Recession or not, brace for tough times, economists say

Friday, 19 May 2023

A recession may not be a certainty this year, but that doesn’t mean things will be any easier for households, economists say.

When the Budget was announced this week, it was revealed that Treasury no longer expects the economy to enter a recession.

The Treasury is forecasting relatively robust economic growth of 3.2% in the year to the end of next month, and a more tepid 1% rise in GDP the following year.

The “strong economy” would weather the storm of a “challenging global environment” and the Treasury now expected inflation to drop back under 3% late next year, Finance Minister Grant Robertson said.

Earlier, the Reserve Bank had predicted that the economy would go through a year-long, relatively shallow recession stating in the second quarter of this year.

But a significant increase in migration figures, the cyclone rebuild and return of tourists have prompted a reassessment of the outlook.

Westpac chief economist Kelly Eckhold said the Treasury’s view aligned with his. He said earlier in the week that the official cash rate (OCR) was likely to need to rise to 6% to keep inflation in check, thanks to economic activity sparked by population growth at its highest level in decades.

He said Westpac and Treasury took a similar view, except Treasury had not factored in as much inward migration.

“What’s hidden under the absolute levels of growth is that, on a per capita basis, it’s still going to be pretty tight. Even though we’re growing, because there are more people in the economy, there’s a smaller share of each unit of income available.”

That was likely to continue for some time, he said.

“It’s running below trend levels for the rest of this year and most of next year.”

He said on a per capita basis, government spending was forecast to be flat or declining.

The amount of spending was not forecast to keep pace with inflation growth, he said. “While Treasury is focusing on delivery of core services, the reality of their numbers suggests fewer services per person. That may not be realistic.”

Infometrics chief executive Brad Olsen said the available data indicated the country had avoided a recession so far.

“We’ve still got to be cautious about the future, given we’ve got those expectations for households to still be hit with higher interest rates continually through this year.

“In the short-term, the additional level of migration could be demand-stimulatory and could keep inflation at a more uncomfortable level for longer and could require the Reserve Bank to push against it harder. At the same time, the Reserve Bank will be looking at the Budget thinking there is too much stimulus coming into the economy and it raises the risk of further interest rate hikes.

“[Reserve Bank Governor] Adrian Orr made it clear before the Budget he was looking for reprioritisation, anything new had to be met with something coming out… this [Budget] doesn’t meet that test.”

He said higher interest rates could drag down economic growth more than Treasury expected, if its inflation forecast was not accurate.

But he said even without a technical recession, it would still feel difficult for households.

“If you had a 0.1% increase this quarter then 0.1% down the next, then 0.1% up, you would not have a technical recession but it would still be flat economic activity. Hearing and talking to businesses, they’re starting to feel the strain coming on. Although we might skirt a technical recession economic conditions could still feel recessionary.”

ANZ chief economist Sharon Zollner said she still expected the economy to shrink to the extent the Reserve Bank had forecast.

“There’s a possibility that the Treasury could be right for the wrong reasons. Net migration is forecast to hit 66,000 in the year, which is more than double the Reserve Bank forecast but it is already running at a pace more than double that.

“Recession is technically defined in absolute terms not per capita – depending on whether those numbers drop away quickly or people hang around as the labour market weakens – [avoiding recession] is not our forecast but it’s well within the realms of possibility.”

BNZ chief economist Mike Jones said his forecast still incorporated a recession, too.

“But I think it’s fair to say we acknowledge the growing likelihood we may avoid recession. There’s a couple of things going on here – a slightly less contractionary fiscal stance but the more important factor is booming migration numbers.”