Hopeful politicians chime in and the media narrative starts to shift – as it has in the past week or so.
We’re on our way... finally. But many struggling businesses and households will be wondering, what’s really changed?
Well, after years of uncertainty – pandemic-related weirdness and inflation on a scale the world hadn’t seen for more than 40 years – the economists’ numbers are starting to make sense.
Monetary policy is working. Inflation is coming back into the target range. We can almost taste that first interest rate cut. In fact three major banks cut their mortgage rates last week.
The end of the painful period of economic history is in sight.
We are entering “green shoots” territory. At least that’s what we used to call it.
I’m not sure what we’ll call it this time and I can’t recall what they called it when New Zealand’s longest run of economic ill fortune finally ended in the mid-1990s.
But I still remember clearly when things started to turn after the Global Financial Crisis (GFC). Back then we called the newfound economic optimism green shoots.
The words were everywhere through 2009 as politicians and central bankers sought to calm markets and bring confidence back to the system.
Green shoots took hold in the US and UK around April 2009. That’s just six or seven months after the Lehman Brothers collapse – the high point of GFC panic.
It was two years after the initial credit crunch that precipitated the whole sorry GFC meltdown.
Regardless though, that optimism was too early to reflect the economic reality of most consumers and businesses.
That was especially so in New Zealand where the country still had a grim and recessionary winter ahead. Sound familiar? It’s funny how much the weather can affect consumer sentiment.
Technically, this country emerged from recession in the third quarter of 2009 – but it didn’t much feel like it.
The Reserve Bank didn’t lift interest rates until the middle of 2010 (yes, lift! Back then we were battling deflation and higher rates were good news).
As it turned out, the Christchurch earthquakes put the local recovery party on hold that year. We weren’t dancing about like economic rock stars until 2014.
The point is that green shoots and optimism take hold early in markets because investors are always looking to the future, trying to get ahead of the curve.
It takes longer for economic growth to improve.
Will history repeat?
Well, as I keep saying (to the detriment of my career as a pundit) nobody can actually predict the future.
So I won’t pretend I know what is going to happen from here. Something surprising might happen (hopefully not another earthquake). Or, new trends like online shopping or AI might change the pattern this time.
But what I can tell you is the statistics that typically keep getting worse, after investors and economists have cheered up, are the ones that have the most devastating impact on people’s lives.
The unemployment rate, credit defaults, mortgagee sales and business liquidations will likely keep rising well into next year – even if the cost-of-living crisis is over and the economy is out of recession.
Those following the news for these numbers will notice that they are all still at historically low levels relative to the recessionary period we’ve been through.
That’s partly because they were all coming off a low base after the Covid stimulus fuelled the boom of 2021. But also partly due to monetary policy’s built-in lag.
The Reserve Bank’s own data suggests that, due to fixed rate terms, it can take as long as 27 months for the full impact of a rate rise to flow through the economy.
The full pain of the last hike in May 2023 won’t be fully transmitted until August 2025.
There is still hope that none of these horrible statistics will reach the levels they did after the GFC. The annual unemployment hit 6.6% in late 2009 and again in June 2010. It didn’t drop below 6% until 2013 (due in part to those quakes).
The current rate is still just 4.3%. We get new unemployment numbers on August 7. They’ll be up. But economists are optimistic we’ll see a final peak below 5.5%. Here’s hoping.
Let me switch back to my original metaphor.
“Only when the tide goes out do you discover who’s been swimming naked,” sharemarket legend Warren Buffett once said. I used that quote in May 2022 as it became apparent the downturn was beginning.
It has taken its time but the tide is now close to its lowest mark.
Businesses are fully exposed and many are feeling acutely under-dressed.
Mercifully hitting the low tide mark allows investors economists and politicians to start shouting “look, it’s coming in now!”
This new optimism is a relief. In fact, it is vital. It paves the way for more confidence and a return to economic growth.
But for those still stuck out in the tidal mud the wait to be lifted by a wave of economic growth must still look a long way off.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
