Does recession beckon for New Zealand? The factors for and against, according to an economist

Tony Alexander's reasons for driving a recession far outweigh the factors against it.
Tony Alexander's reasons for driving a recession far outweigh the factors against it. Photo credit: Image - Getty Images

An economist has laid out the factors for and against Aotearoa going into recession - and his reasons for driving a recession far outweigh the factors against it.

Tony Alexander outlined the factors that could potentially drive a recession in his latest newsletter. 

The case for a recession happening

Household expenditure accounts for about two-thirds of spending in Aotearoa's economy and he warns it doesn't look positive. 

"We have been on a spending binge during the pandemic," Alexander said.

"Consumer spending is naturally set to weaken because [of] the binge ending."

He said the cost of living isn't helping either. With high prices for necessities, Kiwis are having to divert spending to their weekly grocery shop. 

Alexander signals sectors like hospitality will take a hit as Kiwis with mortgages cut spending to ensure they can service their mortgage too.  

"That is what will happen now, and this will, particularly affect the hospitality sector." 

The falling of house prices is another contributor to Aotearoa going into recession. Alexander said central banks cut interest rates during the global financial crisis (GFC) and the pandemic to encourage spending. 

"To try and push asset prices higher in the hope that feeling wealthier would encourage some people to spend more." 

"Migration losses" 

With about one million Kiwis offshore already, Alexander believes they won't return.

"Slower population growth naturally will dampen aggregate economic growth," he said.

He added that with talks of a "brain drain", consumer and business sentiment will likely be impacted negatively. 

"Business pessimism"

Alexander doesn't anticipate business spending growth, given there's "rising pessimism about the world economy and deepening resource and pricing issues".

Growing risk of world recession 

Russia's invasion of Ukraine has thrown energy and food markets into "turmoil", which Alexander said has led to a downward revision to world growth predictions. 

"There is deepening concern about the impact on European growth of the accelerating switch away from using Russian energy sources." 

He said China's "blind adherence" to a failed COVID-19 management policy has worsened supply chain interruptions.

"There are more upward pricing pressure to come which will keep central banks nervous but potentially have a greater impact on business and consumer confidence." 

Alexander said New Zealand businesses in Aotearoa strive for a level of output they won't be able to achieve or maintain because "the ingredients they need are not there".

"Lobbying a Labour government to let more migrants in who will push rents and house prices higher simply to boost business profits is not going to work."

Export prices 

Alexander wrote prices for New Zealand's exported commodities are now falling but remain high. 

"That will work to keep primary producer profits up at a time of rapidly rising input costs, (fule, machinery, feed and labour)." 

The case for a recession not happening

Alexander said since the last time he ran his positive and negative list, the outlook has deteriorated and recession risk has increased, but said this doesn't mean a recession is guaranteed. 

So what are Alexander's growth-supporting factors? 

He said New Zealand has "essentially" had no job growth over the past six months, but added that reflects a lack of supply, not a lack of demand. 

Alexander said a return of international visitors will provide more stimulus to the economy, but it will be a slow burn and New Zealand would likely see the flow-on effect over the next three years. 

And it's not just the return of international visitors that will see a "slow burn" - a return of foreign students will see something similar. 

"The impact will mainly be noticed in Auckland. But the flow of students there may be put at risk by the city's growing reputation as a dirty, dishevelled, empty shop-ridden crime-infested cesspool."  

Strong housebuilding 

Consent numbers are at record levels and Alexander said efforts are being made to expand and accelerate infrastructure development to support construction. 

"Having said that, the greatest shocks occur in sectors and assets where growth and upside are near-universally accepted as natural, desirable, and inevitable. Such is the case for house construction."