Stimulus bubble will burst soon

If you thought the big gains on your KiwiSaver balance or the valuation on your house were real, then the past two months may have been something of a shock. Stockmarkets — led by Wall Street — have fallen sharply. Most of us will have seen our KiwiSaver funds fall by at least 10 per cent. The local NZX50 index is off by more than 16 per cent since its peak in November. All the signs are that shares have further to fall before they hit bottom.

Meanwhile, house prices are off by around 5 per cent since November — based on the latest Real Estate Institute index. That seems less dramatic but for many Kiwis, housing is the primary store of wealth. It’s also where we have most of our debt.

Housing is where the Reserve Bank sees the biggest risk to New Zealand’s financial stability.

Economists fear the housing market still has some way to go before it stabilises. Forecasts are for falls of between 10 and 15 per cent from peak.

Despite a multitude of policies to curb house prices being introduced in the past few years, it seems to be rising interest rates that have finally done the trick. Interest rates are also largely to blame for the stockmarket correction. Rates are rising fast, here and around the world, as central banks look to get on top of inflation.

Hopefully New Zealanders have understood that the asset boom of the past two years was a mirage, an accounting device to spread the shock of paying the pandemic price.

All of the gloomy property and equity market news of the past few weeks should really just serve as a reminder the global pandemic did not create wealth. It was a huge cost on the economy, the same way disasters like earthquakes and floods are.

But the stimulus unleashed to head-off large scale unemployment and business failure had the side effect of inflating the balance sheets of many New Zealanders. By the end of 2021, house values and KiwiSaver balances had never looked better.

A StatsNZ survey found the median net worth of New Zealand households in 2021 was $397,000 — an increase of 21 per cent from the last survey in 2018 and an increase of 39 per cent since the first survey of its type in 2015.

For all the noise about inflation and the rising cost of living the latest economic data still suggests Kiwis are cocooned in that bubble of stimulus wealth. Latest card spending data for April showed no discernible sign of belt-tightening by consumers. It rose by $551 million or 7 per cent, Stats NZ said.

That was a larger increase than seen in the previous month, when spending rose by just 1.7 per cent and suggests the real economic pain is still ahead for most of us. Economists are increasingly gloomy about the prospects of getting through this economic cycle without a recession.

All recessions are not created equal.

With unemployment low, a short, shallow technical recession my be the most efficient way to get on top of inflation.

But that doesn’t mean it won’t hurt.

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