The US defines where we are going. In the last 5 months 125,000 people have died from Coronavirus and it’s not slowing down. This is proving a lightning rod for change. The pendulum between the US and China is to escalate. There will be a home bias with pharma being brought home. Over the past 10 – 15 years outsourcing has been a big force keeping inflation down, however this is unwinding. Some areas are finding taking lockdown up difficult, including Melbourne and Houston. The gaps between the haves and the have nots has gotten worse.
The US election result will be a tussle between Labour versus Capital. The disconnect between Main street and Wall Street is troubling. The act of the Federal Reserve buying corporate debt is over stepping the mark. Covid-19 is a supply shock that central banks can’t fix.
NZ has benefited from globalisation and borders coming down. There is a move to more security of supply chains. Singapore for example plan to become 30% self-reliant for food. Household savings rates have been dropping over the last 20 years as asset prices have been increasing.
Tourism and migration will be the drivers over the next 2 years. On a net basis (ie. tourists coming to NZ versus New Zealanders travelling abroad) it is not the biggest sector, however still a big player.
This coming summer period will be an issue for tourism businesses given the borders will be closed. Covid-19 is like containing crime in that people don’t want to play by the rules.
1/3 to ½ of NZ’s growth is via migration.
30,000 is due to natural growth.
NZ has 60,000 total migrants / year of which 40 – 50,000 are working age.
Reduced migration will hit the domestic construction industry hard after this Christmas.
Levels do matter and we are bouncing off lows. There was pent up demand in June and natural euphoria.
There are different predictions for a recovery ranging from ‘V’ to ‘U’ to ‘L’ and finally ‘W’. A ‘W’ shaped recovery for the Global and New Zealand economy is the central scenario.
New Zealand during the Global Financial crises from 2007 – 2010 had a ‘U’ shaped recovery. New Zealand’s economy will take till 2022 to reach the same level it was at at the end of 2019. Migrants have not come back although Cameron thinks this is temporary. This though is a hit to productivity growth.
NZ banks can cut deposit rates then mortgage rates. Interest rates will stay low in the short term. There are risks interest rates will rise in the future.
The United States is absorbing all the global savings pool to fund itself, as it has insufficient domestic savings. The US deficit is 150% of GDP. Markets need to wake up and think about the risk premium.
New Zealand has lots of private debt. The reserve bank needs to think about the next war chest strategy.
We need a strong economic recovery. From 2000 - 2018 spending was contained. Going forward asset sales will be required, taxes will go up and changes to NZ Super will need to happen.
New Zealand is currently a sanctuary in a Covid world and has opportunities in manufacturing and pharmaceuticals.
Unemployment in NZ will increase and house prices will go down 10% in the next 12 months. A lot of New Zealanders have not woken up to economic reality.
This event is similar to the 1987 – 1992 economic downturn.