Covid 19: Will we see a repeat of the economic rebound as the economy slowly begins to reopen?

OPINION: Last year’s post-containment economic rebound took many of us by surprise.

Despite the dire economic forecasts, we did not experience the massive job losses and business failures that had been widely predicted.

With our largest city currently in its seventh week of restrictions, many will wonder if we can expect a similar economic rebound when the city joins the rest of the country on a lower alert level.

While there is still a lot of uncertainty, there is reason to be confident we’ll see a repeat.

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Why? This is because the economy has entered the current containment in a very good position with very strong consumer confidence.

While there are many ways to measure confidence, applying for credit is one of the best. When businesses and consumers are confident, they use credit to anticipate their purchases, confident that they will be able to meet future repayments.

The combined borrowing power of the Kiwis is over $ 300 billion.  Last year, consumers used credit to increase their spending, which helped improve the cash flow for Kiwi businesses.

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The combined borrowing power of the Kiwis is over $ 300 billion. Last year, consumers used credit to increase their spending, which helped improve the cash flow for Kiwi businesses.

In contrast, when they worry about the future, they quickly do the opposite: reduce debt, cut spending, and increase savings. That is why the demand for credit provides a real-time indicator of economic confidence.

Just before the country went to Alert Level 4, the credit market told us the Kiwis were confident – borrowing, investing and spending at record highs.

However, when New Zealand went into lockdown in August, we saw demand for credit drop immediately, dropping 30% overnight. The good news is that this decline has not been as sharp as the last time the country entered Alert Level 4 in April 2020, when demand for credit fell by 70%.

Centrix CEO Keith McLaughlin wonders if we envision a repeat of the relatively remarkable economic recovery we experienced last year.

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Centrix CEO Keith McLaughlin wonders if we envision a repeat of the relatively remarkable economic recovery we experienced last year.

More importantly, unlike last year, we didn’t see any significant changes in the average credit score during this foreclosure. In fact, the average credit score actually went up in August.

Why is this important?

Credit scores are used by banks, retailers, and utility companies to determine the risk of lending money. The higher your credit score, the more likely you are to pay your bills.

Last year we saw those with higher credit scores disappear from the credit market as they sought to avoid borrowing money. At the same time, we have seen those with lower credit scores become more active as they sought to borrow to support themselves during the economic crisis.

As a result, we have seen a dramatic drop in the average credit score. This did not happen this time around as the average credit score remained high.

Quality borrowers remain active in the market, particularly in the housing market, where we have experienced record levels of mortgage lending in recent months. But we also see it with new non-mortgage loans, which remain strong.

The housing market remains active with record levels of mortgage lending in recent months.

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The housing market remains active with record levels of mortgage lending in recent months.

The power of the credit market to stimulate economic growth should not be underestimated – the combined borrowing power of the Kiwis stands at over $ 300 billion, or 94% of GDP.

The increase in borrowing helped our economic recovery last year as consumers used credit to increase spending, which helped improve cash flow for Kiwi businesses.

So what motivated this increased borrowing, and will we see it again?

The Reserve Bank’s expansionary monetary policy has driven interest rates to record highs, making the cost of borrowing cheaper than ever before.

This is good news for borrowers but not good news for savers, as bank and term deposits generate very low returns. As a result, people chased returns from elsewhere.

This helps explain the dramatic rise in house prices we have seen this year as Kiwis borrow money to buy their first home or invest in real estate.

And anyone looking at their Kiwisaver account will have seen strong growth in their balance as well, as capital is increasingly redirected from cash and bonds to stocks.

The resulting rise in asset prices created a wealth effect, which further stimulates borrowing and spending.

The Wealth Effect is an economic theory that suggests that when households get richer as a result of rising asset prices, they feel more confident and financially secure, and are therefore likely to increase their consumption by spending and by borrowing.

This helps to improve the cash flow of local businesses, which helps further improve business confidence and encourages increased spending and borrowing for investment, thus creating a virtuous circle.

The good news is that, depending on how long the restrictions remain in place in Auckland, the Reserve Bank is likely to be cautious when changing its monetary policy.

As a result, historically low interest rates can be expected to continue, with increases likely to be gradual. This gives reason to be optimistic that we will see an economic rebound again when we get out of the current restrictions.

Keith McLaughlin is the CEO of Centrix.

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