NZ recession 10-15 percent likely within next year - experts

NZ recession 10-15 percent likely within next year - experts
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Despite falling interest rates and US/China trade uncertainties, the New Zealand economy is in pretty good shape, experts say.  

Local economists at a financial services breakfast on Tuesday pegged the risk of New Zealand going into recession in the next year at around 10 - 15 percent.

Michael Gordon, senior economist at Westpac, put a 10 percent chance on it, adding that New Zealand has gone into recession once every 10 years, on average. 

"A one in ten chance would be 'normal' and I don't think that the odds are higher than normal," he said.

"With monetary stimulus, lower interest rates, a perkier market, housing in short supply and a fair chunk of fiscal spending, the window of opportunity for a recession is probably passing."

Sharon Zollner, chief economist at ANZ, estimated the risk slightly higher at "about 15 percent".

"The income-earning backbone of the New Zealand economy is actually in pretty good shape. But nonetheless, firm sentiment, surveyed employment and investment intentions are consistent with heading into recession," Zollner said.

Referring to the sharp commodity price drop as the catalyst for the last two recessions, associated with drought, Zollner acknowledged that for commodity producers, the world economy is increasingly all about China. 

"The proportion of our goods exports going to that market has gone up more than five-fold in a decade, and for some commodities - such as logs and wool - is now about half [of our exports]," said Zollner.

"This level of exposure in a nontransparent economy indicates that China has a strong influence on demand for New Zealand exports.

"Supply side factors, including China's swine flu epidemic, are holding our commodity prices up, but it's fair to say the risks are looking a bit one-sided."

From an international perspective, despite all the noise, most of the key economies are growing at or near potential - that's according to Paul Gruenwald, global chief economist at S&P Global Ratings.

"We do have weakness in certain parts of the economies globally, centred mostly around manufacturing and trade: the different levels of stress in the major economies depends on [that] economy's dependence on [those areas]," he said.

Gruenwald also emphasised that the US economy is running at or above its potential level of activity, with a growth rate of around 2 percent and close to full employment.

From a credit perspective, China's sustainable growth rate should be around 5.5 percent and the country is growing faster than that.

"China contributes more to global growth than any other country: if global growth is 3.5 percent, 1 ¼ comes from China alone," he confirmed.

"China is not an investor or export-led economy: Chinese consumers alone are driving Chinese growth... this is driving global growth."

Europe is a mixed bag, with France and Spain enjoying fairly good levels of investment. However, Germany is a reflection of global weakness, due to the country's dependency on trade.  

"The potential growth in Europe is around 1 ¼," said Gruenwald.

US/China trade spat

The big risk at the moment is the trade spat between the US and China, and Gruenwald emphasises that it's not all about trade. 

Despite a range of issues bantered about:  bilateral investment, intellectual property protection, technology transfer, state-owned enterprises and the Chinese model itself, the upshot is that confidence and growth are affected. This results in companies and households dialling back their spending.

"Our view is that uncertainty around the US/China relationship is putting downward pressure on growth," said Gruenwald.

"The fact that we can't assign outcomes and probabilities to those outcomes means there's uncertainty rather than risk."

From a local perspective, Nick Tuffley, chief economist at ASB, said that the drawn out nature of the conflict is weighing on confidence. However, as exports are consumed in China, New Zealand is somewhat insulated from the trade war.

"From a New Zealand point of view, most of our exports to China are consumed within China, as they are mainly consumer exports rather than intermediate goods for eventual re-export to the US," Tuffley said.

"The key thing for New Zealand is how consumer spending tracks in China."  

Currently, the endgame of the two countries is unclear; but Gruenwald said that what is clear is that there is a solution. 

"China wants continued access to US and western technology, while the rest of the world wants access to the chinese market," he said.

"Everyone wants [the parties] to play by the rules."

Predictions on further OCR cuts

The economists were in agreement in predicting where New Zealand interest rates are going - they all think they'll go lower. 

Zollner said that the current forecast is for another 25 basis point cut to the Official Cash Rate (OCR) in November. That would drop it to 0.75 percent.

If proposed changes to capital requirements for local banks go ahead, yet more cuts will be forecast, said Zollner.

"Given the the one-sided local data-flow and alarming global headlines lately, the risk is skewed to more cuts than that, and/or possibly earlier. 

"If the Reserve Bank goes ahead with its bank capital plans as currently proposed, we will be putting further cuts into our forecasts due to the impacts on the cost and availability of credit,” she said.

Echoing the forecast of lower interest rates, Gordon said that uncertainty created by the US/China conflict is likely to affect global business confidence and investment decisions, which is one of the reasons growth forecasts have been lowered, both globally and for New Zealand. 

"Things will feel worse before they feel better," he said.

Gordon also said that with the Reserve Bank stimulus in-place, he expected that it may take one to two years before it flows through to housing, spending and job creation.

"The Reserve Bank is being very proactive in providing the economy with stimulus," added Tuffley.  

"The impact of the [proposed] Reserve Bank capital changes is likely to be much more than what they are calculating, and will potentially trigger further OCR cuts next year."

Although there's a slow-down in global growth and confidence - not helped by the US/China trade conflict - local economist predictions of a recession here in New Zealand indicate we certainly have some breathing space.