Can New Zealand Avoid A Recession?

Tuesday, 12 July 2022, 3:54 pm
Opinion: Kalkine

Highlights

• The US has been the hub of recessionary talks as inflation in the country has reached unprecedented levels.
• Global headwinds have travelled from Ukraine and the US to the New Zealand economy.
• Rising interest rates also lead to a halt in economic activity as they hurt consumer and business demand.

Talks of a recession have been incessant as worrying global factors have emerged in the backdrop of post-pandemic recovery. Central banks across the globe have been on a rate hike spree to bring down inflation caused by supply chain issues and post-pandemic recovery. Following aggressive rate hikes by the US Federal Reserve and other central banks, many believe that likelihood of a recession hitting New Zealand has become increasingly more pronounced in the present climate.

For the uninitiated, an economy is said to be witnessing recession if the country's Gross Domestic Growth (GDP) declines for two consecutive quarters. The United States has been at the centre of recessionary pressures due to the withdrawal of pandemic-era liquidity and aggressive rate hikes by the US central bank. Even other economies are also witnessing recessionary fears.

The New Zealand economy has been strained by declining consumer and business confidence. However, the rebound in tourism and a strong labour market are some factors providing stability. This volatile setup has prompted many experts to forecast a recession in the Kiwi economy. The main question remains whether the positive factors would outshine the NZ economy's challenges.

The business confidence index, a survey conducted by ANZ Bank, fell to minus 62.6 in June, close to the record-low of minus 66.6 reading reached in April 2020 when the country was in a lockdown following the outbreak of the first Covid wave.

ALSO READ: Kiwi business confidence shaky, will RBNZ change its track?

Shockwaves travelling from the rest of the world

Much of the issues facing New Zealand can be attributed to international factors that have impacted the entire world one way or the other. Particularly, the events that have unfurled from the Russia-Ukraine war have left economists extremely worried. The war not only gave rise to a geopolitical storm but also severely impacted the supply of crude oil, some base metals and agricultural products, creating inflationary pressure.

Following the war, commodity prices have skyrocketed, supply chain disruptions have increased, and inflation has become a global concern. Previous experiences with a recession have taught us that declining consumer demand can be highly damaging. For instance, the rapid decline in consumer confidence seen during the Global Financial Crisis left the economy in shambles.

However, some experts believe that the impact on consumer and business sentiment would be lesser this time compared to the GFC era. Despite the many oddities facing the economy now, post-pandemic recovery still presents a glimmer of hope. Despite price rise, individuals are still keen to step out of their homes and spend on goods and services.

Additionally, foreign tourists are expected to rescue the nation from an impending slowdown. Much like Australia, New Zealand is dependent on foreign tourists for revenue generation in the hospitality sector. Thus, as tourists unleash their pent-up demand, the expected economic slowdown may get somewhat cushioned.

GOOD READ: Inflation worries: OECD asks NZ government to take targeted action

Where do central banks' actions stand?

Central banks have resorted to monetary policy tightening to combat rising inflation. The US Federal Reserve has even stated that it is willing to cause a recession if required to bring down inflation. Rising interest rates make loans costlier, causing business investment and consumption to decline. This ultimately leads to a slowdown in the economy.

As demand for products and services decline, prices start to fall. Meanwhile, lower demand also stalls the economy, and GDP numbers decline, resulting in a recession. The Reserve Bank of New Zealand (RBNZ) has turned hawkish and expects the cash rate to double to 4% over the next one year from 2% now. This means that upcoming interest rate rises could be more aggressive.

Additionally, as the economy remains in the negative real interest rate territory, the pressure on RBNZ to curb inflation will persist. Given these factors, we may see another 50 basis points hike in the official cash rate (OCR) in July, which can further hurt consumer demand. Most importantly, mortgage holders would face the toughest test as rising interest rates would heavily increase the repayment burden.

At the same time, first-time homeowners are seeing a decline in the value of their homes for which they had paid exorbitantly high prices. Meanwhile, rising interest rates would also strain their finances as mortgage rates will go up. Amidst this chaos, the economy would be highly reliant on a rebound in the hospitality sector to provide some stability.

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