New Zealand and “one of the biggest shocks in modern history”

by Ksenia Stepanova03 Dec 2020

The New Zealand economy has shown “surprising resilience” in the COVID-19 crisis according to ASB chief economist Nick Tuffley, who forecasts finishing 2020 with figures only 3% smaller than 2019 – half the decline that was originally expected in March.

Tuffley also says that the housing market is keeping customer spending afloat, and that interest rates don’t need to get any lower to encourage more spending. However, he says business borrowing has remained low, and that low business confidence and uncertainty is primarily to blame.

“2020 is a year that many people will be quite keen to put behind them,” Tuffley commented.

“It has been tumultuous and testing, yet also shown the surprising resilience of the New Zealand economy in the face of one of the biggest shocks in modern history.”

Read more: Orr says RBNZ “cannot address housing challenge alone”

“Locally, the debate has quickly turned to the strength of the housing market, which is helping to tow consumer spending along, and whether or not interest rates will or should go lower,” he explained.

“Households don’t need even lower interest rates to encourage them to spend more money and buy houses at present – they have jumped the starter’s gun on that one.

“In contrast, business borrowing appetites are weak at present and businesses have stockpiled deposits in banks. Getting businesses to the point at which they have the confidence to act is what will make the difference here.”

Tuffley again confirmed that ASB no longer sees a negative Official Cash Rate (OCR) on the horizon, given the strong response from households to the ongoing low interest rates. He says the Reserve Bank’s Funding for Lending Programme (FLP) will also help keep bank funding costs down – though he says the government is still ‘digesting’ concerns around an overheating housing market.

“The silver lining is, it’s better to see the economy responding to low interest rates than not,” he concluded. “That would be a much bigger problem to cope with.”

Read more: Is a negative OCR still on the table? Economist predicts new endpoint

Economist Cameron Bagrie said that despite an optimistic outlook, we need to accept that there are still significant challenges ahead – particularly when it comes to business sector lending.

“We need to acknowledge the challenges,” Bagrie said.

“The GDP is still well below what it was in 2019. The price of credit isn’t an issue, but the willingness of banks to lend is – particularly into what we call the ‘productive’ part of the economy, the business sector being a key part of that.

“It’s a lot easier to get a housing loan across New Zealand, which may be good for housing, but I’m not sure it’s good for a productive balance.”

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