A New Year may bring fresh hope as the economy struggles through recession. However, recovery is unlikely to be swift or sure with some aspects lagging behind, as Richard Rennie reveals.
Bay of Plenty business owners are heading into Christmas with the prospect of seeing a low and slow road to recovery through the New Year and beyond.
A solid turnout of Bay businesspeople learnt from BNZ chief economist Mike Jones’ presentation, in late November, about the full depth of the recession and how long it will take to recover from it. After a tough year, Jones cast a positive light on the year ahead indicating 2024’s final quarter as the point of inflection where things start to take a turn for the better across the economy.
“This is really the first time the picture has changed to being one of ‘light on the horizon’, to talk about the recovery rather than the recession,” said Jones.
He described the downturn as the largest per capita recession New Zealand has ever experienced with no region being immune. Jones fully expected the decline will have some lingering scarring aftereffects across the country.
Despite an upward tick in growth prospects, the aftershocks hitting company balance sheets were likely to ripple through for some time yet, with unemployment likely to peak around 5.5 per cent by the middle of 2025.
“We have economic output per capita 4.5% smaller than it was before the recession and that’s likely to peak at 5%,” Jones confirmed. “It is the greatest decline since we started keeping data in the early ‘90s. In an aggregate sense, profitability is about as weak as it gets in New Zealand right now.”
But the upside is that inflation has been well and truly curbed and 50% of mortgage holders are poised to cash in on lower mortgage interest rates, given they will have their interest rate reset over the coming six months.
“Much more so than past cycles, borrowers have seen this rate cutting cycle coming and people have moved borrowing on to shorter terms in anticipation. We think the Reserve Bank has plenty of work to do to bring interest rates down further. The current OCR of 4.75% is well above any sort of estimate of the ‘neutral rate’, around 3%.”
As growth starts to warm up, Jones cautioned business owners to expect it to be ‘low and slow’, taking until 2029 before New Zealand’s per capita output matched the same level as at the start of the decline in 2022.
BNZ’s comparisons to previous economic recoveries have this one sitting slightly ahead of the GFC recession in its recovery rate, but well below the early 2001 recession’s recovery rate.
Jones’ expectations match those of independent economist Cameron Bagrie who, in late October, described the country as likely to experience ‘grumpy growth’ with a long crawl to recovery anticipated.
However, Bagrie also maintained New Zealand has a ‘lottery ticket’ for strong future growth if it can sort out issues around productivity, education and infrastructure.
He pointed to New Zealand’s wealth of natural resources, particularly water, as a key asset in a world becoming increasingly challenged by the likes of climate change impacts on food production.
“We have a lottery ticket, but we will need to cash it in,” Bagrie concluded.
Doing so includes improving education among the next generation and improving lending opportunities for small to medium businesses to expand as well as a re-evaluation of how New Zealand assesses risks and opportunities to enable greater
expansion.
BNZ’s Mike Jones said Bay of Plenty continues to benefit from gains in population, particularly in the Western BOP district with international migration above the national average. It was also experiencing strong gains from internal migration as people move out of higher priced cities to live here. The Bay of Plenty can claim to be one of the top six regions for population growth to June this year.
The region is also expected to benefit from sectoral growth in dairy and horticulture over coming months. Fonterra’s recent payout announcements have dairy doing the heavy lifting for regional growth offerings and Bay of Plenty Central Plateau comprises about 10% of the national herd. Fonterra’s gains in payout over last year will inject an additional $3 billion into the New Zealand economy.
“And prospects look pretty positive for kiwifruit this season,” Jones said.
Early indications suggest retail’s dire quarter-on-quarter slide in sales has stabilised with some discretionary spending starting to creep back into consumer behaviour. Tauranga Chamber of Commerce’s CEO, Matt Cowley, said Jones’ hard data supports the anecdotal news he is hearing within the Bay’s business community.
“There are still plenty of businesses on ‘struggle street’, but we are seeing businesses getting more enquiry, if not [yet] purchases, from potential customers,” Cowley advised.
“Those clouds on the horizon are definitely clearing and everyone is looking forward to getting rid of 2024 and on with the New Year,” he added.
