NZ recession fears: ‘chance of a soft landing is fading’
AUCKLAND: ‘‘The chances of the New Zealand economy moving into recession are rising by the day,’’ BNZ head of research Stephen Toplis says.
New Zealand’s economic ‘‘imbalances’’ were being exposed at a time when the global economy was increasingly coming under duress, he said.
With the policy measures taken to ‘‘fix’’ these issues getting more and more aggressive the
‘‘chance of a soft landing is fading’’, Mr Toplis wrote in his latest economic outlook report: ‘‘Recession Bells Are Tolling’’.
‘‘Our central forecast, currently, is that New Zealand’s growth stalls completely in 2023. The danger is that the wheels well and truly fall off.’’
The fundamental issue New Zealand faced was that the economy had suffered a series of massive supply shocks, he said.
The local pandemic border closures were being compounded by war in Ukraine and ongoing Covid restrictions in China.
Meanwhile, a range of stimulus measures had kept demand far stronger than had been anticipated.
‘‘The result of all this is that demand is exceeding supply, the unemployment rate has plummeted to levels that are seen as being well and truly inconsistent with maximum sustainable employment and CPI inflation has climbed to 30year highs,’’ Mr Toplis said.
‘‘To cap things off, more recently the New Zealand dollar has fallen sharply, pushing up tradables goods prices even further.’’
That was forcing the Reserve Bank to act more aggressively than initially expected.
The New Zealand cash rate has so far been hiked by 125 basis points, from 0.25% to 1.50%.
But we were less than halfway through the process, he said.
‘‘We are expecting a further 50point increase at the May 25 monetary policy statement, followed by a series of rate increases until such time that the cash rate reaches somewhere between 3% and 3.50%.
‘‘This will represent the steepest increase in the cash rate since the Reserve Bank began inflation targeting,’’ he said.
Asset markets were already correcting. Both equity and bond prices were in retreat.
‘‘The last time we had a move in international rates similar to what markets now suggest was 2008,’’ he said.
‘‘So whichever way you look at it, the planets are aligning in such a way that a recession seems difficult to avoid.’’
The recession risk would be highest in 2023 when the full impact of rate increases and falling asset prices hit home, he said.
There were, however, several reasons to have confidence New Zealand was well placed to handle a recession and that it would be shortlived.
There was such a strong excess demand for labour at present the first stage in any economic softening would simply ease the excesses rather than drive the unemployment rate higher, Mr Toplis said.
‘‘The peak in the unemployment rate should be lower than in previous recessions,’’ he said.
‘‘The Government’s coffers are in decent nick, so extra fiscal spending can come to the rescue if things begin to look dire.’’
While there would be fallout from the drop in house prices, the declines had the upside of helping make housing more affordable, Mr Toplis said.
The banking sector was well capitalised, so the risk of a financial meltdown was very low.
He also expected New Zealand to benefit from a pickup in tourism as international travel accelerated.
‘‘The emergence from all that Covid19 has thrown at us will provide some tailwind to the economy,’’ he said.
There was still the chance a recession would not eventuate, he said.
‘‘But we think, given the way the world is evolving, households and businesses would do best adopting a preparefortheworst, hopeforthebest strategy.
‘‘We can say with some certainty that growth can only be moderate at best. If demand constraints don’t put a cap on the expansion then supply constraints definitely will.’’ — The