Stephen Toplis: Why the worst of the economic downturn is still to come

Of Interest

By Gareth Vaughan

The first-half of 2024 is likely to be tough with rising unemployment and more businesses failing as the economy "bounces along the bottom," says BNZ Head of Research Stephen Toplis.

In a new episode of interest.co.nz's Of Interest podcast, Toplis delves into the swathe of domestic economic data from the past week including Gross Domestic Product, migration, Statistics New Zealand's Selected Price Indexes, the Real Estate Institute's latest monthly housing data, the current account deficit, the dovish US Federal Reserve monetary policy review, China and more.

It's tough times for businesses and households are under the cosh, Toplis says.

"Our view has long been that the second-half of 2023 and first-half of 2024 would be the trough in the economic cycle. And I think this [recent data] is confirming evidence of it," says Toplis.

"We're just bouncing along the bottom. And we'll continue to bounce along the bottom, probably until the central bank starts lowering interest rates. So there's more of this really, probably until the second-half of next year."

He notes the economy would look even worse without surging migration, but this is becoming problematic.

"We knew prior to Covid that we were having difficulty as an economy absorbing more than about 50,000 or 60,000 people in a given year. Now we're trying to absorb double that, and that's resulting in things like pressure on your rents, pressure on your housing market, and a pick up in demand in some places that will be difficult to meet," Toplis says.

Thus it's time to "look very closely at tweaking the [migration] settings to moderate those inflows."

Meanwhile, with the new coalition government planning to reduce government consumption aggressively, the reduction in the size of government "is going to be a headwind to New Zealand for some time to come."

"There are quite strong multiplier effects of that because government consumption is largely people employed. So if you reduce the size of the state sector, particularly its employment, it will have multiplier impacts on spending throughout the economy."

"If you think about the last time we had a massive correction in the size of government, that was actually in the early 1990s when Ruth Richardson ran her mother of all budgets as she called it. The sort of decline in government consumption that we're talking about now is of a similar magnitude. Back then it had a very, very big impact on both the unemployment rate and economic activity generally. The broader environment was quite different so it would be remiss to suggest it would be exactly the same impact, but it will be meaningful," Toplis says.

In the podcast he also talks about the inflation outlook, including why we "need to be a little bit careful in being overly concerned about non-tradeables" inflation, the housing market, the labour market, the outlook for interest rates, and more. (See more on tradeable versus non-tradeable inflation here).

"Volatility remains the order of the day unfortunately, and we still have the worst of this economic recovery to get through."

*You can find all episodes of the Of Interest podcast here.