a roof over their head.

The property sector, which forms a major part of the New Zealand economy, has been exacerbating the inflationary pressures. Those unaffected by surging housing unaffordability have increasingly charged the economy with a greater money supply. However, most inflationary pressures have stemmed from global factors, such as commodity price hikes and an international supply chain crisis.

Although the New Zealand economy has already bounced back from the pandemic-related pressures, higher consumer prices seem to be overshadowing its real growth. The economy grew by 3% in the December quarter, while it did not include the impact of the Omicron outbreak. The March quarter economic growth data is not yet out but could reflect the impact of fractured supply chains, Omicron spread, higher interest rates and accelerating inflation.

Good Read: Kiwis gear up for more mortgage rates as RBNZ raises OCR

A tectonic shift in global supply chains

The pandemic has changed almost every aspect of daily life, including working dynamics, the approach toward personal healthcare and even the supply-chain management systems developed worldwide. The rapid spread of the COVID-19 virus has further shown that countries across different parts of the globe are more interconnected than one could imagine.

It easily explains why the economic shock from global supply-chain snags did not remain constrained to the countries where it emerged. As Russia invaded Ukraine, many countries levied sanctions on Russian exports, especially on its oil and gas exports. Reduced oil supply in Europe quickly impacted the global economy, as energy prices shot up to unprecedented levels.

Ultimately, prices for imported fuel, metals and even food items rose amid geopolitical concerns. Adding fuel to the fire, lockdowns in China hampered the production of many large corporations, leaving a gaping hole in the supply-chain mechanism. The lack of raw materials raised the prices of goods, including intermediary items that are used to produce other products.

At the same time, a weaker New Zealand dollar raised import prices. The increases in the costs of raw materials have now passed on to the consumers in the form of higher prices of final goods and services.

Rising interest rates adding to the pressure

The Reserve Bank of New Zealand (RBNZ) has embraced back-to-back interest rate rises over recent months, increasing the cost of borrowing for Kiwis. With rate hikes becoming more rampant, many mortgage holders could face a tough time ahead. Although high interest rates could invite new challenges, RBNZ could not avoid this move amidst surging inflationary pressures.

Central banks across the globe rely on monetary policy to combat the rising cost-of-living pressures. Higher interest rates discourage borrowing in the economy, prompting consumers to hold off large expenditures such as buying a home or a car. This reduced borrowing helps withdraw some level of the money supply from the economy while reducing the financial momentum. Thus, the economy enters a period of relatively lower growth, and price pressures dampen with time.

Experts fear that high interest rates could bring more turmoil to the New Zealand economy. Demand for goods has already decreased due to rising prices and could potentially fall further once interest rate pressures start affecting households more intensely.

Alternatively, some economists suggest that the slower momentum today would be enough to take inflationary pressures away from the economy. One cannot neglect that housing prices have already been on a decline while the property market momentum remains strong. Declining housing prices could be good news for first-time buyers as they might now get an opportunity to enter the market.

At the same time, a rebound in international tourism and improved government financing could keep the economy buoyant. It will be enticing to see if these relatively positive factors will prevent the economy from falling into a recessionary phase or if high interest rates will overpower this recovery.

Also Read: Does Budget 2022 addresses cost-of-living crisis in NZ?

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