The biggest uncertainty now appears to be uncertainty.
Welcome to the new world order where bungee-nomics rules: you go both up and down, and markets are all over the place from night to night.
The New Zealand economy is slowly removing itself from a painful disinflationary period where growth was hit to contain inflation pressure. Disinflation requires growth to stall for price increases to slow. When consumers are not buying or building, the pricing pen needs sharpening.
With the Official Cash Rate now 225 basis points below its peak and around 75% of mortgages due to refix in the coming 12 months, the seeds of recovery are in place. Monetary policy is a powerful tool that supports interest sensitive sectors such as spending on durable goods and housing.
Housing has been slow to respond, but a decline in median days to sell is a precursor to higher prices. There is just a lot of stock to move at present.
The recovery is being accentuated by strong primary sector incomes, boosted by commodity prices and the low New Zealand dollar against the United States dollar, though the NZD/USD has risen of late.
The vibe in the rural sector is more upbeat that urban centres. That is good to see as it signals more of an earnings recovery as opposed to a spending one.
Despite government rhetoric of austerity and reigning things in, the fiscal stance is expansionary over the coming year. Investment Boost, where you can claim a 20% write-off upfront will encourage tractor and ute sales, along with supporting commercial property. Government stimulus is front-loaded and savings backloaded. Next year is an election year. I doubt it will be a scrooge Budget.
An economic recovery is baked in. We’ve seen it within the (lagging) gross domestic product numbers (we only have data up until December 2024), the timelier high frequency data, or the soft (leading) indicators such as what firms’ views are on activity over the coming months.
My eyes are on five areas
The first is the global scene. It’s high-stakes poker. The US has a strong hand, as the US consumer is the world’s biggest and countries want to sell to them. I’m not sure their President is the best poker player though. Russia has the weakest hand but is arguably the best poker player. China will just keep you at the table for as long as they can.
We know protectionism is bad for global growth and means more inflation, which is a nasty combination. However, national security is now aligned with economic security. Protectionism favours big countries over small ones.
The big picture is simple. Geostrategic and geopolitical imperatives now usurp economic imperatives. National security is important. New Zealand plans to take defence spending from 1.2 to 2% of gross domestic product. That carries a $30 billion cumulative price tag over the next decade.
The second is our productivity performance. The New Zealand economy is going to hit capacity bottlenecks early in the upswing phase if we do not turn up the dial on productivity.
A hat-tip to the recent announcement putting road cones under the spotlight. We’re seeing policies to address failings in education. However, improving outcomes are not an overnight fix.
Lifting productivity needs to be a national priority and we cannot just look at government policy settings. The private sector needs to step up, use technology better, and take and manage risk.
The third is inflation. We’re seeing a lot of inflation in non-economically sensitive parts of the economy. This includes local authority rates, electricity and gas bills, medical insurance and additional port charges on trucks. Brace for government charges to rise, much more than inflation.
At the same time wage growth is slowing, a reflection of a tough labour market. Household disposable income is rising due to lower mortgage costs but is being siphoned by price rises in other areas.
The fourth is the US Treasury market, the most liquid bond market around the globe that defines the global cost of capital. Central banks have been cutting rates which has provided interest rate relief, but longer-term interest rates are higher than they were when central banks started lowering rates.
Uncertainty, inflation and concerns over government debt mean investors are demanding additional compensation for risk. Eyes on private credit.
The fifth is all the structural shifts, including demographics, the geopolitical world, sustainability, the political environment, particularly when it comes to technology and artificial intelligence. It’s like the evolution of the motor car, train or industrialisation, but on steroids. One plus one now equals eleven.
The bottom line
Uncertainty can bring both nervousness, which we’re seeing, and excitement. When structural change is required, and we need lots of it, maybe we just need to just accept that the status quo we’ve been used to for the past 30 years is not fit for purpose for the next thirty. Get less excited about economic prospects for the next year and more excited about what we want to see for the next thirty.