Kiwi business bosses in New York told global recession likely, but trigger is anyone's guess

The Kiwi business leaders including chief executives from Spark, Infratil and the Warehouse Group were briefed near Times Square in Manhattan. Photo / 123RF

The world is headed for recession but whether it's a normal slowdown or major crisis is likely to be determined in the next year, an economist told New Zealand business leaders in New York.

Karen Harris, a managing director at global consultancy Bain & Company, briefed executives including CEOs of Spark, Infratil and the Warehouse Group.

And the briefing was just a block away from the former headquarters of investment bank Lehman Brothers, which collapsed in 2008 triggering the Global Financial Crisis.

Harris, who leads Bain's Macro Trends Group, said there were two paths in a recession.

"One is just a normal recession where the economy slows down," she told business leaders at Renaissance New York Times Square Hotel.

"To tip into a crisis as we saw in 2008 takes some sort of trigger event. And I think if we are going to have one, we will see that emerge over the next few months to a year."

Harris said she couldn't pinpoint what the trigger would be.

"Will we see a major sovereign crisis, will we see a financial institution blow up? I don't think anyone other than the people who worked with it had heard of LDI two weeks ago - now they are centre stage in the UK pensions market."

LDI, or liability-driven investment strategies, are used by pension funds to insure themselves against big moves in bond markets.

But the UK financial regulator is now looking to tighten rules around the strategies, after LDI funds faced severe stress when British government bonds fell sharply.

The fall followed announcement of a tax cut package which has since been walked back.

Harris said one trigger for a sovereign crisis could be the sharp rise of the US Federal Reserve cash rate.

"Certainly the Fed, I don't know if it is too far too fast for the US economy, but it could be too far for other economies as the dollar rises, pulls in liquidity from the rest of the world."

The rising US dollar has made it much more expensive for countries like New Zealand to buy products and services from the US.

Harris said rising costs especially for food and fuel could be beyond what some countries could bear.

"We saw that happen in the Asian financial crisis, for example. I think for the US to tame inflation, this continued assertive policy is likely the middle path."

But rather than Asia, it could be Europe struggling to cope with that cost right now.

"I worry that Europe has enormous financial strains right now because of energy and protecting households from that spike in energy prices."

Rising interest rates could also catch out a financial institution.

"We have had predictably low rates for so many years it's hard to believe there aren't institutions that made what felt like very safe bets on that. That may end up looking less safe as rates rise rapidly and that's another source of potential."

Harris said any trigger is likely to be sooner rather than later.

She said the world was dealing with the end of many of trends which had driven the business cycle for decades.

"Increasing globalisation, expanding financial markets, the ability to find cheaper workers that were more productive - particularly in China of course, the urbanisation. Those were all unwinding already as we came into the pandemic.

"The pandemic and the lockdowns created a global crisis and really accelerated that move to the next cycle and now we are seeing what was a very bizarrely rapid business cycle from the pandemic and recovery to what looks likely to be a global recession."

Harris said Europe was probably already in recession, the US was slowing down and while China may not have a technical recession, its lockdowns were a major headwind on its growth numbers.

"Consumers are suffering"

"What we see at Bain is that consumers are struggling.

"Consumers are suffering under the weight of higher fuel prices, higher rental prices and higher food prices and of course that is going to slow spending in other kinds of ways.

"We are seeing an adjustment. We expected an adjustment now," she added.

"They are always painful and when long secular trends and a business cycle clash it just makes it more of a churn than it is if it is simply the business cycle where we saw central banks spray liquidity and get us out of it."

Harris said New Zealand businesses looking to reconnect with the world after border closures needed a clear strategy.

"For any company, any country, what is the strategy, what does New Zealand want out of its trading partners? That is the first demand.

"How do you best serve the needs of the NZ population - create the jobs for the kids who are in school and the quality of life for the people who are working and how does trade augment that?"

She said New Zealand needed to look after the health of its economy and its businesses.

"They may not always be aligned perfectly with trade but that to me is where New Zealand - any country should look. New Zealand is blessed with security around it unless one of those dormant volcanoes changes its mind..."

- Tamsyn Parker travelled to New York courtesy of Air New Zealand