New Zealand set for another recession, but housing market will remain hot, Westpac says

Monday, 15 February 2021

New Zealand is set for another recession this year, Westpac’s economists say – but it won’t be enough to stop the runaway housing market.

A recession is two consecutive quarters of drops in gross domestic product (GDP).

New Zealand was plunged into a recession during lockdown last year but rebounded in the September quarter.

Westpac’s economics team expect the closed borders will lead to another over the early part of this year.

“We estimate that the absence of overseas tourists cost the country around 2 per cent of GDP in the September quarter, including the second-round effects on domestic spending and production. But that will rise to around 6 per cent by the March quarter, when tourism normally peaks.

06012021 PHOTO: ROSA WOODS/STUFF Maungaraki, Lower Hutt, Petone, Harbour Views, Matiu Somes Island, Hutt Valley, generic, housing, Wellington.

* Coronavirus: Negative cash rate in November, Westpac chief economist predicts

* Millennial Money: An economy crash course that might make you smarter

Kmart Botany was closed for deep cleaning after a staff member, a student at Papatoetoe High School, tested positive for Covid-19.

“This means that some of the upcoming data, once seasonally adjusted, will show the economy slowing or even going backwards. We’re expecting overall GDP to shrink by 0.7 per cent over the December and March quarters combined.”

Chief economist Dominick Stephens said the economy had weathered the Covid-19 pandemic better than expected so far. The June and September quarters this year were likely to be buoyed by people staying in New Zealand when normally there would be a net outflow.

The current house price boom is starting to eclipse that of 2003, Westpac’s Dominick Stephens says.

This week’s lockdown was unlikely to alter the recovery track, as long as it was brief.

“When people are temporarily barred from certain economic activities, they often divert their spending to other things or undertake the same spending at a later date. Of course, this doesn’t detract from the fact that some individual businesses will be hit hard by even a temporary lockdown.”

He said the unemployment rate was much lower than expected.

“A wide range of data indicates that the labour market has reached a turning point, so we are forecasting that unemployment will be flat to falling from here. However, there have been some big differences across sectors.

“Those affected by the closure of the international border, such as retail, hospitality and transport, have in fact seen significant job losses over the last year. But this has been outweighed by growth in other areas, especially those linked to government spending such as health, education and public services. The other major area of jobs growth has been construction, which is enjoying booming demand and has been able to pick up workers displaced from other sectors.

“Differences in the economic fortunes of various sectors explain why we are hearing reports of skill shortages at the same time as unemployment has risen.”

Inflation was expected to grow to 2.5 per cent by June this year but Stephens warned that would then drop to 0.8 per cent by June 2022.

Environment Minister David Parker explains how the Resource Management Act will be replaced by three new laws. (Video first published in February 2021)

But he said the Reserve Bank had “done enough” to then bring it back to its target 2 per cent eventually.

Westpac did not expect any official cash rate increase until 2024.

“The Reserve Bank won’t realistically contemplate raising the cash rate until the borders reopen and longer-term inflation is comfortably on a path to 2 per cent. And given the extended period in which inflation has lingered below 2 per cent, we think there is a real possibility that the Reserve Bank will allow inflation to rise into the upper part of its target band for a period.”

The housing market would continue to roar ahead while interest rates were low, Stephens said. House prices lifted 9 per cent in the last three months of 2020 alone.

“The housing market has heated up much as we warned,” said Stephens.

“We are now forecasting 17 per cent house price inflation in 2021, due to ongoing low interest rates. But by the same logic, we continue to warn that when interest rates do eventually rise, house prices will fall.

“Our analysis has long shown that financial factors, and in particular interest rates, are by far the biggest driver of house prices. And with mortgage rates at record lows, there is scope for further significant gains in prices.“

He said it was becoming clearer to more people that what was driving house prices was the level of interest rates, rather than supply and demand imbalances. “There’s only so much RMA reform is going to do.”

That might prompt more assistance for first-home buyers, he said, or an extension of the bright line test, which taxes the capital gains made by some investors who buy and sell a property within five years.

Stephens said it would be more effective to stop investors being able to deduct their mortgage interest payments from their tax bills. The Government has already “ringfenced” those expenses, so that they cannot be claimed against other income.

“That could change the game in terms of who actually wins at auction.”

Despite the better-than-expected performance in recent months, Stephens said the effect of Covid on the economy was not over yet.

There would be a long, slow period of recovery, he said, as the country opened first to Australia and then to the rest of the world next year. The legacy would be higher levels of government debt that would have to be repaid.