Economic recovery: Is this time different?

Now that the official cash rate has been cut, with expectations of further reductions through next year, most forecasters are predicting a gradual economic recovery.

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

ANZ’s economists said there was “significant uncertainty” about how the economy would respond to lower interest rates, because the recession the country had been through was deliberately engineered by the Reserve Bank.

“Typically, the OCR is lowered in response to some kind of negative national income and confidence shock, but that’s not the case in this deliberate recession. How much activity has been deferred rather than cancelled?”

Senior economist Miles Workman said every easing cycle was not the same as the last.

“If you think about past downturns, take for example the Asian financial crisis or the global financial crisis – they were what economists call exogenous shocks, out-of-the-blue, not something anyone was expecting… which monetary policy was responding to.

“In both of those shocks, they affected credit availability. Credit markets faced liquidity issues, there were confidence concerns, if you compare and contrast those shocks to what we’re going through right now, there’s no credit availability shock, there’s no financial market shock – it’s restrictive policy settings causing households to tighten their belts.”

He said that suggested when the Reserve Bank cut rates, it might need to do so more cautiously.

“If you think about all the other drivers of economic momentum, there isn’t that big external shock also weighing on things right now.”

ANZ said there was a risk that activity – and the housing market in particular – could surprise everyone with the speed with which it bounced back.

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

The evolution of a policy-induced recession and recovery was uncharted territory for everyone and that uncertainty was significant, he said.

Easing was not necessarily the wrong thing to do, he said, but the Reserve Bank would need to be cautious..

Kiwibank economist Sabrina Delgado said there were valid concerns that house prices could pick up more quickly than expected, given the structural problems in that market.

“Supply is still too low. So, there’s definitely a greater risk that we see a surge in prices there. However, we now have DTIs [debt-to-income ratios] in place and they’re there exactly to help with this.”

But she said the confidence shock that the economy had suffered was a real one, even if it had been engineered.

Gareth Kiernan, chief forecaster at Infometrics, said the counterpoint to the “deliberate” and engineered nature of the recession was the overstimulated boom in the economy before it.

“In other words, I see the upturn and following downturn as the unusual parts, rather than the downturn and future upturn.”

He said the question of how much activity was deferred was the wrong way around.

“I see the current hole in economic activity occurring because that activity already occurred two years prior, having effectively been borrowed from the future due to extremely low interest rates and stimulatory fiscal policy. That view essentially implies that there is no ‘missing’ activity now that might be caught up in coming quarters as interest rates become more favourable.

“Specifically regarding the housing market, my view remains that interest rates would need to drop substantially before property becomes an affordable or attractive purchase for either owner-occupiers or investors. In other words, affordability remains a major constraint.

“Further worsening in the labour market over the next nine months will also be a key factor discouraging people from taking on debt and keeping buyers out of the market.”