With a recession looming in New Zealand, what might a so-called “polycrisis” mean for the island country? Here, Coface economist Eve Barré (pictured above) and NZ commercial director David Meys (pictured below) examines the prospects for 2023.
“While 2023 has just started, cost pressures, risks of recession, nuclear escalation, and the spread of new variants – such as the recently observed ‘Kraken’ variant – mean this year will remain challenging for businesses,” Barré told Insurance Business.
“Kristalina Georgieva, the International Monetary Fund (IMF) managing director, stated that 2023 will be ‘tougher’ than last year, with a third of the global economy in recession.”
The IMF managing director issued the warning in an interview on Face the Nation.
Similarly, the Chief Economists Outlook found that nearly two-thirds of chief economists believe that the world is likely to see a global recession this year. In New Zealand, a shallow recession is expected in the latter part of 2023.
“Over the past three years, the global economy has experienced several different but interconnected crises impacting NZ businesses,” Meys told Insurance Business. “This started with the emergence of COVID-19 in early 2020 and the series of ongoing COVID variants. In 2021, global supply wasn’t able to keep up with rebounding demand and pressures on supply chains, which increased commodity prices.
“2022 marked the Russia-Ukraine war erupting, which triggered a further rise in commodity prices, which in turn caused an energy crisis in Europe and a food crisis in low-income countries. In recent months, the word ‘polycrisis’ has re-reappeared to describe this context of a succession of interacting shocks that are combining to shape 2023.”
One of the recent uses of the term “polycrisis” is found in the Global Risks Report 2023, which points to a cluster of related global risks with compounding effects. Some of the key themes are discussed here.
So, where does New Zealand stand in this global picture? According to Barré, the island country has not been spared.
She noted: “Last year, the country’s activity remained affected by COVID-19 restrictions. Meanwhile, the surge in commodity prices and supply disruptions pushed inflation to a three-decade high increase in the second quarter of 7.3% year on year.
“To counter price pressures, the central bank increased the official cash rate (OCR) seven times, including by a large 75 basis points hike in November. This was the first time that a hike of such an extent was taken since the rate was established in 1999. In this context of high inflation and interest rates, both consumer and business confidence reached their all-time lowest levels in December, according to ANZ-Roy Morgan surveys.
“While 2022 saw a slowdown in real GDP (gross domestic product) growth, the worst is not behind us for this year. New Zealand is expected to be among the countries experiencing a recession during this year due to both domestic and external developments.”
Barré highlighted that tighter monetary conditions will increasingly weigh on domestic demand.
“Monetary and financial conditions should tighten further, with the RBNZ expected to continue to raise its policy rate,” she told Insurance Business. “As it prioritises the fight against inflation over economic growth, the central bank forecast to raise the OCR to 5.5% in the third quarter of 2023.
“Higher borrowing costs will impact business investment. This would particularly be the case in sectors that are capital-intensive or those with long-term projects, including technology, utilities, housing and construction, machinery equipment, and automotive.”
One of the current features of the country’s economy that is poised to remain, according to Barré, is high inflation, which she called a “major risk” to businesses whose margins stand to be compressed by cost pressures.
Citing the continued uncertainty for local businesses, Meys added: “NZ business leaders should look to mitigate counterparty trading risk and securitise trade where possible. Credit insurance is the tool that companies are commonly using around the world to trade confidently and grow, both in their domestic and export markets.”
What’s your outlook for 2023? Share in the comments below.
