A remarkable recovery in highly uncertain times – with Jarrod Kerr
Kiwibank Chief Economist Jarrod Kerr loves the environment, financial markets and everything economics. A keynote speaker at our Future-Fit Aotearoa conference in September, Jarrod shares his insights on the current economic climate in Aotearoa and the global effect of COVID.
Jarrod, what will you talk about at Future-Fit this year?
I’ll look at global economic developments and how the COVID vaccine rollout has contributed to our recovery and the likelihood of travel between countries. How the world’s borders reopen is one of the big unknowns, but hopefully, we will be in a position later this year or early 2022 when we can start accepting visitors from around the world, students, and workers into New Zealand.
How important is it that we reopen our border to the world?
Our economy is currently operating at about 95% capacity, while the remaining five per cent is struggling to stay afloat. Tourist operators are trying to survive by capitalising on the domestic market but are struggling without the international dollars.
Universities are also feeling the pinch and are scaling back their operations to help them survive while small numbers of international students are allowed into the country.
Are other businesses struggling because the borders are closed?
It’s pretty mixed.
We’ve seen some businesses perform better than they were before COVID significantly changed the playing field. For example, anyone involved in real estate or construction has seen a real boost to their business fortunes over the past six months. It has come from the government’s support of infrastructure development across the country, and we’ve seen the rampant rise in house prices.
Rising house prices have allowed people to assign a higher value to their homes, resulting in an upsurge in renovations and more spending on the home. Working from home has also had an impact with people investing money in office equipment and household furniture as they turn their spare bedroom into an office.
We’ve also seen online retailers do far better than traditional retailers as the public switched to doing business online. However, this has been countered a little at the moment by disruptions in the supply of products. There are issues in servicing ships at some of our ports, which has a significant impact on retailers.
Some of our customers have said their business is doing well but could be doing far better if they could get the product onto the shelves. Delays of seven weeks for certain products is not uncommon, and some freight costs have doubled.
Those issues have resulted in a challenging environment for some, while others are doing reasonably well.
How well have we done economically over the past 12 months?
We’ve done exceptionally well compared to what we thought would happen 12 months ago. Globally speaking, New Zealand is an outperformer because we managed to get on top of COVID so quickly and only had to endure very short lockdowns.
Twelve months ago, the general feeling was that we would be in a very deep recession by now, with unemployment rates close to ten per cent. As it turned out, we got out of lockdown early, we returned to something close to business normality very quickly, and businesses have adapted to the online world. We are generally performing well when compared to most countries.
What is the likely outlook for the global economy in the short to medium term?
The short-term outlook will be determined by the way countries continue to combat the pandemic and the success of their vaccine rollout.
Governments will still do what they can to support their economies, while central banks will continue to provide liquidity to ensure economies have the tools to facilitate their recovery. Interest rates will stay very low, and I believe the global economy will be in recovery mode through the rest of this year and next.
Over the medium term, other issues come back into play. During the next five years, we’re going to see a reasonable amount of growth around the world as we climb out of the pandemic. The fundamental support for the global economy will come from central banks on the monetary side, but more importantly, the government stimulus will be massive this time around.
Have the shovel-ready projects begun lifting our economy?
The greatest benefits from the shovel-ready initiative are still to come. I think there is a lot of potential through this work programme, and we will have a higher growth rate and a better economy because of it.
However, there are still questions over how effective the projects will be, how quickly and efficiently they are completed and how cost-effective they will be.
New Zealand has an infrastructure deficit because the maintenance of our infrastructure has been lacking for an extended period. We’ve had a record immigration boom that peaked in 2019, and over the seven years from 2012, we didn’t build enough roads, railways, hospitals and houses to meet the needs of the hundreds of thousands of immigrants that came into the country.
What will the housing market do in the short to medium term?
The short term is interesting as we still have some momentum in the market despite everything that has gone on. The house price push will continue in the short term, and we will see a run rate of between 25% and 30% a year, which is just amazing.
Over the medium term, it’ll become more interesting as we expect investors to move into new dwellings to capitalise on the tax advantages. The government is clearly nudging investors into new builds.
We may see debt to income ratios coming in for investors on top of the LVRs and other hurdles they’re currently facing. The moves may take some of the heat from the investor side of the market, but all the measures we’ve seen from the government and the central bank so far are focused on the demand side. However, the real problem is on the supply side as we haven’t built enough homes over the past decade.
One government initiative that shows promise is the acceleration fund for councils. The fund will give councils access to money to help them build the infrastructure required to unlock land. It’s hoped that this initiative will help accelerate the development of new housing subdivisions.
Our recent modelling of the housing market revealed a shortage of 80,000 homes which is enormous for a small country like New Zealand. There has been a massive fall in immigration over the past 12 months, which has allowed the supply of homes to outstrip demand. It’s the first time in eight years that this has occurred.
That has seen our housing deficit fall to 67,000, and with another year of house building like we saw in 2020, the shortage could be 47,000 homes.
With this level of house building, we think that by 2024-25, the shortage will be a little more under control, making housing more affordable.
Hear Jarrod speak at Future-Fit Aotearoa by registering