Now we’re going backwards at pace. But we’re still a long way off the kind of dire third-world status some of the more extreme political commentators like to imply.
We are still a lot wealthier than we were prior to the pandemic ... or prior to the arrival of the Labour Government in 2017.
The catch is that most of the new wealth created since 2020 isn’t real.
It was not the kind of wealth that comes from making and doing more and selling it to the world and not the kind that comes from doing things more efficiently and reducing costs.
It was the wealth that comes from borrowing.
The Government borrowed billions, the Reserve Bank slashed interest rates and we borrowed billions more.
With our wealth tied largely to the fortunes of our housing market and (to a lesser extent) our KiwiSaver funds and retirement savings, it’s not surprising we’re going backwards now.
The really bad news is that our wealth remains artificially inflated and almost certainly has further to fall.
We should be braced for this.
We’ve been talking about this downturn for more than a year now - in fact, we’ve been willing it on as we wrestle with high inflation.
If you read the economic forecasts, the timing and the expectations around the severity of the downturn haven’t really changed a lot.
But talking about a downturn and being in one are quite different things.
Sadly, I think many New Zealanders aren’t prepared for it.
We haven’t been through this kind of protracted economic downturn for almost 15 years.
Reserve Bank Governor Adrian Orr and Finance Minister Grant Robertson. When the pandemic hit, the Government borrowed billions, the Reserve Bank slashed interest rates and we borrowed billions more. Photo / Mark Mitchell
The recession in 2020 was entirely due to the pandemic lockdown and we used stimulus to defer the economic pain until the threat of Covid-19 had subsided.
Even the recession in the December and March quarters was marginal. On aggregate, on a macroeconomic level, what has happened across the past six months is that growth has flatlined.
Last week I made the point that the country was probably no longer in a technical recession.
That upset some people who believe we are already deep in a painful economic contraction.
For some parts of the economy, this is true. I don’t want to underplay the fact that there are many businesses at the front end of this economic downturn.
But the economy - as the wealth statistics show - still has a lot of money sloshing around in it.
The point of last week’s column was that the worst of this economic cycle is still to come. It wasn’t an upbeat column.
So I’m labouring the point this week.
We are still at the starting line for the real economic downturn. Around half of mortgage holders are still to re-fix on high-interest rates.
Reading some of the media case studies around rising mortgage rates you’d think the OCR hikes of the past 18 months had been top secret.
It is a year since I made a rare specific prediction in this column about where mortgage rates were going.
Using a lazy and unscientific formula of taking the consensus OCR forecasts and assuming inflation would be a bit worse than expected, I came up with 7 per cent.
And here we are.
I’d have been bang on if the banks hadn’t decided to sneak in one last profit-grabbing hike last week.
If you have equity in your home you can still re-fix for two years at just under 7 per cent. If you are a new homeowner with no equity you are looking at just over 7 per cent.
The full pain has yet to transmit through the consumer and retail end of the economy.
As ANZ’s Sharon Zollner said last week: “We expect the “real recession [i.e. one that reflects the aggregation of individuals’ more cautious decision-making, and rising unemployment] to occur in the second half of the year.”
The long forecast rise in unemployment from the record low 3.2 per cent to around 5 per cent, would leave us within historically moderate territory.
That means more than 100,000 people losing their jobs.
I don’t want to get too grim here.
The worst may be yet to come but, by the time it does, we should at least see some light at the end of the tunnel with interest rate cuts on the horizon.
We’ll have this winter and a bitter election behind us.
We should also keep that big net wealth household number in our minds as we go through this downturn.
New Zealand is a wealthy country and still will be when the cycle turns. House prices are already finding a floor.
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
