Independent Economist, Tony Alexander, presents a market update on New Zealand’s economy and the housing market.
This is about as bad as it gets. Nothing seems to be going right for the economy, households and businesses. The pressures keep growing.
Another hit for the market, the Reserve Bank is set to raise interest rates another 0.5% next week.
- The US economy may already be in recession.
- Data coming out from most countries is very poor.
- Confidence levels here have collapsed.
- The IRD is bringing down an overdue hammer on firms which have been given a lot of leeways.
- A new wave of Covid is sweeping the world and there’s open talk of a return to “red” in NZ.
- Plus house prices are still falling.
Most of these (not Covid) are good things.
The last thing we need right now is for demand in our economy to be bounding ahead. That would mean rising inflation risks and more pressure on resources which simply are not available. A period of slow growth is much needed. Buying time for the inflation risk to subside and resource availability to improve.
The key point,
My key point since receiving the results of my first monthly Spending Plans Survey for 2022 has been that the weakness the Reserve Bank needs to see is happening.
Now everyone can see it and that weakness is deepening. As a result, interest rates in the wholesale markets have fallen. Pricing has shifted to the official cash rate peaking below 4% rather than 4.75% at one point.
I expect a peak of 3.5% but wouldn’t rule out the rate topping at my original prediction of 3.0%. Notably, this week, some banks have cut their two-year fixed mortgage rates. Because the two-year swap rate which they borrow to has fallen over half a per cent in the past three weeks.
This is the point in the cycle – assets, economic etc. – where you need to step back from the fray and concentrate less on voyeuristically wallowing in the horror of the news, and more on controlling your emotions. Specifically – don’t panic. If you are in the home building sector, then it is too late for you to do much about the construction decline and collapse of partners coming your way. I warned about this over 15 months ago. The time to get prepared disappeared a long time back. You’re in for the ride down now.
But for other sectors, look at it this way. This is the worst time to be divesting. There is no strategy you would have developed in the past which could be summed up as – we will enjoy the growth but sell our asset/business when things are at their worst. Buyers can’t get credit, and sentiment levels are at record lows.
By all means, rein in spending plans,
but concentrate on means of boosting productivity through investment. We are now a capacity-constrained economy. You cannot run your business by acquiring customers and then getting credit, capital, premises, staff, and supplies.
You have to first figure out what of these resources you can acquire and retain for the next 5-10 years. Then figure out what growth in output that will allow you to achieve. For some businesses, the answer is that the current level of output cannot be achieved with the timeliness of delivery and quality of service desired. For SME owners, are you now a slave to your company working 80 hours a week trying to produce a flow of output that you can’t sustain if you want to preserve your physical health, mental health, and family cohesion?
You need to look through all of your outputs and ditch the least profitable ones – with profit perhaps measured as those that demand the greatest resources. You need to do the same exercise for your customers and the markets you target, the locations you are in, and the production and distribution methods which you use.
The future of the housing market,
As an economist, I have to avoid focusing on where the economy is, and look at where things are going. You are not. You live in the current environment and you will be feeling very pressured. You’ll probably have to make some changes to get through. The best message I can give from my area of expertise and responsibility is this.
The changes needed for a better operating environment for yourselves going forward are already underway. Weakening demand yet rising population will slowly alleviate hiring pressures – but not back to the old pick and choose days. Inflation prospects are improving for 2023, people are doggedly determined to re-embrace their pre-Covid travelling ways, an easing of LVR rules is on its way, mortgage rates have about peaked except for floating and one-year fixed rates, the exchange rate is good, foreign students will return, and our export prices are strong.
