Hanging on - many of us are just hoping to 'survive till '25'.
Hanging on - many of us are just hoping to 'survive till '25'.
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.
OPINION
Survive till ‘25 ... that seems to be the mantra as businesses hunker down for what could bethe toughest winter the economy has been through for more than a decade.
As mantras go it’s not a bad one, a catchphrase for recession in 2024. For starters, it rhymes. I heard it from the CEO of a large company the other day, although I imagine the notion of clinging on through the storm of high interest rates is more relevant for many small businesses and homeowners.
Survive till ‘25, next year it will all come right! Er, yeah right (as the beer commercial goes).
It does suggest that the big economic narrative, the monetary policy rebalancing we’re going through, is well understood now. People get it. This is a recession that the Reserve Bank (RBNZ) has engineered. Interest rates had to rise to beat inflation, which was killing us slowly anyway.
At some point, they’ll start to fall again and the economy can breathe again - we hope.
Survive till ‘25 is a global meme that appears to have come out of the United States. New Zealand doesn’t have a monopoly on a grim year of correction in 2024.
The whole world is obsessively waiting for interest rates to fall.
I’m late to the Survive till ‘25 party. I’ve noticed the push-back is already well advanced. There’s no shortage of earnest articles on sites like LinkedIn warning that a survivalist mentality can be a trap for business.
“Don’t ignore ‘24″, they say. “Do more in ‘24″. Yawn.
That stuff seems pretty trite to me. It’s business jargon. We should always be alert for opportunities. We all need to enjoy the moment. Life is short.
Survival is a more primal response to adversity. It’s about stark choices. The reality for many businesses and households right now is that they have no choice but to make managing cash flow, costs and debt their key priorities.
The numbers no longer add up.
So we all watch, worry and wait (as RBNZ governor Adrian Orr puts it) and we argue in circles about when the first rate cut will come.
For the record, the spread of economic forecasts as of this week runs from November to May. Markets are a bit more enthusiastic than the economists, with some investors betting on a cut as early as August. As time marches on the odds will narrow and the start point will become clearer to see.
Isn’t it more relevant to ask how far rates will fall in 2025? Is it realistic to expect 2025 to deliver enough rate relief for the economy to bounce back and for those numbers to make sense again?
There’s no shortage of warnings about what a new normal might look like. The post-GFC era - that decade or so before Covid hit - was a time of unusually low interest rates.
It would be foolhardy to assume we’ll see the official cash rate (OCR) back below 3 per cent again. We’d only see that if something had gone horribly wrong with global markets. Or perhaps if New Zealand was facing another unique local crisis, most likely a natural disaster.
What’s reasonable to expect then?
Let’s start with an optimistic take.
International consultancy Capital Economics has been consistently more dovish in its commentary than local economists.
It continued with that tone in its monetary policy statement preview last week. Like everyone else, it doesn’t expect the OCR will move next week, or even that the RBNZ will soften its stance (no rate cuts until at least May).
Reserve Bank governor Adrian Orr says the RBNZ is in "watch, wait and worry" mode. Photo / Mark Mitchell
“That said, once the bank does start cutting rates, it will do so more decisively than many are predicting,” writes Capital Economics’ Australia and New Zealand economist Abhijit Surya.
“We expect the bank to slash rates by 200 basis points by end-2025, above the 150 basis points worth of cuts that the analyst consensus is projecting and the 100bp worth of cuts investors are pricing in.”
In other words, Capital Economics is picking an official cash rate of 3.5 per cent by the end of 2025, a much more comfy spot for anyone with debt to pay.
“The main reason we expect the RBNZ to take a bold approach to policy loosening is that there will be a pronounced risk of inflation undershooting the bank’s target over the medium term if rates are kept too high for too long,” Surya wrote.
Before I get too excited about my mortgage rate falling I’d better add another perspective.
ANZ’s local economists are picking the RBNZ will need to stick to its script and we won’t see the first rate cut until May. They are also more downbeat than Capital Economics about where the rate track goes from there.
They expect we’ll see OCR stuck at 4 per cent well out into 2026. That’s as far as their current forecast goes.
That gels with other hawkish commentaries around warning of a “new normal” where we all have to get used to higher rates than we’ve become accustomed to.
I’m not too downbeat about that.
The first cut (as Cat Stevens said) is the deepest. It’s the grim sentiment in 2024 that needs breaking. As a signal the first cut, when it finally comes, will send an outsized signal to the economy.
Time to draw a line, time to wake up and get busy. Time to come alive in ‘25.
If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz ... or leave a message in the comments section. He’ll try to answer in Inside Economics, a new column published every Wednesday.
