Don’t expect a deep recession

The global economy is in better shape than it has been through downturns in the past, which means deep recessions are unlikely this time around.

That’s the view of ANZ Chief Economist Richard Yetsenga, who told a special edition of the new 5 in 5 with ANZ podcast the world can avoid a damaging recession thanks to underlying strength in a number of key economies.

“The data have been telling us that households are in very, very strong shape, relative to the last 15 years,” he said. “This is the case in a range of economies - New Zealand, Australia, the US, and a number of other… advanced economies.”

Yetsenga noted the technical recessions underway in Europe and New Zealand – as well as recent negative quarters of growth seen in the US – came amid encouraging official figures.

“If you look at unemployment in all those economies, unemployment is not telling you these economies are in recession,” he said.

“I don't expect deep recessions - at least partly because of the improved balance sheet story which has contributed to the interest rate hikes.”

For Yetsenga, this result is no accident, but a result of both central bank activity through and beyond the COVID-19 crisis, and reforms put in place in the wake of the global financial crisis.

“I think the natural consequence of that is when the next downturn hit… households were in better shape, businesses were in better shape, were able to handle higher interest rates, certainly more than the consensus expected,” he said.

The strength of the economic cycle – and whether regulators can get an effective handle on inflation - is critical for New Zealand’s outlook, ANZ’s Chief Economist for New Zealand, Sharon Zollner told the podcast.

A lot then relies on the direction of the US Federal Reserve, she said.

“The debate there about whether the Fed can get on top of inflation without breaking something is highly relevant to New Zealand,” Zollner said.

In China, the biggest theme is stimulus – and whether policymakers will look to inject more activity into a market battling slowing, but still impressive, growth.

Yetsenga is unconvinced.

“If you're looking for a big bang stimulus… I don't think you'll see that,” he told the podcast. “I think we are already seeing lower-key stimulus… [in] efforts to ease up on some areas in the economy, efforts to encourage and support the private sector.”

Indeed, China’s unique structural issues, which include a falling population, mean any stimulus-based sugar hit would be short-lived anyway, Yetsenga said.

“I think what they're going to do is continue along this just easy gradual trying to support the economy the best way they can,” he said.

ANZ’s Head of Asia Research Khoon Goh told the podcast that while China faced near-term challenges, the remaining growth was nothing to sneeze at.

“While China growth has been disappointing so far this year, they are still expected to grow at close to 5 per cent this year,” he said.

“The economic pie is still expanding, it's not shrinking. And I have confidence Chinese authorities will overcome their near-term challenges.”