David Hargreaves sums up the first (nearly) six months of the year and assesses how the unfolding of various economic events has matched up against what was expected to happen

Well, first things first. Let us start by getting over the shock that 2023 is nearly halfway through already.

So, as we are now mid-year, let's ask: How has it been so far?

Predictable is the word that comes to my mind - although maybe that sounds more than a little misleading. 'Predictable' in this instance doesn't mean good. It just means that economic developments have followed a path that was pretty-much predictable.

This year didn't look like being a good one and now half-way through we are getting the confirmation. It's not a good one.

But as to predictability, when at the end of 2022 I did my two-part preview of the year (first part here; second part here) and tried to identify likely key issues for the coming year, I name-checked the following things: the labour market, inflation, the Reserve Bank and the Official Cash Rate, recession (real or imagined), the election, migration, and the housing market (well it wouldn't be NZ if we didn't mention that).

Those subjects have all turned out to be central to the economic picture in the first six months of the year and will likely continue to be so for the rest of the year.

But there's always a wild card, isn't there?

An upside down world

Sometimes this can be an out-of-left-field global event that tips everything upside down. The emergence of the pandemic in 2020 would represent one of the worst such occurrences. Last year Putin's invasion of Ukraine tilted the global situation.

This year we've had our own domestic drama with the two big weather events in January and February. These have provided a hit to the economy that helped to propel us into a 'technical recession'. Let's be clear, our economy was heading down anyway, the weather gods just gave it a bit of a kick on the way down.

So, anyway, let's have a bit of a quick look at where we stand with some of the key economic issues.

Well 'technically' we are in recession. The March quarter GDP figures showed our economy shrank by the merest fraction, 0.1%, in the quarter, following a (downwardly revised) -0.7% figure for the December 2022 quarter.

So, we only JUST made the technical description of a recession - this being two consecutive quarters in which the economy shrank. As an aside, it would be fairly interesting if there's any revisions to the March quarter figures done by Stats NZ once the June quarter figures are released in September. (Entirely possible.) If for example that March quarter figure upon revision is just given the merest tweak up - to 0.0% then as I write this we are NOT actually in recession! 

Such are the fine margins. And it all goes to show that we really should not get hung up on the 'R' word, which is just a label that in itself is fairly meaningless. But it does carry significant impact with people. What really matters though is not a label, but the extent of any slowdown in the economy. There's a world of difference between an economy shrinking 0.1% and say 3.0% in a quarter.

The concern might be though that the high levels of inbound migration we've seen in the early part of the year are in some part camouflaging how poorly the economy is going.

By Stats NZ estimates we've had a net migration increase in the 12 months to April of over 72,000 people. Such a big population boost has an impact on economic output - IE it boosts it. So, we've gone into recession despite such a boost. What this all means is our GDP on a per capita basis ain't looking flash at all.

Per capita GDP is not looking flash

ASB economists say on a per capita basis, GDP was down 1.1% in the December quarter and 0.7% in the March quarter. On the basis of disposable income per capita, they say we are looking at declines of 2.2% and 0.9% over the last two quarters. "Given it is ultimately the standard of living of each New Zealander that matters, these are key figures to keep an eye on," ASB economist Nat Keall says.

I thought we would dodge (just) a technical recession in the first half of this year. And we haven't. I expected we would get there in the second half of the year. So, we are ahead of ourselves and not in a good way. 

All this while the labour market has remained hotter than a hot thing. As of the March quarter our unemployment rate was just off its record lows at 3.4%. I've said before that at the moment the labour market figures are THE key ones to watch, for a number of reasons. It is most unusual to say the least to have an economic slowdown occurring and yet retaining virtually full employment. 

Full employment means that people can cope better with inflation, they can keep spending, they can meet the higher interest rate bills and so they can stay put in their houses.

When New Zealand was in a deep recession in 1991 our unemployment rate hit nearly 11% - and that just exacerbated the process of the economy grinding to a halt as people stopped spending.

The Reserve Bank is never going to admit to wanting to see people losing jobs, but in reality it DOES want to see 'slack' in the workforce simply to help take heat out of the economy, as it battles to get inflation under control.

Before the end of last year the RBNZ had forecast that in the March quarter unemployment would rise to 3.6%, so, the slowdown in the labour market is taking longer to arrive than the RBNZ had been earlier thinking/hoping. The RBNZ will want to see the labour market 'turn'. It is forecasting an unemployment rate of 4.6% by the end of this year.

That inflation beastie

So now we come to inflation, the villain of the piece, that thing the RBNZ is meant to keep on a tight leash of between 1% and 3%. It's been running amok. Inflation peaked at 7.3% in the June quarter 2022 and has proven sticky, falling just slightly to 7.2% in the September quarter and remaining at 7.2% in the December quarter. This year? The RBNZ had as of earlier this year been picking inflation to actually rise again to 7.3% in the March quarter. In reality it came in at 6.7% - some sign perhaps, at last, that the efforts to drive it down are starting to gain traction.

But those efforts on the part of the RBNZ have been to say the least strenuous. Continuing on with its 'hiking cycle' that began in October 2021 when the Official Cash Rate (OCR) was at just 0.25%, the RBNZ has so far this year added a further 125 basis-points to the OCR, taking it to 5.5% - the highest level since 2008.

The RBNZ indicated last month that it now doesn't see the OCR rising further as it is forecasting 5.5% to be the peak. That's just a forecast of course. And it can change its mind at any time. But for now it means mortgage interest rates are likely at or near peaks.

The rises in mortgage rates we've seen though have certainly had an impact. New mortgage figures are well down, with the first four months of this year seeing the slowest growth in mortgage stock since the aftermath of the Global Financial Crisis. 

House prices, which fell right through last year, have continued to do so but economists reckon the end of the falls may be nigh. REINZ's National House Price Index (HPI) was, as of May, down 18% from its November 2021 peak. So far this year the HPI has dropped nearly 3.5%.

Putting this into some perspective, however, the falls we've had have only taken the HPI back to levels it was last at at the start of 2021.

And if we compare the HPI level as of May 2023 with January 2020 just prior to the start of the pandemic house market frenzy it's actually now some 20% HIGHER than it was then, even after the falls since November 2021.

Elevated housing

So, if house prices really do start to level off and then even rise again from here, well, the housing market is actually starting the next 'cycle' from a still very elevated position. 

In the meantime, in the background, we've got the election looming.

I could say much more. But summing up the first half of the year, I would say it has been pretty much as expected for the economy, though if anything possibly slightly worse than I might have thought. The early onset of a 'recession' - just the very word - could be a quite significant psychological blow to a Kiwi public that I think's been showing a lot of resilience. But it's getting colder out there. And I don't just mean the approaching mid-winter weather.

For me the 'meat' of this year is going to be in the second half. That's when we will get the answers to a lot of the questions that have formed in the first half.

So, I shall be back for more, detailing what I think are the key things to look out for over the next six months. And there's a lot. Look out for that in a few days.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.