This is the second of a two part look at the economy as we reach the halfway point of 2023 (already!). The first part, looking at where we are currently, can be read here.
And now I give my view of what might be to come in the second half of the year...
I can't fully explain to you why I was so annoyed at the GDP figures for the first quarter of 2023 that were revealed last week.
It is partly because I was firmly convinced that the economy would NOT contract in the quarter to March. I was actually in the camp of the Kiwibank economists who were picking an exactly flat GDP result, IE 0.0%. And well, they missed by a whisker. A declared outcome of -0.1% was apparently enough for us to now be in recession. We are doomed. (Ok, I'm slightly exaggerating there.)
From my perspective the problem is thus: I was (and am) expecting to see both the June and September quarters of this year turn in negative GDP out-turns. Yes, that's right, I have believed a 'technical recession' would start in the second half of the year.
Therefore, I thought that the economic downturn narrative would start running in the back half of 2023 and into (and perhaps more strongly so) 2024. Gloom ahead.
With what has happened through the March GDP figures, we've effectively got off to an 'early start' to the gloomfest.
That doesn't bode well at all from a psychological perspective and I am now more officially downbeat about the outlook for the rest of this year and for next year than I was a week ago.
Irony. Misfortune. I'm not a betting man, but I would state now with some conviction that I reckon by the time the next GDP figures (for the June quarter) are released on September 21, there will have been an upward revision to that March GDP figure and it will no longer be negative, IE we will NOT have been in recession. Just watch.
Too late though!
The mindset is in.
We are 'in recession'.
Woe is us.
I have tried valiantly in the recent past to put forward my view of why the 'R' word is, taken in isolation, essentially meaningless and unhelpful, but no amount of jawboning on my part is going to change the strange magic power of that word. I suspect a fair few people don't even really know what it means - but it scares the living daylights out of them anyway, as if that word alone makes the world change.
And that's I guess where my annoyance comes in. Because of that fractionally negative March GDP figure, we may now start talking ourselves into bad things. It's human nature. If people get down on themselves they retreat into their shells. They stop going out and they stop spending. An economic downturn can become a downward spiral.
Just by way of example, this would mean we don't eat out in order to try to save money. The restaurant we would have gone to starts losing money and closes down. The staff of the restaurant lose their jobs and because they haven't got jobs they stop going out and spending...etc, etc. Vicious circle.
So, my fear is now we are going to start seeing shadows everywhere when previously we were seeing sun (through the 2023 rain!) and that could be bad for us as we move through the second half of this year. And it could be bad because I reckon that however the GDP figures for the March quarter end up looking (and I'm certain they will be revised up) I think and have felt for some time as said above that the June quarter GDP WILL be negative! And probably the September quarter as well. We could very well now end up being 'in recession' or something like it for a year or more.
And the really bad news is that the June GDP figures will be coming out right slap bang in the middle of the election campaign. That's right, the 'Vote for ME, I need the Job!' season will be in full swing. And I dare say our politicians in full bribe-the-public mode, will be able to make a lot of a contracting economy and a probably darkening mood among the populace. Plenty of potential for glum moods and conflict.
This election was always going to be crucial because of its potential to produce a U-turn in Government policies particularly that affect the housing market (and that includes 'open door' inbound migration - although Labour has already somewhat pre-empted that by reopening the doors anyway). And anything that affects the housing market affects the mood of the NZ people.
If I read the current thinking of the nation correctly (and I guess it always depends who one associates with and talks to), I read that fairly large numbers of people are cheesed off with BOTH of the two main parties. We could therefore see one of those elections where voters sample different flavours - IE vote for parties other than the main two.
With National promising to reverse Labour moves such as the ending of interest deductibility for housing investors and removing the increased time limit for the 'bright-line test' they had always seemed to have enough to get over the line. But boy, they are making it hard for themselves. I'm even still not quite yet dismissing the possibility that come election time National might have a different leader to the one they have now. Long shot. But similar things have been done before.
Anyway, don't rule out the prospect that a potentially increasingly gloomy and cantankerous (just don't call them 'whiny') electorate may deliver an 'interesting' election outcome on October 14. I now wouldn't rule out one of those dreaded MMP standoffs where the 'winner' is not known and might not be for some time. If the general mood in the country is as downbeat at the time as I suspect it might be, then such a delay will not help at all. Uncertainty is a killer.
Depending on what happens then, the election may have a very big impact on the latter part of this year and into next year.
I still think, however, the biggest factor in the economic landscape this year - and it will be even more so in the second half - is the labour market. You can't have a 'good' recession with virtually full employment. Unemployment of just 3.4% as of the March quarter is a key reason why the mood has been so resilient and why people had been prepared to keep spending.
Let's see what happens from now on though. The surge of inbound migrants we've seen in the first half of the year has been filling jobs that you suspect in many instances may have been unfilled for two years or more. The 'slack' in the labour market is being taken up. What next?
If the until-now resilient mood starts to turn, as it might well, things could change quickly. A lot of the reason why spending patterns had remained so relatively strong (and I freely concede it has been 'patchy' out there with some businesses faring well and others not at all) is that a fair portion of the population has been insulated from the Reserve Bank's efforts to rein in inflation by jacking up interest rates.
Only about 38% (according to RBNZ calculations) of the population have mortgages. This means a lot of people are not directly affected by mortgage rates that have gone through, ahem, the roof. But rising unemployment - if it happens faster than currently seems likely - would be a game changer. The RBNZ reckons unemployment will be 4.6% by the end of this year. The RBNZ has under-estimated the ongoing strength of the labour market in recent times. But it has certainly not been alone in that.
If the RBNZ is right this time about rising unemployment, or indeed if unemployment starts to rise faster maybe than even the RBNZ thinks (after all, we are 'in recession', you know!) then life is going to be looking a lot different for significant numbers of people.
Inflation may be one moderately cheering point in the second half of the year in that, if the economists are right, it may start to fall meaningfully. Goodness knows it needs to. I'm still recovering from spending $18.64 on eight tomatoes last weekend (and yes, it was correct, I checked! Just wish I had checked the price before buying!). The RBNZ thinks the annual rate of inflation as measured by the Consumers Price Index (CPI) will be 4.9% by December, down from 6.7% as of March.
Fingers crossed everybody's right about this, because getting inflation back into its 1%-3% 'box' is key to us seeing lower mortgage rates. Unfortunately, I still reckon inflation's got some nasty surprises ahead for us and may be much longer lasting than anybody hopes - and I talk internationally as well. And I'm talking years rather than months, which means interest rates may well stay elevated for longer than a lot of people think - absent a major global meltdown, which, however, is always possible.
Interest rates, along with the early mentioned election, will be key factors in what happens to the housing market.
According to the REINZ's House Price Index (HPI), our house prices are now 18% lower than they were at the peak of the pandemic frenzy in late 2021. But the HPI is still 20% higher than it was at the start of said pandemic in early 2020.
So, our houses are still 'expensive'. But that's not stopped the enthusiastic kiwi house buyer before. Several economists are now calling the end of the house price falls. Even the RBNZ, which has been hitting those mortgage rates with a big stick, now reckons house price falls will be smaller than it earlier expected, and just about be done by the end of the year.
I sense a mood out there, almost of impatience. A mood of 'get the [house price] machine started up again!' We buy houses. That's what we do. You can't stop us.
If inflation's coming down and a National-led government does get in then the hounds will be baying for housing action again before the end of the year.
I think house prices will start rising again and there will be a mood of 'get in, it's good for you' starting to emerge. But I certainly wouldn't rule out a very quick reversal of that either. The RBNZ won't want interest rates to drop any time soon. If it thinks it needs to hike the Official Cash Rate again, it will. Don't doubt that. And if unemployment really does start to rise meaningfully and if we are potentially going to be in recession, or close to it for a year or more - then these are all things that could swipe the feet out from under a fledgling house price surge.
Our house prices were 'expensive' before the pandemic. They most certainly still are. Try to remember that.
The first six months of this year have been like a watery entree. The second half of the year is definitely the main course. It will be meaty, but it might be quite tough and indigestible.
Much will depend on the labour market. Much will depend on the election outcome.
I'm hoping for the best, but rather fearing the worst.
*This article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.