Not Your Usual Recession: Tony Alexander on the Post-COVID-19 Economy
OCG had the pleasure of hosting respected independent Economist Tony Alexander for his first in-person engagement since COVID-19.
Below is a breakdown of the key insights from the event to help you make sense of the economy as it stands and what we might expect to see in the coming months.
Atypical Economic ConditionsDespite the doom and gloom that has been circulating the news feeds, Alexander made it clear that this is not a standard recession and there are a number of unusual conditions that are shaping today’s economic climate. To emphasise this, he cited the following factors:
- Prior to COVID-19, the New
Zealand economy was in good shape, with an annual GDP growth of 2.3% in 2019, a
3.5% increase in retail spending and around 310,000 jobs having been created over the last five years. This is in stark contrast to the declining conditions that typically precede a recession.
- In general, the biggest issue is not that the economy is in bad shape, but the lack of business confidence, and New Zealand would likely not be in recession at this time had it not been for COVID-19.
- The banks are well capitalised, there is no pressure on the government to be prudent, and the country did not go into this recession with a lot of debt. Consequently, it is unlikely that there will be a need to increase tax rates.
- Around 5.5% of spending stems from visitors to the country, and this drying up has significantly impacted the regions.
- Export education contributes about $5.5 billion to the economy, but about 50% of these international students are instantly gone.
Positive Signs EmergingAlthough COVID-19 has obviously had a major impact on the economy, it’s not all bad news, and there are some bright spots to focus on that indicate business confidence is beginning to return. Alexander highlighted several positive signs that are already surfacing:
- New Zealanders normally spend $10 billion overseas each year, but domestic spending is booming following the return to Alert Level 1. Unlike in a normal recession, people haven’t stopped spending, instead, they’re spending more on local purchases.
- We are seeing some domestic travel, with New Zealanders taking advantage of less crowds in destinations such as Queenstown.
- There has been a surge in home renovations and sales of lifestyle blocks, as well as purchases of items such as spa pools, as people spend more time at home.
- People are not being forced to sell their homes (with 43% of NZ homes being mortgage-free) and there have been few mortgagee sales, which is very different from an average recession.
- The export market remains strong due to the positive NZ brand, and China – which makes up 30% of our exports – is recovering.
What the Future HoldsAlthough Alexander noted that no one can truly predict the trajectory of this unprecedented economy, he did paint a strong picture of what he anticipates the future might look like. Here is what he expects to see as we move through the post-COVID-19 period:
- Although wage growth and bonuses will be on hold for the time being, there are also less jobs at risk in the coming months.
- Because of the uncertainty, a lot of organisations will be restructuring though the end of 2021 and those in middle management are most at risk. This may lead to a shift towards utilising more contract workers in order to plug the gaps.
- The majority of the businesses that will fail (or have already) are not established businesses but relatively new ones, which are already in less stable positions.
- Housing prices may go down a little in 2020, but we can expect to see them rise again in 2021.
- It’s likely that NZ’s borders will remain closed at least until 2022.
- We should see an improvement in the economy by the June quarter of next year, and the NZ dollar will edge up slightly as well.
If you’d like further information off the back of this, we’d encourage you to sign up to receive Tony Alexander’s free weekly publication, Tony’s View, or contact us to discuss the insights and find out how we can support you through this time.