Recession is coming, commentators warn

Monday, 11 July 2022

Confidence is down, which could be self-fulfilling, one commentator warns.

Almost three-quarters of economic commentators surveyed in a new poll expect New Zealand to enter a recession before 2025.

The technical definition of a recession is two consecutive quarters of falling gross domestic product (GDP).

The Finder survey of 13 experts and economists asked about the official cash rate (OCR) decision this week and the state of the economy more generally.

Of the 11 who answered a question about the likelihood of a recession, eight said they expected one before 2025.

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Some expected a recession in 2023 and some in 2024.

Economist Shamubeel Eaqub said, given house sales, consumer confidence and business confidence were all at recessionary lows, it would be a surprise if that pessimism was not self-fulfilling.

NZ Initiative chief economist Eric Crampton said the chance of the Reserve Bank getting inflation within its target band of 1% to 3%, from the current 7%, without a recession were slim.

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At Infometrics, chief forecaster Gareth Kiernan said, given there were no real signs yet of inflation starting to moderate, the pressures remained heavily on central banks to continue tightening.

“The Federal Reserve has effectively said that it is willing to cause a recession if necessary to bring inflation back under control. Although our Reserve Bank has been more equivocal, there is a clear risk that the slow start to its interest rate rises means it has to overtighten over the next six to 12 months.

“So weighing up the international and domestic risks, I'd say there's more chance of a recession within the next three years than not. Indeed, if it wasn't for the guaranteed rebound in tourism over the next two years, I'd say we'd almost certainly have one within the next 12 months.”

All 13 respondents said the OCR would increase in July from the current 2%. Most expected another 50 basis point increase.

Oliver Hartwich from The New Zealand Initiative said multiple rate hikes were on the horizon.

'We are still in the territory of negative real interest rates, inflation expectations are becoming entrenched, and the RBNZ has signalled that further increases can be expected,” he said.

“For all three reasons, I expect an increase in July, followed by further increases over the coming months.”

Mark Holmes from the University of Waikato said rising inflation was still a major concern for the economy.

“Another 50 basis points increase is required in order to keep on top of the fight,' Holmes said.

The overwhelming majority of panellists who answered the question said property prices would continue to fall in 2022.

Most experts agreed that the main driver would be rising mortgage costs in the form of higher interest rates and lower immigration levels.

Kelvin Davidson of CoreLogic said the forces that pushed property prices higher were now in reverse. “Mortgage rates are higher, more listings are available, and mortgage supply is being restrained,' he said.

Sharon Zollner from ANZ agreed that rising interest rates and quite possibly negative net migration were contributing to the fall.

Donal Curtin of Economics New Zealand Ltd said all of the factors point to one outcome.

'A starting point of high unaffordability, exacerbated by rising mortgage costs and falling real household income (and with possible pickup in net emigration) and prices can really only go one way,' Curtin said.

Finder's Economic Sentiment Tracker gauges experts' confidence in five key indicators: housing affordability, employment, wage growth, cost of living and household debt over the next six months.

Experts were the most negative towards cost of living (82%) – up from 75% in May. But positivity towards housing affordability (36%) slightly increased from 25% in the May survey.