There are a lot of moving parts in the New Zealand economy, and some of them are very out of balance.
Soaring inflation, and rising prices, are making it all feel pretty real right now. Interest rates are also rising, putting the heat on many Kiwis.
Unemployment is low, which is good for workers and the businesses which rely on their spending, but makes life difficult for employers.
The stock exchange is holding up better than some markets overseas, but it has fallen this year.
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After a decline in gross domestic product at the start of the year the question of a recession was in the air. The answer came on Thursday with a 1.7% rebound in quarterly gross domestic product.
House prices are falling, and households’ debt burden is growing.
If you want a big number, the annual current account deficit jumped $16 billion to $27.8b in the year ended June. At 7.7% of GDP that’s not great, although the deficit was 7.8% of GDP during the global financial crisis when it hit its previous record of $14b.
But that pales into comparison next to the country’s residential real estate which is worth about $1.7 trillion, with mortgages secured against 20% of that value.
“There are a lot of forces at work, and I think that the outlook for the economy is quite awkward at the moment,” says Kiwibank chief economist Jarrod Kerr.
There are capacity constraints in many areas. Businesses are screaming out for workers, in construction, as well as hospitality, and accommodation, unable to use the usual migrant workers.
To balance out the lack of supply, the Reserve Bank is trying to pull down demand by lifting interest rates.
But those rising interest rates are putting immense pressure on household budgets, says Kerr.
“So not only is high inflation eating into the purchasing power of consumers, but we also have higher interest rates get into those with debt.
“And on top of it all, we have a housing market which is in decline, mainly due to the rise in interest rates, but also everything else that’s been thrown at it recently – LVR (loan-to-value) restrictions, CCCFA (Credit Contracts and Consumer Finance Act), removal of interest deductibility, there’s a lot happening. And supply is also picking up, which is good news.”
Independent economist Benje Patterson says there is no recession but some parts of the country and some people are experiencing recession-like conditions.
“Everyone’s got jobs and everyone’s got wage increases. But for some people that’s just not enough and in real terms, they’re actually going backwards.”
The public sector – government administration, health, professional services, utilities – is humming along, unsurprisingly because it kept working through Covid restrictions.
Feeling a lot more grumpy is construction, accommodation, hospitality, retail, even parts of agriculture and manufacturing, Patterson says.
In terms of revenue coming in, exporters are doing well. Commodity prices have soared, the border has opened, and they can start making some sales.
But households and domestic businesses have tightened their wallets, which concerns both Patterson and Kerr.
Services and consumers make up most of the economic activity, and consumer confidence is at the lowest level since the 1980s according to Westpac’s survey.
“That worries me, people are obviously hurting from high inflation and high interest rates,” says Kerr. “There are risks that a lot of households will be doing quite tough right now.”
The difficulty getting labour, material, and parts is holding back parts of the economy. An increase in supply, among other things, is likely to see some air come out of construction’s tyres.
The balance of payment deficit is as wide as it’s ever been, a potential red flag for overseas investors and a drag on the New Zealand dollar.
“New Zealand’s a very highly rated country and concerns from investors aren’t that strong to be honest,” Kerr says. “But it’s obviously nice to be in a bit of balance with our current account, because we’re effectively spending a lot more offshore than we’re bringing in.”
Inflation is a global problem and running above target in many countries including New Zealand.
Central banks are trying to unwind the extraordinary stimulus that they have pumped into economies to support governments which spent up to battle the pandemic.
“Now we’re in a period where both governments and central banks are looking at their stance, and thinking about reversing what they’ve done,” says Kerr.
The NZX has underperformed over the past year, a reflection of rising interest rates and a slower outlook for economic growth.
The country’s housing market is out of all proportion to the economy, considered an outlier along with Australia, which means a lot of households are carrying a lot of debt and exposed to rising interest rates.
“It worries me that people fight tooth and nail to pay off their mortgages, and it’s just going to get harder, particularly for those that have only recently got into the housing market,” says Kerr.
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