Company tax miss, rising bank provisions point to recession biting

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New Zealand's recession isn't yet showing up in any increase in non-performing mortgages but banks are starting to prepare for it by increasing provisions and it is showing up in the business sector and in the government's tax take, independent economist Cameron Bagrie told a Chubb conference last week.

Wednesday, June 28th 2023, 12:07PM 1 Comment

“The government's books are starting to turn agressively down,” Bagrie said, adding that company tax collected in April was $1 billion compared with a forecast $2.5 billion, “so we're not talking about a small miss.”

It isn't that businesses sales are going down, it's their costs are rising steeply, he said.

“This is just another sign we've got out of our economic lane.”

Bagrie said he expects that firms will have to start cutting costs, particularly labour costs by laying off staff, and that the process of eliminating inflation will take about 18 months.

Until the current burst of inflation, it had been declining for 30 years but the factors driving it down are reversing, making inflation sticky.

“You need to have experienced it to realise what it takes to get rid of it on the others side, and it's brutal.”

Bagrie said a number of central banks around the world, including the Bank of Canada and Reserve Bank of Australia had paused rate hikes earlier this year but are now again raising rates and it's yet to be seen whether NZ”s central bank has finished hiking.

The forces driving inflation down included globalisation, employers having the ability to keep a lid on wages, the baby boomers were saving and we also saw technological advances.

“That's a recipe, a playbook for low inflation, lower and lower interest rates and higher and higher asset prices.”

The old rule-of-thumb that house prices doubled every 10 years “might have something to do with the fact that interest rates went down for 30 years.”

But the world is no longer as globally connected. “Just-in-time is now just-in-case and just-in-case isn't as efficient as just-in-time,” Bagrie said.

“All power to the employer has been replaced by all power to the employee. The baby boomers are starting to spend and they're having a whale of a time.”

But wage increases and spending aren't what Reserve Bank governor Adrian Orr needs to get on top of inflation.

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