Cameron Bagrie – 26 January 2023
We start 2023 with the bears having the upper paw, inflation rife, and the spectre of recession.
Recent figures from the New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion, point to an economy heading backwards and REINZ figures show the housing market doing the same.
There is no doubt the gloss is rapidly disappearing on the economy, such is the reality of taming inflation, impact of higher interest rates and direct words from the Governor of the Reserve Bank telling people to rein things in.
A sense of perspective is still needed.
Recent building consent figures point to a pipeline of more than $32 billion of building work, far exceeding the construction sectors building capacity.
Be careful how you interpret confidence surveys. They ask respondents whether the year ahead will be better, the same, or worse than last year. For many businesses, most of 2022 was stellar, and less stellar is not necessarily bad, just less good.
Bank non-performing loans remain low at 0.4 percent of total loans. There is little distress, for now at least.
A recession is typically defined by two negative quarters of economic growth. But levels of activity matter too. A pullback from extreme highs might be a recession in the technical sense, but in the reality space, just a pull-back from highs.
Money illusion will also hide somewhat a real recession. It is hard to see the nominal economy (that is inflation plus volumes) going backwards, but certainly the real economy (nominal less inflation).
The true sign of a recession is a turn in the labour market. We do not appear to be at that point, yet.
I suspect the second half of 2023 and 2024 will be the real recession but the technical variety will be sooner.
Bad news is good click-bait.
“Tech stocks, Treasury bills, cryptocurrencies, real estate. The great market sell-off of 2022 has been indiscriminate, wiping trillions off the [US] stock market capitalisation of risky and not-so-risky assets, and taking a huge bite out of average investors’ retirement plans. New York Times, 27 December 2022
Bad news drives clicks so the term recession will appear frequently this year.
I prefer the phrase reset.
Recession invokes negativity. The phrase reset involves some of that too, but also with an element of opportunity.
People will have their own views on what a reset could mean but I’ll put some out there. It is about embracing change.
The laws of economics are coming back into play. Low and lower interest rates allowed boundaries to be pushed, extended asset prices and wealth inequality to stretch too far. More normal interest rates mean boundaries come back into play.
You do not purge decades of excesses in a few months or a couple of quarters of negative growth.
The knuckle down period is longer.
Rising interest rates mean you need to take real risk to make real money. That sounds normal to me. We should be encouraging business growth not a framework to sell more expensive houses to each other.
Build me up buttercup.
The economy does not work economically or socially with inflation, so we need to get rid of it. That will involve some difficult time.
Well-being needs an economic base. Stimulus from printing money, low interest rates, or huge government spending is a temporary lever to drive growth. Now the era of identifying drivers that have substance is here.
There is more pressure than ever for politicians to follow through and deliver on key areas such as infrastructure, inequality, climate change, housing, health, and education. Today’s problems are not just a manifestation of Covid, they reflect decades of failures to act. Tax cuts? Not on my priority list.
New Zealand has become both economically and socially unhealthy.
We have pushed the boundaries when it comes to housing, inequality and we do not reside in a society where there is equality of opportunity. The result is a very divided society. We need a policy platform that will help New Zealand mend.
We are facing the impact of an ageing populations, fewer workers but the life cycle around saving turning into spending. There is also shifting expectations across generations, and the change from an industrial age to an information age. The industrial age is about producing stuff, whereas the information age is about ideas.
A post-war trend of globalisation is reversing, and this started prior to Covid. And we are entering a period of rising geopolitical unease. Climate change is real, and one consequence will be a series of ongoing inflationary shocks. That will create greater economic and social tension.
So, while the temptation will be to get dragged down by the inevitably recession that is around the corner, it might pay to focus on the big picture. Change is the new normal. That is an exciting environment.
The past thirty years should not be the playbook for the next thirty years.
One plus one now equals eleven and mindsets need to reflect the non-linear environment we now reside in. Inflation and the cost-of-living crisis should not usurp all the attention – “fortune favours the brave”.
Written for Waitapu Group by Cameron Bagrie
Bagrie Economics is a boutique research firm that specialises in independent, authoritative analysis of the New Zealand economy and economic issues generally. We don’t do spin or over-complication, just honest analysis of trends and figures.
The views expressed in this article do not represent financial advice.