Boxing on into 2022: A Financial Markets Perspective.

Also published on the NZ Herald 13 Jan 2022.

For a nation that prides itself on punching above its weight in all we do, 2021 has seen us bobbing and weaving against the ropes somewhat, as we’ve fought the economic impact of an enduring COVID pandemic. We may have been down in some places, but we’re certainly not out.

The blows we’ve taken have been felt keenly by the bond and equity markets, which after years of delivering strong returns to New Zealand investors have this year underperformed their global counterparts. However, while the NZX has waned, private equity has waxed with many companies, particularly in the tech sector, attracting global interest.

Our export sector continues to underpin our recovery – not least through our dairy industry which, despite its many criticisms, has this year poured billions of dollars into New Zealand’s economy to help make up for the lost output from international tourism, education and hospitality. Add in our still buoyant commercial and residential property markets, and from a macro level we can see that total economic activity has held up well. The question on all of our lips though, is will this continue?

Red flags near and far 
Well to look forward, we still need to look back. In the past New Zealand has been able to rely on a growing population to add momentum to our economic growth rates. But with immigration having been stalled by the pandemic, and the increasing likelihood of more Kiwis looking offshore for opportunities or feeling less inclined to return home, at least in the short term, we look set to remain handicapped by a countrywide skills shortage. Without this growth potential, I believe we’ll see the OCR peaking earlier than the Reserve Bank and financial markets are currently pricing.

There are also global threats to New Zealand’s economic wellbeing that have been signalled this year. America is starting to tighten its monetary policy – a move that will likely slow the world’s largest economy and the largest buyer of consumer goods. China’s growth rate is also likely to slow, which has implications for our export sector and therefore our overall prosperity. Given that it’s our top export destination, China’s aging and falling rate remains a longer-term concern.

Life gets in the way
So called ‘black swan’ events that impact on global economies, like the COVID pandemic, are unpredictable but also increasingly less unexpected. Natural disasters that are still termed ‘one-in-a-hundred-year’ phenomena seem to now occur with far greater frequency than their nomenclature suggests; while developments as varied as Brexit, armed conflict, the GFC and nuclear meltdowns continue to offer regular reminders that we don’t need to rely on Mother Nature to put ourselves on the back foot. We also can’t ignore the impact of the possible emergence of further COVID variants.

With the first economic policy response from Central Banks to such events being to cut interest rates, my point here is that life has this uncanny knack of simply getting in the way. So while the RBNZ is forecasting raising the cash rate by 2.6% by the end of 2023, it may not get the chance to push it this high if, indeed, life gets in the way again.

Housing
We all know of the negative impact rising mortgage rates have on the housing market. But this is by no means the only headwind the sector now faces – particularly in our biggest centre. In the year to June 2021, Auckland’s population actually fell for the first time on record, as immigration was strangled by the pandemic and an increasing number of Aucklanders reacted to it by heading for the provinces. Another example of life getting in the way.

The corollary of this is that 2022 will likely see more developers put their plans on hold as demand for new builds decline. I expect the pace of house price growth to reduce and then plateau, which will take some of the heat out of both the sales and construction sectors.

More than just a numbers game
Supporting the country’s wellbeing through economic growth isn’t all just about numbers. Growing the feeling of inclusiveness; providing a good education for our children; letting families grow up in healthy homes in safe neighbourhoods; having a well-resourced health sector; providing the elderly and needy with dignity and support; and even supporting the business community in times of crisis are all things we can and should strive to achieve.

These things take money. Some of them, a lot of money. That’s why having economic settings that support healthy business and export sectors and encourage an environment that provides jobs and income for all New Zealanders matters.

Creating the right economic settings for our emerging tech and innovation sectors to thrive is central to our future well-being. The economic and employment impact of the NZ tech sector over the last decade has been huge. Rocket Lab, Xero, Weta Digital, Zuru … these are all home grown businesses attracting huge global investor attention while providing Kiwis with highly paid work and the opportunity to further develop and enhance their talents.

Alongside our tech sector, let’s not forget that there is also the upside potential of the down-trodden hospitality, tourism and education sectors coming back to life as 2022 progresses. If this bounce back is to occur, it will add significantly to the strong performance of the export sector that has helped sustain New Zealand income levels over the dark days of the pandemic lockdowns.

But let’s end with some numbers nonetheless
With the caveat that if the last two years have shown us anything, it’s surely the folly of making predictions, I’ll stick out my neck sufficiently to say that inflation, the OCR and long-term bond yields will all peak in 2022. Long term bond yields are likely to peak before the OCR tightening cycle is complete, and I’m picking that the CPI will likely reach its highest point by mid-year. Pending no further extended lockdowns from other COVID variants, I’d expect the Delta rebound to have lost its momentum by September, at a time when house prices are stalling and migrant numbers remain low. Collectively these influences will reduce the pressure for interest rates to rise further.