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Fear and Lending: New Zealand’s 2023 Economic Outlook
At the most stable of times economics is a dark art, but with so many variables at play, few things are certain.
Economists at ASB and Westpac predicted GDP growth of just 0.9 percent for the September-ending quarter, according to data released in the middle of December. It was estimated at 0.8 percent by the Reserve Bank, and BNZ came in higher than the rest with what seemed like a ridiculously optimistic 1.3 percent.
However, the retrospective figure was 2 percent, which was significantly higher than even BNZ's seemingly optimistic pick.
So, what does that mean for our 2023 predictions if it is tough to predict the past in the current environment?
Mike Jones, BNZ's chief economist, said that in the aftermath of the GFC in 2008 the orthodox economic rule book had been torn up, and it is yet to reassert itself again.
Despite Jones' assertion that the phrase ‘unprecedented times’ had become tiresome as a result of the pandemic; it was a fact of the present situation and one that was continuing on into the foreseeable future.
There are so many moving parts, and it is becoming hard to remember a time when there was more uncertainty, but the most important stories for 2023 will be how New Zealand deals with inflation and the RBNZ’s manufactured recession.
Consumer banks are anticipating inflation relief in 2023 and many banks are of the opinion that inflation has either already reached its peak or is about to reach its peak.
Yet, that relief would likely result in slower price increases, not lower prices. Which for most people is not necessarily good news, just less bad news.
Inflation is unlikely to return to the target range of 1 percent to 3 percent this year unless something economically significant occurs, such as a collapse in the oil market.
The problem that keeps the Reserve Bank turning in their sleep is that wage inflation has become so high that there is now significant risk of a wage price spiral. If this happens, it means that it will be much harder to bring inflation down and keep it down long term.
The Reserve Bank's OCR response to inflation, projecting to peak at 5.5% in April and resulting in a recession by the middle of the year, is understood to be a significant factor in the economy's performance this year.
Yet, if inflation expectations and figures end up being lower than predicted, which we believe has a relatively high chance of happening, the RBNZ might not need to take those kinds of measures to control the economy.
Mortgages:
Since the OCR determines the loan rates that banks offer to their customers, a mortgage should theoretically be more expensive the higher the cash rate. However, the mortgage story becomes a little more nuanced toward the end of the tightening cycle.
Due to the fact that they already take into account their OCR perspective, the longer dated three; four; or five-year mortgage rates may not be too far from peaking. Yet, short-term rates certainly still have some room for improvement.
The downward property market is likely to find a floor in the first half of the year if mortgage rate increases stopped, but we are cautious about putting too much faith in what might happen to property prices outside of the generally accepted 20 percent peak to trough correction forecast.
Mortgage rates could also change independently of what the Reserve Bank does with the OCR. The release of some of the Reserve Bank's more creative crisis tools, such as the funding for lending program or the bond buying Large Scale Asset Purchase program, indicates that some of the Covid-response liquidity that was injected into the economy is being drained.
That will cause mortgage rates to rise regardless of the Reserve Bank's actions. As a result, we tend to disagree with predictions that mortgage rates, particularly short-term rates, have reached or will soon reach their peak.
In 2023, just over half of all mortgages will be rolled over, according to the Reserve Bank. According to recently published mortgage data the average mortgage rate was about 4%, and it will likely reach about 6.5 percent in 2023 regardless of what the Reserve Bank does in the future.
Spending Cash:
If you run the numbers on a mortgage of half a million dollars, you might find households that pay their mortgage bill on a weekly basis will be forking out an extra $300 or $400 per week, and for some, that won't be expected at all.
There are very few household budgets that can accommodate an additional $300 or $400 per week without having to sacrifice something else, and this may be especially challenging for those who purchased at the height of the housing market. Meaning there is probably going to be some difficult discussions at the dinner table in the near future.
This is the primary reason we believe that discretionary spending will be under pressure. Every household will be unique, but retail, hospitality, domestic tourism, and some areas of the construction industry are expected to experience the greatest spending cuts.
The Reserve Bank's interest rate changes have strengthened many banks’ forecasts for a small technical recession (two or more quarters of economic contraction) in 2023.
In the past, New Zealand has experienced recessions as a result of three things: a global growth shock, a drought, or an aggressive tightening of monetary policy. We currently have roughly two of the three, so we believe that it will be difficult to avoid.
An Unequal Recession:
Yet, the extent to which New Zealanders would experience the recession is likely to differ significantly from headline figures.
Strong export prices would help regional centres perform better than Wellington and Auckland. This time around, the likelihood of a recession might be very different. Even though the term "recession" is sometimes used in a technical sense, it still evokes a sense of dread because recessions typically coincide with significant job losses, which are felt by the majority of people.
These are famous last words, but the labour market is beginning to slow down from the highest point, almost, in the history of data we have in New Zealand, and this time it does really feel different.
Yet even so, in a national recession we think that unemployment would likely rise, but not due to the elimination of existing jobs but rather because of workers coming from overseas. As during this recession, we believe businesses will be eager to actually retain workers, even if that means opting for overseas labour.
In such an economically uncertain time, it is best practice to ensure that your business insurance is relevant and up to date. Before things become worse it is perhaps a good time to reassess your insurance plan and make the necessary changes to safeguard yourself against the increased risk that the 2023 is going to bring.