Tina Teng is a Market Analyst at CMC Markets New Zealand.
OPINION: As the global and local economy continues to be plagued by a range of elements (including inflation, unemployment, pandemics and wars), it is imperative for kiwifruit consumers and investors to be aware of the recession that is about to hit our shores, and what this means the financial markets.
New Zealand may have had a stronger gross domestic product (GDP) in the September quarter of 2022, but the Reserve Bank expects a full year of negative growth from the June quarter of this year.
Meanwhile, recent Westpac and BNZ polls show consumer confidence has slipped to record lows as Kiwis prepare and hope for a soft landing.
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As we enter territory unexplored for over 15 years, here’s what you need to know.
An economic recession cannot be avoided
Brace yourself for the impact, because it’s inevitable for a number of reasons:
1. Inflation in New Zealand is at a 30-year high of 7.2% (and expected to be extremely volatile) compared to an average inflation of 2% over the previous decade. Wages have risen rapidly but have not kept pace.
Companies cannot sustain more than 5% wage growth for their workforce without passing it on to others. So inflation rises, followed by wages, food, cost of living – and the cycle only breaks with the destruction of demand. It looks like we don’t just have an inflation problem, we have an inflation uncertainty problem.
2. Consumer confidence has fallen to its lowest level (around 3%) since the 2007-2008 GFC on the back of this persistent inflation, rising interest rates and an unemployment rate. Staff shortages and low immigration continue to create a unique post-Covid dynamic, with tight labor markets typically adding to inflationary pressures.
But the country has about 170,000 people on government unemployment benefits, and it is reported that nearly 100,000 of them are willing to work but still cannot find employment.
3. The housing market is also facing difficulties, with a 12% annual decline in the average price of residential property and a 55% increase in prices for properties for sale nationwide.
How will the financial markets react to an impending crisis?
History has shown us that stock markets tend to fall and the New Zealand dollar weakens significantly during a financial crisis.
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History has shown us that stock markets tend to fall and the New Zealand dollar weakens significantly during a financial crisis.
During the global financial crisis and the Covid pandemic, the NZX50 fell 72% and 48%, respectively, and the New Zealand dollar fell 66% and 34%, respectively, against the US dollar. The S&P 500 also saw significant falls, falling 57% during the GFC and 54% during the pandemic.
Although there has been a market rebound since October 2022, a further fall in risky assets could be possible. The S&P500 EPS could fall 11% to $200 and the index could bottom at 3150 (-19%). Goldman Sachs economists assign a 35% chance that the US economy will enter a recession in the next 12 months.
Market reactions are always three steps ahead – market participants have been selling stocks since November 2021 and major benchmark indices fell by 20-30% in 2022. It’s clear that the stock market is anticipating a decline in earnings and pressure on margins in 2023.
Central Bank Monetary Policy Market Crash in 2022 – Now What?
In 2022, the bear market was mainly caused by central banks aggressively raising interest rates in response to skyrocketing inflation. The US Federal Reserve Bank hiked interest rates seven times and 425 basis points, while the Reserve Bank of NZ hiked interest rates seven times and 325 basis points.
Although central banks are expected to slow their rate hikes this year, they still focus on inflation when setting their monetary policy stance.
THINGS
Cory and Indy Mitchell changed their investment strategy when the pandemic struck and now believe cash flow positive is a must with any rental.
Havens to lean on
In times of crisis, safe-haven assets like gold, bonds, and defensive equity sectors like consumer staples, utilities and healthcare tend to do well. During a rate hike cycle, cash is also a valuable asset compared to stocks and other risky assets.
It is up for debate how deeply the shock waves of the impending recession will be felt in the economy.
Despite the challenges, there are still ways to protect your wealth and weather the storm. It is crucial for investors to stay informed and make informed decisions during these uncertain times.
Disclaimer: This is not investment advice and should be read and considered as general information. No opinion contained in this material constitutes an endorsement by CMC.
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