Economic recovery: Is this time different?

photo: Royal Bank of New Zealand

Now The official cash rate has been cutWith further tax cuts expected next year, most forecasters expect a gradual recovery.

But economists at the country’s largest bank say things could be different this time.

ANZ economists said there was “significant uncertainty” about how the economy would respond to rate cuts because The country experienced an economic recession It was carefully planned by the Reserve Bank.

“Normally the OCR would fall in response to some sort of negative national income and confidence shock, but that has not been the case in this deliberate recession. How many events have been postponed rather than cancelled?”

Senior economist Miles Workman said each easing cycle is different from the last.

“If you think back to past recessions, like the Asian financial crisis or the global financial crisis — these were what economists call external shocks, which came out of the blue and no one expected them … monetary policy simply responded to them.

“Both of those shocks affected the supply of credit. There were liquidity problems in credit markets, there were confidence problems, and if you compare and contrast those shocks with what we’re going through now, there was no credit supply shock, there was no financial market shock – it was restrictive policies that caused households to tighten their belts.”

He said this suggested the central bank might need to be more cautious when it comes to cutting rates.

“If you think about all the other factors driving the economy, there isn’t that much of an external shock affecting the economy right now.”

ANZ Bank said there were risks associated with this activity. Especially the real estate market – and the speed with which it rebounds may surprise everyone.

“We don’t know how many potential buyers are just sitting on the sidelines, waiting for mortgage rates to come down a little bit and trying to buy in on the dip,” Workman said.

As conditions improve, the housing market is expected to start rebounding.
photo: RNZ/Marika Habbazi

He said the evolution of the policy-induced recession and recovery is uncharted territory for everyone and there is a lot of uncertainty.

He said easing policy was not necessarily the wrong approach but the central bank needed to be cautious.

Kiwibank economist Sabrina Delgado said there were reasons to be concerned house prices could rise faster than expected, given structural issues in the housing market.

“Supply is still too low. So there’s definitely more risk of price increases there. But we now have DTIs (debt-to-income ratios) and they can help with that.”

But she said the confidence shock to the economy was real, even if it was artificial.

Gareth Kiernan, chief forecaster at Infometrics, said the “deliberate” and human-made nature of this recession contrasted with the previous overstimulated boom.

“In other words, I think the recovery and subsequent recession are the unusual part, not the recession and future recovery.”

He said the question about how many events had been postponed was misguided.

“I argue that the current gap in economic activity is because economic activity occurred two years ago and was effectively borrowed from the future due to very low interest rates and stimulative fiscal policy. This view essentially means that there is no ‘missing’ activity now and that it may be made up in future quarters as interest rates become more favorable.

“Specifically for the property market, I still believe that interest rates need to fall significantly before property becomes an affordable or attractive purchase option for owner-occupiers or investors. In other words, affordability remains a major constraint.

“Any further deterioration in the labour market over the next nine months will also be a key factor in discouraging people from taking on debt and deterring buyers from entering the market.”