Donal Curtin
With interest rates on the rise globally, the slowdown could be closer than we think. But the view of the IMF and many local forecasters is that Australia and New Zealand could come through better than most. Donal Curtin looks at both sides of the equation.
Would a global recession be on the cards if countries talked to each other more?
futureproof
“I'm really excited about being able to do forecasting. At the moment, it's all in spreadsheets and a bit static. We need to get it on dashboards in everyone's face all the time”
As we peer into what 2023 might bring, the outlook is becoming more sombre.
Donal Curtin is an Auckland-based economic consultant. He served for 12 years on the New Zealand Commerce Commission and was previously chief economist at BNZ. He was named Columnist of the Year in the 2020 Mumbrella Publish Awards and was Highly Commended in the 2021 Awards.
Interest rates are on the rise pretty much everywhere outside Japan, putting pressure on household and business budgets, as central banks fight back against a surge in inflation that nobody foresaw happening on the scale it actually did.
Slow is no way to win a race
The International Monetary Fund’s (IMF) latest forecasts in its latest World Economic Outlook for example made sober reading: “Global growth is forecast to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001”, ex the very unusual circumstances of the global financial crisis and COVID-19’s first hit.
It’s also an outlook where things could easily get worse than the central scenario anticipates. The IMF said that “Risks to the outlook remain unusually large and to the downside”, and in another of its flagship publications, the Global Financial Stability Report, said that “There is a heightened risk of rapid, disorderly [asset] repricing which could interact with – and be amplified by – pre-existing vulnerabilities and poor market liquidity”. Cue for Warren Buffett’s famous quip, that it’s only when the tide goes out that we discover who’s been swimming naked.
It hasn’t helped that of the three big drivers of the expected downturn – central banks’ anti-inflation push, Ukraine, COVID – the risks have indeed been materialising on the wrong side.
US inflation has been running higher than expected, and the Fed’s likely tightening is being adjusted upwards (another 1.75% to come, on the latest futures pricing). With the world economy already struggling with both slowing growth and too-high inflation, the unlovely cartelists of OPEC+ (Organization of the Petroleum Exporting Countries) ratcheted up the oil price at their October meeting, prompting the (apolitical) International Energy Agency to say that “higher oil prices may prove the tipping point for a global economy already on the brink of recession”. President Vladimir Putin, previously on the retreat in the Ukraine war, has put Sergei Surovikin, a scorched-earth general in command and ordered a partial mobilisation. China has kept rolling out more lockdowns, most recently in parts of Shanghai.
There’s a little ray of sunshine
And the slowdown could be closer than you think: on past behaviour, slowdowns tend to creep up under the radar and can get underway before the policymakers or business folk realise the economy is already sagging beneath them. I like to follow the JP Morgan Global Composite index: it’s a mouthful, but what it does is aggregate up a very wide range of national activity indexes (Australia and New Zealand included), into a global picture of the economic cycle. The latest readings have been poor. They showed that world economic activity actually contracted in both August and September, with especially weak conditions in real estate, in parts of manufacturing (cars, forestry and paper, chemicals), and, after its earlier post-COVID recovery, tourism, since newly pressured household budgets don’t stretch to that delayed overseas trip after all.
Another indication that the clouds might be darkening earlier in the piece is the IMF’s calculation of how many countries are close to or already in a ‘contraction’: “a contraction in real GDP (gross domestic product) lasting for at least two consecutive quarters (which some economists refer to as a “technical recession”) is seen at some point during 2022–23 in about 43% of economies with quarterly data forecasts (31 out of 72 economies), amounting to more than one-third of world GDP”.
But before you go and gobble some Prozac, there is some good news.
The IMF’s view (and a lot of local forecasters’) is that both Australia and New Zealand will come through the slowdown not too shabbily at all (see graph below).
But, as overseas, it wouldn’t take much for things to go worse than that, especially if monetary policy were to overtighten by mistake.
How’s your hip pocket?
Here’s an example: someone rolling off a three-year fixed mortgage they took out three years ago. Back then, on a $500K 25-year mortgage, they were up for monthly payments of around $2465 in Australia and $2585 in New Zealand. Today, they’re facing $3235 a month in Australia, a 31% increase, and $3140 a month in New Zealand, a 21% increase (New Zealand rates were higher to begin with). Put that into context, that’s a shade over 10% of average monthly earnings in both countries. That’s a big hit.
“There have never been so many practice management solutions available in the Australian and New Zealand markets as there are today.”
There are a zillion qualifications: not everyone’s rolling over yet, some people have smaller mortgages, some people don’t have mortgages at all. But on the other hand, that’s just counting the rate rises to date and there are likely more to come on both sides of the Tasman. If rates go up another 1%, in six months’ time someone rolling off a three-year mortgage they took out two and a half years earlier will be looking at an increase equivalent to some 16.5–17% of average earnings. Ouch.
So let’s hope for the (modest) best, but be prepared for worse. And let’s take away some useful policy lessons for the future. In particular let’s get better coordination of fiscal and monetary policy. Not everyone’s been as cackhandedly incompetent as the fiscal policy omnishambles in the UK, which cost prime minister Liz Truss and chancellor Kwasi Kwarteng their jobs, but pretty much everywhere governments and central banks haven’t made a great fist of coordinating fiscal and monetary policy, with the combo accidentally set to ‘too hot’ and kept there for too long. We can’t do much about the Ukraines of this world, but we could talk to each other better.
Current rate
Name of interest rate
Country/region
Direction
Previous rate
Change
4.000%
3.250%
11-2-2022
United States
American FED
2.850%
2.600%
11-1-2022
Australia
Australian RBA
13.750%
13.250%
8-4-2022
Brazil
Brazilian BACEN
3.000%
2.250%
11-3-2022
Great Britain
British BoE
3.750%
3.250%
10-26-2022
Canada
Canadian BOC
3.650%
3.250%
11-2-2022
China
Chinese PBC
2.000%
1.250%
10-27-2022
Europe
European ECB
5.900%
5.400%
9-30-2022
India
Indian RBI
6.500%
6.750%
6-16-2016
Indonesian
Indonesian BI
-0.100%
0.000%
2-1-2016
Japan
Japanese BoJ
10.000%
9.250%
11-10-2022
Mexico
Mexican Banxico
3.500%
3.000%
10-5-2022
New Zealand
New Zealand NZRB
7.500%
8.000%
9-16-2022
Russia
Russian CBR
0.500%
-0.250%
9-22-2022
Switzerland
Swiss SNB
Acuity Special Edition December/January 2023
See full issue
"It’s only when the tide goes out that we discover who’s been swimming naked."
– Warren Buffett
Reducing our carbon footprint for the good of the planet is a big call, but the first step is knowing what carbon emissions your organisation creates. There’s software that helps to maintain compliance through keeping track of emissions, collecting data and reporting sustainability.
Sholto Macpherson is an award-winning journalist and editor of DigitalFirst.com, a blog on the latest in accounting technology for accounting firms and SMEs
Story Sholto Macpherson
As we peer into what 2023 might bring, the outlook is becoming more sombre.
Country/
region
As we peer into what 2023 might bring, the outlook is becoming more sombre.
Interest rates are on the rise pretty much everywhere outside Japan, putting pressure on household and business budgets, as central banks fight back against a surge in inflation that nobody foresaw happening on the scale it actually did. The war in Ukraine has added to the inflationary pressures and further disrupted global trade. COVID-19 continues to hold everything back, mostly because China is sticking to its zero tolerance lockdowns, but also because elsewhere people off sick are making it hard for businesses to operate. In economies like those in Australia and New Zealand, there are few warm bodies unspoken for to fill in the gaps: unemployment is very low (3.5% in Australia, 3.3% in New Zealand).
See full issue
Acuity Special Edition December/January 2023
A genre still in infancy
It’s also an outlook where things could easily get worse than the central scenario anticipates. The IMF said that “Risks to the outlook remain unusually large and to the downside”, and in another of its flagship publications, the Global Financial Stability Report, said that “There is a heightened risk of rapid, disorderly [asset] repricing which could interact with – and be amplified by – pre-existing vulnerabilities and poor market liquidity”. Cue for Warren Buffett’s famous quip, that it’s only when the tide goes out that we discover who’s been swimming naked.
It hasn’t helped that of the three big drivers of the expected downturn – central banks’ anti-inflation push, Ukraine, COVID – the risks have indeed been materialising on the wrong side.
It hasn’t helped that of the three big drivers of the expected downturn – central banks’ anti-inflation push, Ukraine, COVID – the risks have indeed been materialising on the wrong side.
Slow is no way to win a race
President Vladimir Putin, previously on the retreat in the Ukraine war, has put Sergei Surovikin, a scorched-earth general in command and ordered a partial mobilisation. China has kept rolling out more lockdowns, most recently in parts of Shanghai.
And the slowdown could be closer than you think: on past behaviour, slowdowns tend to creep up under the radar and can get underway before the policymakers or business folk realise the economy is already sagging beneath them. I like to follow the JP Morgan Global Composite index: it’s a mouthful, but what it does is aggregate up a very wide range of national activity indexes (Australia and New Zealand included), into a global picture of the economic cycle.
The latest readings have been poor. They showed that world economic activity actually contracted in both August and September, with especially weak conditions in real estate, in parts of manufacturing (cars, forestry and paper, chemicals), and, after its earlier post-COVID recovery, tourism, since newly pressured household budgets don’t stretch to that delayed overseas trip after all.
Another indication that the clouds might be darkening earlier in the piece is the IMF’s calculation of how many countries are close to or already in a ‘contraction’: “a contraction in real GDP (gross domestic product) lasting for at least two consecutive quarters (which some economists refer to as a “technical recession”) is seen at some point during 2022–23 in about 43% of economies with quarterly data forecasts (31 out of 72 economies), amounting to more than one-third of world GDP”.
But before you go and gobble some Prozac, there is some good news.
"It’s only when the tide goes out that we discover who’s been swimming naked."
– Warren Buffett
10%
More of monthly earnings are going towards mortgages in Australia and New Zealand
Acuity Special Edition December/January 2023
See full issue
But, as overseas, it wouldn’t take much for things to go worse than that, especially if monetary policy were to overtighten by mistake.
There are a zillion qualifications: not everyone’s rolling over yet, some people have smaller mortgages, some people don’t have mortgages at all. But on the other hand, that’s just counting the rate rises to date and there are likely more to come on both sides of the Tasman. If rates go up another 1%, in six months’ time someone rolling off a three-year mortgage they took out two and a half years earlier will be looking at an increase equivalent to some 16.5–17% of average earnings. Ouch.
Growth outlook (IMF)
2022
2023
3.8
2.3
1.9
1.9
Australia
New Zealand
Australia
New Zealand
2022
2023
2027
6.3
3.9
6.5
4.8
2.1
2.5
Inflation outlook (IMF)
The war in Ukraine has added to the inflationary pressures and further disrupted global trade. COVID-19 continues to hold everything back, mostly because China is sticking to its zero tolerance lockdowns, but also because elsewhere people off sick are making it hard for businesses to operate.
In economies like those in Australia and New Zealand, there are few warm bodies unspoken for to fill in the gaps: unemployment is very low (3.5% in Australia, 3.3% in New Zealand).
Australia
New Zealand
2022
2023
2027
3.8
1.9
2.3
1.9
2.3
2.4
Growth outlook (IMF)
Acuity Special Edition December/January 2023
See full issue
Australia
New Zealand
Would a global recession be on the cards if countries talked to each other more?
futureproof
Summary of current interest rates of central banks globally
Source: global-rates.com
2.4
2.3
2027