We have probably seen the lows this “cycle” for wholesale borrowing costs a month or so ago. Rises from here are more likely than declines, but those rises will be capped by central banks around the world adopting a deliberate risk preference.
A number of central banks have stated that they prefer to take the risk of taking interest rates too low and leaving them low for too long – thus eventually over-stimulating growth, inflation, and asset prices – than not easing by enough. Risks are weighted in favour of low rates for the next couple of years, but then catch-up surprises on the upside from 2022-23.
Housing wealth & construction
The Reserve Bank wants house prices to rise because that will help reduce the risk of inflation consolidating too low in their target range of 1% – 3%. Rising house prices make people feel wealthier and they spend a bit more. The number of homeowners far outweighs the number of first home buyers who might have to cut spending to save more for a deposit.
Rising house prices also stimulate house construction and this sector accounts for around 6% of GDP and provides employment and business opportunities for thousands of people across a very wide range of activities.
Business capital expenditure
When recessions come along businesses pull back from spending plans and this aggravates the downturn. But when growth returns businesses re- engage with their expansion and modernisation plans and this catch-up period of capital expenditure boosts the pace of economic growth coming out of a recession.
Bank lending policies
Banks have tightened up policies for lending to business borrowers, in recognition of economic weakness and uncertainty associated with the Covid-19 shock. But as the shock dissipates and confidence about economic conditions improves, banks will become more willing to finance business growth. The chances are good that their improved willingness to lend will coincide with the increased willingness of businesses to borrow and restart their capex plans.
Migration anticipation
Most Kiwis expect that once the borders open many Kiwi expats will return to New Zealand. Maybe, probably not. There are very good reasons why the estimated one million people offshore with at least New Zealand residency are not in New Zealand right now.
Most will not return. But expectations that they will are likely to drive the decisions of Kiwis already here to buy assets before the hordes come back. This will accentuate upward pressure on house prices through 2021 and perhaps encourage greater purchasing of businesses in anticipation of greater population growth and possible business demand from returning Kiwis.
Tourism returning
When the borders are fully open it is likely that visitors will return to New Zealand in large numbers, just as we Kiwis will take trips overseas. International travel is a net positive for the New Zealand economy so this is a boost which will build over 2022. industries, and pushback against businesses which have adopted a model of operations dependent upon cheap, often desperate, foreign labour. Seeing more and more job opportunities, average employees will tend to be willing to spend more than would be the case if unemployment were to remain at high levels and stories abound of continuing job losses.
Export prices
The prices which our primary exporters are receiving for their goods sent overseas by and large are good. The rising NZ dollar will provide some restraint, and we cannot discount China treating New Zealand in some degree the same as they are treating Australia.
But the return of growth overseas, particularly in the food services sectors, will be beneficial for our exporters.
Mortgage repricing
Over the coming year some $176bn worth of fixed rate mortgages will come up for repricing. As perhaps half these people roll onto lower rates this lagged effect of earlier interest rate falls will support more consumer spending.
Term deposit rollovers
As each month goes by more and more savers will roll off their old, high, term deposit rate and be offered the lowest rates for reinvestment that they have ever seen – usually now below 1%. These investors are likely to shift some of their funds to other assets, including property.
Extra deposits
At the moment households have about $10bn extra on deposit with banks than would have been the case had Covid-19 not come along. This extra financial wealth will help support consumer spending.
Infrastructure
The government is determined to forge ahead with more spending on the country’s infrastructure, and local authorities are under pressure to catch-up on basic investments which should have occurred earlier. A lack of appropriate labour is likely to see the list of projects able to be completed scaled back over the next five years. Nonetheless, work done will rise and this will help drive some greater economic growth, job security, wages etc.
Underlying growth
There were many sectors experiencing firm underlying growth heading into Covid-19 and by and large they will continue to experience good growth going forward.
Examples include aged care, healthcare, games development, video production, medtech, horticulture, viticulture, space, etc.
But there will be some restraint on the pace of economic growth from a number of sources.
Consumer Durables
There is one traditional factor boosting growth coming out of a recession which will not be in play this time around – increased household spending on consumer durables.
Normally during a recession, you and I pull back on buying spas, gazebos, motorbikes, campervans, house extensions and renovations, new TVs and so on. Then, when the economy looks better and we feel more secure in our jobs, we catch-up on this delayed spending and this gives the pace of economic growth an extra kick upward.
But this time around we have greatly increased our spending on durable goods during the
recession through diverting $10bn which we had planned to spend overseas. At some stage we will not only revert to more normal levels of spending on spas, but we will spend less than average because those people who had been planning to buy such things over 2021-23 will have already bought them.
Retailers and manufacturers in such sectors should give the uniqueness of this cycle some deep thought before risking over-extending themselves heading into 2022 in particular.
Deficit repair
The government is under no international pressure to quickly reduce annual budget deficits. Nevertheless, New Zealand is a country which receives a number of economic, seismic, disease shocks as the decades proceed and the government will want to slowly restore the fiscal buffers able to be utilised when the next shocks come along.
This is unlikely to involve extra taxes beyond the ideologically driven imposition of a 39% top personal income tax rate. Instead, restraint on spending is likely to be emphasised, with assistance from a lot of money put aside for Covid-19 not being needed, and a lot of planned spending unable to be done because of staff shortages across the relevant sectors.
Business closures
History tells us that not all businesses which go under as a result of a recession do so when the economy is actually shrinking. For some the closure decision can take some time to be made and through 2021 some more businesses are likely to close down and lay off their staff.
Rising Kiwi dollar
In the absence of interest rates being pushed up the NZD is unlikely to rise tremendously over the coming 1-2 years. But there will be good support from the state of the domestic economy and recovery in trading partner growth rates. A rising NZ dollar will take some earnings away from exporters whilst making ability to compete on price more difficult for domestic manufacturers of imported products.
By Chas Gunaratne