NZ may be able to skirt a recession, but…
The Treasury recently said that it no longer expects the economy to slip into recession this year and believes inflation will be back in the target band before the end of next year. The Reserve Bank still forecasts a recession, but a relatively mild one, with inflation also returning within the 1-3%pa target band by the end of next year.
With the economy's resilience so far appearing remarkable, can New Zealanders dare dream of a soft landing? Infometrics’ Brad Olsen (pictured above) remained somewhat sceptical. Here’s why.
“In our view, there are risks that economic activity needs to be hit harder because inflation remains more persistent,” said Olsen, Infometrics CEO and economist.
“Regardless of whether New Zealand experiences a technical recession or not, economic conditions in 2023 and 2024 will feel recessionary, as we pay the price for our earlier supports during the pandemic. All this economic pain is necessary to get the economy onto a more sustainable path for the future.”
Recession fears dwindles, but still there
Recent economic indicators and forecasts have suggested that a soft landing might well be possible.
At the 2023 budget, Treasury said it now expects the economy to be 1.1% larger at the end of 2023 compared to 2022. This was a reversal from its HYEFU forecast back in December, where it expected activity to fall over the same period.
RBNZ, on the other hand, said it now expects a recession of the mildest kind in the May 2023 Monetary Policy Statement, with a 0.3% total decline in activity over two quarters in mid-2023.
Both see better tourism activity, cyclone recovery spending and investment, and higher net migration as adding to the economy into the future.
“Our own estimates also show a remarkable level of recent economic activity, with our preliminary assessment of economic activity over the start of 2023 being flat to ever so slightly higher,” Olsen said.
Budget 2023 includes many smaller policy changes
Several smaller policy changes included in budget 2023 meant an addition to the overall increase in spending.
Such changes included the 20 hours of free early childhood education being extended to two-year-olds from March next year, scrapping the $5 co-payment for many prescriptions, free or half-price public transport for young people, and more funding for insulation.
Also announced was the additional funding to support cyclone recovery, with a direct $1bn package announced pre-budget, as well as a $71bn boost in infrastructure investment. An extra $6bn was allocated to be invested as part of the National Resilience Plan.
There’s also the $160m subsidy over four years for the electronic gaming industry, which it got after heavy lobbying. Olsen said economists take a dim view of such subsidies, “given the creation of winners and losers when it comes to government’s favouring some areas and not others.”
“The amount of funding, at $40m per year for a sector worth $400m per year, is a substantial subsidy that many other private businesses would also be keen to enjoy,” he said. “It also sets the wrong tone about priorities, in our view, with only $130m allocated over the same period for community and business support post-cyclone.”
Olsen welcomed the continuation of funding for the Apprenticeship Boost scheme until the end of 2024, enabling an “estimated 30,000 apprentices to start or continue” in the scheme.
“However, all this additional spending, as well as a tax take that is set to be weaker than previously forecast, saw a deterioration in the outlook for the fiscal position,” he said. “Core Crown expenses are set to be $9.4bn higher over the 2024-2027 forecast period than expected in December, and revenue is set to be $10.7bn lower. Net debt will rise and remain higher for longer, pushing the move back to a budget surplus out at least another year.”
Concerns raised over ability to deliver infrastructure
The budget identified two “specific fiscal risks” that raise concerns about future infrastructure funding and delivery. It involves insufficient funding within the National Land Transport Fund and Transport Local Government Share to carry out their respective activities and programmes.
“Both risks reaffirm our concerns that, although official forecasts of infrastructure investment are tracking higher, the actual ability to deliver these projects is more challenging,” Olsen said. “Expectations remain for a rephasing, re-costing, or other form of rescoping of parts of the New Zealand Upgrade Programme.
“Wider than just transport investment, problems with the planning and delivery of infrastructure investment risks undermining economic development and standing in the way of productivity improvements.”
Are the OCR hikes over?
RBNZ took the market by surprise when it announced that the 5.5% OCR was the peak, despite growing concerns that the higher levels of migration and forecast government spending could increase inflationary pressures.
“The bank now sees evidence of both inflation and inflation expectations moderating, and more economic indicators showing that this disinflationary pathway will continue,” Olsen said.
The central bank expected inflation to be back below the top of the Reserve Bank’s 3% target band by the end of 2024, in line with the Treasury’s forecasts, as higher interest rates work their way through the system.
“Both Treasury and the Reserve Bank expect household spending to fall throughout 2023, leading to less demand-side inflationary pressure,” Olsen said. “As a result, the Reserve Bank thinks that prior increases to the official cash rate will be enough to achieve its inflation goal, and it doesn’t currently see a case for further interest rate raises.”
He noted that no further rate hikes provide New Zealand with a pathway to avoid recession – at least technically.
Still just a feverish dream
Although the dream of a soft landing might well see New Zealand skirt a recession, Olsen said the overall slowdown in economic momentum will “still feel like a recession, and some areas such as residential construction and retailing will go through a tougher period of activity.”
“Let us be clear – 2023 and into 2024 will bring economic pain – the unknown is how deep it will be and how long it might persist. An emerging view is that it might be shorter and less sharp than first feared,” he said.
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