Mark Lister, 19 October 2020

We’ve seen a few strong economic indicators during the last few weeks. Could the New Zealand economy be in better shape than some might think?

The first positive sign is the strength in the housing market. Last month the number of properties sold across New Zealand increased almost 30 per cent from a year earlier. This made for the busiest month since March 2017, and the strongest September in 14 years.

The number of days it takes to sell a house fell across the board, while prices increased in all regions. Auckland prices are now 7.5 per cent above May levels and 11.5 per cent ahead of where they were a year ago. Prices across the rest of New Zealand were up 2.4 per cent in September and are 10.4 per cent higher than a year ago.

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Rising house prices are very much a double-edged sword. They create major hurdles for first home buyers, and worsening affordability is a significant contributor to a range of social issues and challenges.

However, from a purely economic perspective they are an important driver of activity. For most people, their house is their biggest asset and when prices are rising, people feel wealthier and more confident. This impacts their behaviour, with homeowners more likely to eat out, upgrade the car or renovate the kitchen when prices are going up.

Another piece of good news was Fonterra’s announcement a few days ago that it was upgrading its forecast milk payout range for the current season.

Fonterra is now expecting a payout of $6.80, an increase of 6.3 per cent from the previous estimate. This would be the fifth highest in the last two decades, and it is comfortably above the average of $6.04 that has prevailed over the past five years.

This is a significant positive for many regions. Fonterra CEO Miles Hurrell estimated that with the payout at that level, more than $10 billion would flow into regional New Zealand.

The higher payout is largely due to improved demand in China, which has recovered quickly from the slowdown earlier in the year. With a bit of luck, dairy farmers aren’t the only group benefiting from a resurgent Chinese economy.

Last but not least, I was very encouraged by what I saw in the latest ANZ Business Outlook survey.

The Own Activity component is the part of this report that I pay the most attention to. What businesses know best is how things are going in their own operations, which makes this aspect of the survey a very good indicator for where economic growth is headed.

In October, the Own Activity measure suggested businesses are feeling much more optimistic than many would've expected. It moved back into positive territory for the first time since February and is now sitting above where it was through the middle of 2019.

Business confidence is a crucial piece of the economic puzzle because it has a direct impact on firms’ behaviour. When businesses feel confident, they are more willing to invest, grow and take on more staff.

We shouldn’t get complacent about the outlook. There are plenty of challenges ahead, and it will still be an uphill battle to recover to pre-pandemic levels.

However, it’s certainly not all bad out there. Some parts of the country are quite upbeat and many sectors are proving very resilient.

There is light at the end of the tunnel, and the economy is on a solid footing to recover from the events of this year as we head towards 2021.