New Zealand is in recession, so why are so many in the finance industry so confident about the future?
Fergus McDonald of Nikko Asset Management explains...
2020 was a year of fear, anxiety, uncertainty and global economic defibrillation. Yet for investors it was also one of growth, prosperity and increasing confidence. New Zealand should still be in a slump by any rational prognosis, but we experienced a far shallower one than many expected. The economy had been forecast to contract by 5.5% in 2020 and only recover to edge past its pre-Covid size by mid to late 2022.
The latest data shows the economy has already recovered from the severe contraction in the first half of 2020. However, industries that have previously been the lynchpins of our economy, such as tourism and hospitality, will continue to require support and stimulus throughout 2021 and possibly beyond. So how can we explain the paradox of asset growth within a still-contracted economy? Is confidence merely illusionary or genuinely sustainable?
While confidence from low interest rates inspires consumer activity, as currently evidenced here in the residential property market, the major beneficiaries are actually governments’ balance books. Here in New Zealand, although our debt burden is forecast to rise from around 20% to 50% of GDP, the nation’s interest bill will soon be significantly lower, as high cost debt is replaced by low cost debt and our credit rating remains high.
It’s worth suggesting that those advocating that asset prices across all asset classes may have already run their race. If we take note of history, since the early 1940's the average US bull market in equities saw a gain of 151% over 52 months, while the average bear market would be characterised by a 32% fall over 11 months. To put this another way, bull markets go about five times further and five times longer, so we’re unlikely to have scaled any peaks just yet.
With the housing market:
The increased buying power afforded by low interest rates and constrained supply are collectively fuelling price rises. Short term interest rates are not about to rise anytime soon, so without a heavy-handed regulatory response, it’s hard to see this price trend reversing until supply more evenly matches demand. Incidentally, the dominant market influence of supply meeting demand is there for all to see even amidst the current housing boom, as house prices in Christchurch remain more stable than elsewhere in the country on the back of its large post-earthquake residential build programme.
Increasing supply has wider benefit beyond the purely economic, but as we get used to the seasonal media focus on house prices, it’s worth noting that rising prices are better for the economy than falling ones. The impact of the housing market touches numerous parts of the economy and, for many, a house is a family’s largest asset. In today’s weakened economic environment and vulnerable jobs market, it would be devastating if a family’s largest asset quickly was to become their largest liability and source of further anxiety.
As it is, generally speaking we can head into 2021 with a lightness of step and confidence that makes us the envy of many around the globe. How long this euphoria lasts and what the new drivers of growth will be in 2021 and beyond are questions still without satisfactory answers. Leveraging New Zealand’s exposure to fast growing economies such as China remains an important economic recovery strategy. Our greatest hope for emerging successfully from this period of ‘confidence slump’ is that the plentiful cash stimulates risk taking and productive investment activities throughout the economy, jumping the paradox and propelling New Zealand into its next phase of prosperity.
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