Is there an economic recovery underway? There sure is.

It’s not a replay of the very strong rebound out of COVID’s first wave in 2020, but that’s partly because the post-Delta downswing in 2021 wasn’t as bad as the initial COVID hit, so there was less damage to recover from. Even so, it’s still going to be pretty good.

You probably won’t be far off if you reckon the Australian economy ends up growing by 3.5% a year in both 2021 and 2022, and New Zealand by something like 4.0% a year. There’s a bunch of factors driving it. Vaccination, natch. People are getting more comfortable as life is becoming more normal and we move on from drastic lock ’em down restrictions. Then there’s the lifting of the restrictions themselves.

There are backlogs to be cleared. “We’re playing COVID catch-up,” as my dentist put it, explaining why you can’t get an appointment with the dental nurse for months. There’s pent-up demand as people spend the money they accumulated but couldn’t spend during lockdown.

Monetary and fiscal policy have been highly supportive. And no immigration has helped turn the local labour market hot, hot, hot.

Business is spending up

There’s also a highly encouraging detail in the economic data. Companies are spending up big on new plant and equipment. In Australia, the September Survey of New Capital Expenditure by the Australian Bureau of Statistics showed that actual spending was up by a strong 12.9% on a year earlier, and planned spending was even stronger, with an expected capex increase of 19.7% for 2021-22.

New Zealand doesn’t run the same survey, but Stats NZ said that the June quarter GDP data showed that capital spending “remains at historically high levels”, and the November ANZ Bank business survey showed that businesses plan robust levels of capex spending.

Why is that encouraging? Because capital spending is the high road to stronger productivity growth, and in the long run it’s productivity growth that makes us all better off.

It may be that some businesses got painted into a corner, and were compelled to invest in gear when, in a tight labour market, they couldn’t put bums on seats instead. Never mind. Now that we’re there it’s a very good thing, especially as pre-COVID neither Australia nor New Zealand was making a great fist of moving productivity along at any decent clip.

Put the equipment spend-up alongside the efficiencies companies learned to achieve through COVID – imagine, people could actually be trusted to do a good job from home without hordes of hierarchy in expensive CBD towers – and you can make a decent case that the businesses that have written the capex cheques will benefit from a sustained burst of productivity gains.

You get the feeling, too, that the recovery is going to be greener than pre-COVID ones. Our governments may be faffing around, with neither Australia nor New Zealand showing to advantage at the global COP26 climate talks in Glasgow, but even with them missing in action there’s a definite “build back better” sentiment in the private sector.

More companies look to be recognising climate change as an issue. The economics is moving that way, too, as (for example) electric car infrastructure rolls out and the costs of battery and solar energy continue to fall. And there’s a payoff in business valuation as investors pile into more highly regarded sustainable investments.

Just look at the range of sustainability and similar ESG-focused options now available on the ASX and flying off the shelves.

What about interest rates?

Of course, it wouldn’t be yer proper economics outlook without the obligatory mention of what might go wrong, and on this occasion the pachyderm in the parlour is potentially tighter monetary policy. (Fiscal policy, too, will have to be wound back at some point, but treasurers on both sides of the Tasman don’t look like they’ll go cold turkey on that any time soon.)

Let’s suppose the outlook for two years of decent growth does indeed come to hand. In that case, there is precious little case for interest rates to stay at the near zero levels that were suited for the depths of the COVID crisis. And that’s assuming the current burst of inflationary cost pressures abates as supply chain blockages ease.

If inflation stays up there, then there’s even more likelihood of higher interest rates. New Zealand’s already started. The Reserve Bank of Australia (RBA) says it’s not moving any time soon, but the financial markets think otherwise.

It’s going to be a tricky path to navigate because the previously ultra-low rates have boosted many asset valuations – house prices, sharemarkets, bonds – to expensive levels, and there’s a good deal of frothy behaviour evident. Letting the air out of the balloon without popping it won’t be easy.

Figure 1: Ultra-low interest rates are on the turn. Source: Sources: RBA, RBNZ, ASX.

Winners and losers

Another issue is the post-COVID shuffling of the sectoral deck. The overall economy should be growing, but there’s still a way to go to sort out the likely winners (such as regional and suburban housing and industrial property) and losers (such as secondary retail and office space) as post-pandemic behavioural change works its way through.

Fingers crossed there’s no monetary policy mistake and we get a couple of good years in the bag. Yet it won’t be wholly plain sailing. For businesses, wages are likely to be rattling along, good people are going to be hard to find, and supplies may be tricky to source and expensive when you find them. If you want a new warehouse or laboratory you’ll be paying through the nose.

But I doubt if people will mind much. If, in the mid-2020 COVID slump, you’d offered that menu to most businesses, I suspect the response would have been, “Where do I sign?”