6 reasons to be optimistic about the economy
It might seem like a winter of discontent in terms of the economy, and everything ‘looks like trash’. But it’s not all bad. Susan Edmunds looks on the bright side.
With warnings inflation of recession high, flying and confidence – both business and consumer – plummeting, it might feel like there’s not a lot of good news going around.
If you’re a homeowner, you might be worried about the value of your home dropping. If you’re trying to buy a first home, you might be concerned about rising interest rates. And if you’re a retiree living off a fixed income, you might be looking askance at volatile sharemarkets reducing (for now) the value of your investments.
But take heart. While there is enough bad news to go around, there are also reasons to be optimistic. As economist Tony Alexander said last week, one of the first signs that things could be improving is that everything
‘‘looks like trash’’ right now – it’s just setting the stage for the Reserve Bank to start cutting interest rates next year.
Here are five reasons to be optimistic. 1 The labour market One of the biggest bright spots in the economy from a household perspective is the labour market. Unemployment remains very low, and businesses are struggling to find the staff they need. While that’s not great from an inflation perspective, or for businesses hoping to grow, it’s good news for anyone who’s worried about their own personal financial situation. If you were to lose your job at the moment, it’s pretty likely that you wouldn’t find it too hard to get another one. Employers are also competing hard to find and keep good people, so the power in negotiation sits with jobhunters.
2 Interest rates might not peak as high as we expected
It seems increasingly likely that the Reserve Bank may achieve its inflation-targeting goals without interest rates having to go as high as previously forecast. It had said it was possible the OCR could peak at 4% but most commentators now expect the bank to stop increasing the rate before it gets that high. Some mortgage rates may already be about as high as they are going to get this cycle. A Finder survey earlier this week found that nearly two-thirds of the economists and commentators surveyed expected the OCR to peak at 3.5%. At the same time, falling house prices are improving affordability somewhat.
3 Export prices have been good
Rising food prices aren’t a great thing for lots of consumers, but they are a benefit to some of our exporters. ASB chief economist Nick Tuffley pointed to strong dairy export prices as a reason for optimism about the economy, and the potential for red meat export prices to remain supported. ‘‘Dairy supply is under pressure globally, and grain feed costs for livestock are elevated because of Russia’s invasion of Ukraine.’’ Jarrod Kerr, chief economist at Kiwibank, agrees: ‘‘We have very strong export prices, and the currency is low. This is a strong income boost for rural New Zealand.’’ At ANZ, economist Miles Workman said export prices were outperforming rising import prices. ‘‘This is reflected in our trending-upwards terms of trade – the ratio of export prices to import prices. That’s a signal that NZ national income is trending in the right direction.’’ But economist Shamubeel Eaqub said commodity prices were starting to come off their peaks so inflation in food should peak soon, which would help households.
4 The only way is up for some parts of the economy
Gareth Kiernan, chief forecaster at Infometrics, said it was worth keeping in mind that for some parts of the economy, all they can do from here is improve. ‘‘As the borders reopen, tourism and international education will recover – total services exports were sitting at just 38% of their 2019 level in the March quarter. Although they won’t get back immediately, or probably even within three years, to their preCovid levels, they are likely to make some significant positive contributions to GDP over coming quarters, as long as we can find the workers to resource the pick-up. ‘‘Even a 50% closing of the gap with pre-Covid levels would add 2.7 percentage points to GDP. This potential for growth means that the economy might avoid a technical recession over the next 12 to 18 months, even though domestic economic conditions are likely to be very challenging. Of course, the distribution of this positive to the economy will be unevenly spread, with Auckland and the tourism-focused areas of the South Island likely to be most positively affected.’’ Workman agreed it might be a tough grind, and slower than some are hoping for, but the recovery of international tourism was a good news story. He said the weaker New Zealand dollar should help. ‘‘However, there will be teething problems, such as finding the labour to lift capacity. Also, peak tourism tends to be in the NZ summer, and NZ typically experiences a net outflow in the winter. But with luck, international tourism will be well on the path to the new normal come summer 22-23.’’
5 Election keeps the focus on the cost of living
With an election next year, political attention is firmly on how households are coping and the economy is faring. This may lead to more action than would be expected in another part of the election cycle. ‘‘Policymakers are probably more agile than before. If things do turn bad, the Reserve Bank can do lots quickly, as can the Government, as we saw during pandemic,’’ Eaqub said.
6 The financial system is in good state
Workman said the financial system was relatively strong overall, which put the country in a good position. ‘‘While household debt has lifted, banks have been prudent in their lending, reflecting the Reserve Bank’s macro-prudential policy settings such as loan-tovalue restrictions, and lessons learned from the GFC. All else equal, this reduces risk in the financial system, and will hopefully limit broader economic fallout if the housing market deteriorates significantly more than expected.’’