Investment Returns Working Despite Environment

The economy & investment returns, where are we up to? 

What is happening in the investment world, the economic world, and how is it affecting us all? 

Are you feeling a little battered by the news this year? Is everything clear as mud? 

Do you need a hug? 

Let’s take a quick tour of the economies around the world starting with New Zealand before looking at investment returns. 

Economic environment – New Zealand 

New Zealand is ahead of the curve internationally. We were the first country to tighten our belts when prices started racing away, by raising interest rates, and now we are the first to stop tightening. 

That must be good news. Does that mean this is as bad as it gets? 

Well, not quite. Our official interest rates stopped rising as of yesterday, Wednesday 12 July, according to the Reserve Bank of New Zealand and several independent economists, but it comes with the caveat of “remaining wary”. Things could change if prices don’t continue to come down fast enough. 

Several bank mortgage rates have gone up recently without any visible pressure from our Reserve Bank, which was disappointing, but this was due to a rise in overseas rates. So not all the influence on interest rates is local. We are somewhat at the mercy of the rates our banks can borrow at overseas. We don’t save enough money in New Zealand for banks to rely totally on local savings to lend out. 

It is possible that official interest rates have peaked here in New Zealand and that must be good news? Well not if you have a mortgage about to roll over from a low rate. Not everyone is in the same boat. 

At an overnight rate of 5.5%, we have the highest official central bank interest rate amongst our key trading partners. Let’s hope it is not up there for too long! 

So, there is good news, and bad news in the interest rate story at the moment. 

What about the New Zealand recession? 

The talk of a recession strikes fear in the hearts of many. To be fair, a recession does hit some New Zealanders very hard – they lose their jobs and businesses, and sometimes they lose their houses. 

Technically New Zealand was in a recession for the first half of 2023 although it might not have felt like it. That is because to be a real recession you must have rising unemployment, and unemployment has been low. The official level of unemployment was sitting at 3.4% at the end of March 2023 while the level of underemployment was at 9%. Both are historically at or near record lows. 

Unfortunately, the level of unemployment is going to rise and so on that front there is pain still to come for some. How do we know that? As mortgages roll over onto the new higher rates many people will not be able to afford a lot of what they could afford previously.  This will play out over the next year. 

40% of New Zealanders have a mortgage, and some of them will not be able to afford the new interest payments as their mortgages roll over and they will stop spending on anything other than the necessities.  

Across the economy spending will slow putting pressure on retailers and an increasing number will fail. 

All this is starting to show up in official data and although the future can always surprise, current trends are pointing in the direction of worse to come for the New Zealand domestic economy. BNZ forecasts unemployment to rise to 5% by this time next year. 

When are official interest rates likely to start coming down in New Zealand? 

Both the Reserve Bank and several economists suggest towards the middle of 2024, in 12 months or so.  

When is inflation likely to fall to 2% per annum as targeted by the Reserve Bank? In 2025, according to Reserve Bank forecasts. 

And lastly, what is the expected official ‘neutral’ over-night interest rate expected to be in New Zealand by the Reserve Bank? Around 3% per annum, they say. 

So, potentially that would indicate official interest rates coming down by 2.5% over the next two-and-a-half years while inflation comes back to 2% per annum. 

Bring it on! 

Economic environment – United States 

The big driver of the international economy is, of course, the United States where they are toying with another two interest-rate rises. They are at 5.25% now so they are nipping at our heals. All eyes are on their inflation data and pundits are, on average, expecting at least one more rise of 0.25% to 5.5%. 

The latest news today from the US is that their inflation for the month of June 2023 came in below expectations. Their annual rate of inflation has fallen to 3.0% to the end of June, down from a high of 9.1% in June 2022, just 1 year ago. As a result, interest rates fell in the US while shares rose. 

With inflation cooling, there is optimism that the US economy will avoid a much-anticipated recession. 

Central banks must keep the rhetoric going on being tough on inflation with “more interest rate rises still to come”. They call it “open mouth operations”. Otherwise, consumers will take their foot off the brake pedal and start spending too much again allowing prices to stop falling too soon. 

It is very hard for central banks to know how hard to tighten due to the lag between rising interest rates and the impact flowing through to borrowers. It can take months if not years for the full effect of interest rate rises to flow through. 


One worry now internationally is the slow post-Covid recovery of China. 

Their pattern of lock-down and re-opening was almost a year behind the rest of the world and they are still in a loosening cycle. 

Their official overnight interest rates are at 3.55% and the next move is expected to be downwards! 

They are not worried about inflation at all as they are experiencing deflation at the moment! 

Their economy is in very poor shape which is making it difficult for New Zealand farmers. 

Empty office buildings around the world are a worry 

There are huge volumes of empty office buildings around the world. Partly this is due to the Covid practice of working from home and many employees are resisting returning to the office. Employers are pushing back. 

Flexible working conditions have some benefits, but so too does working alongside your colleagues in a work environment. The social interaction in a workplace is often helpful to the business. 

The publication ‘Visual Capitalist’ suggests that the United States has almost 1 billion square feet of empty office space. If a skyscraper were built to represent this empty space it would include over 48,000 floors stretching into the thermosphere where the International Space Station is orbiting. That is a height of 530,000 feet or 100 miles. It assumes each floor having 20,000 square feet of office space. This was based on data from Jones Lang LaSalle IP 2023, and they say that the empty space is primarily in the older buildings and is due to corporate cost cutting. 

Many large cities around the world are experiencing similar levels of empty office space and failures of office owning businesses will put pressure on the banks that hold the debt. 

Investment returns have been relatively good 

Diversified investment portfolio returns have been pretty good for the past year, depending upon the risk profile and portfolio size. 

Our 80% growth portfolios have returned around 8.9% for the Classic portfolios and 8.6% for the socially responsible portfolios over the year to 30 June 2023. Most of that return has come in the past six months. 

There have been some very good tax refunds to add to these returns at the 31 March 2023 position of over 0.5% which adds to the after-tax return. 

We still have a wee way to go to get back to where we were before Covid, but we are well on the way. 

Feeling more positive after all that? 

This discussion is all very short term, but if you follow the economic and investment environment over this sort of time frame, the picture is looking reasonably bright. 

Over the longer term, it is always bright. 

Keep asking great questions ...