Whatever the science might say about
cause and effect, it is always my fault.
On telly, they call it the commentator’s curse.
A promising innings is only ever one ball away from the end. A middle-order fightback is only ever a couple of quick wickets away from falling apart.
So too with an economic recovery, as we found out with the false start earlier this year.
There are always issues that could trip up our recovery.
The United States and Chinese Presidents seem to have tucked away the threat of trade war escalation for at least a year.
But there’s enough air in Wall Street’s AI-powered boom to visualise impending doom.
There are credit market cracks in some parts of the US economy which bear comparison to the early days of the Global Financial Crisis.
New Zealand could have another natural disaster.
Still, it seems reasonable to start looking at how the recovery is likely to unfold.
Westpac’s economic team produced an outlook report last week that offered a useful take on where the current data is pointing.
Westpac sees GDP bouncing back in the current (fourth) quarter to 0.8%. That’s after scraping into positive territory (0.4%) in the third quarter – narrowly avoiding recession.
That would give New Zealand average annual GDP growth of just 0.3% in 2025.
Westpac predicts average annual growth of 2.6% in 2026 and 3.4% in 2027.
Unemployment is expected to peak at 5.4% this quarter.
We’ll most likely see it rise to 5.3% for the third quarter when that data is released on Wednesday.
Westpac sees it staying stuck at 5.4% for the first quarter of next year before easing through the middle of the year and averaging 4.9% for 2026.
There have been fears in the past few months that the prolonged nature of the downturn would force struggling firms to begin another wave of job cutting, pushing the rate higher.
But hopefully the Reserve Bank’s 50 basis point rate adjustment has headed that off.
ANZ’s Business Outlook survey for October – out last week – showed confidence has improved.
Overall confidence in the economic outlook is back at the highest it has been since February.
“Green shoots are emerging, particularly for interest-rate-sensitive sectors such as retail and construction,” ANZ chief economist Sharon Zollner said.
The phrase “green shoots” is a loaded one in economics. It was first used in the early 90s but popularised after the Global Financial Crisis in 2009.
Green shoots are starting to emerge.
I don’t think Zollner would use the term lightly.
Another turning point, as we move into recovery mode, is that we can now start to look back and recognise some of the upsides of the downturn – so to speak.
The economy has been through a painful period of contraction, low growth and low confidence.
But it has also been through a much-needed rebalancing.
Zollner offered a good summary of this with her analysis of the Business Outlook survey.
“It shouldn’t be forgotten that the slowdown in recent years, while painful, has achieved a lot in terms of clearing the decks for the next upswing,” she said.
Real house prices had unwound their bubble, household and business debt was now lower than pre-Covid as a share of GDP, she said.
Inflation had been beaten down, and external balance with the rest of the world has been restored as imports had reduced and exports grown.
Our current account deficit blew out to a worrying 8.8% of GDP in early 2023 as Kiwis spent much more than we earned.
That’s now back at a much more manageable 3.7% of GDP.
Inflation still feels bad to many because it has stayed elevated for essentials like food and power.
But Westpac projects it will fall back to an annual rate of 2.3% next year, having averaged 2.9% this year.
It’s worth noting that in some areas, things are already a lot cheaper.
Latest stats show the cost of building a new house is rising at the lowest rate since 2009. Rental prices are also falling.
I’d add a couple of other things to that rebalancing list.
The rising unemployment rate is clearly bad – especially if you’ve lost your job.
Job insecurity has also weighed on consumer confidence and retail spending.
But the extent to which it has forced young people to stay in school or go back to further training may have a productivity pay-off in the longer term.
I don’t want to underplay the damage that unemployment can do to people’s lives.
That’s definitely a silver lining to a very dark cloud.
Likewise, the rising number of business failures and liquidations has a terrible impact on the lives of those involved.
But fans of the Austrian economist Joseph Schumpeter will know that this can produce a positive side-effect with regard to longer-term productivity.
His theory of creative destruction suggests that it will be the least efficient businesses which fail first. Those that survive are forced to become more efficient.
It is sometimes described using a forest fire analogy. A forest fire can be devastating for the plants and animals subjected to it, but in the larger ecological scheme of things, it can play a vital role in a cycle of regeneration that ensures fertile soil and healthy new growth.
It is a brutal way of looking at economic cycles – and does seem to relegate the human cost.
But that downturn has forced the economy to sweat, and as it moves into a more expansionary phase, it should be leaner and meaner for the experience.
The notion of creative destruction falls down if the devastation runs too deep and for too long.
Critics of the theory point out that eventually downturns do structural damage to an economy. They can leave multi-generational scars.
I think we’ve skirted close to that kind of more structurally damaging recession.
The second-quarter slump this year gave policymakers – in Parliament and at the Reserve Bank – a fright. It rocked confidence nationwide.
But I’m increasingly optimistic that we will avoid long-term damage, thanks in no small part to the luck we’ve had with export prices. That, and a central bank that has, perhaps belatedly, put the right monetary policy settings into place.
– Correction: An earlier version of this column said the cost of building a new house was now the lowest it had been since 2009. In fact, the stats showed that the costs of building a new house rising at the lowest rate since 2009.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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