Global economic conditions in 2022 have changed rapidly. Generally speaking, this will have an impact on your KiwiSaver account and beyond. Talks of recession and the Russian attack on Ukraine added fuel to the fire. Furthermore, increased oil prices, and China’s economic slowdown, all have an impact on the lives of everyday Kiwis to some degree.
In this article, we'll talk about some of the most important global events that have happened thus far in 2022. Moreover, we will discuss a little about the impact they’ve had on your investments and KiwiSaver. From major political changes to natural disasters, it’s important to understand how these affect global and local markets.
Globalization - The Ripple Effect
Before I break down some global events that have impacted your KiwiSaver Scheme, it’s important to know why. You may be thinking, “How does the war in Ukraine affect me?”. Well, a term known as “globalization” has a lot to do with it.
Globalization describes a growing interdependence of the world’s economies and populations through cross-border trade. This trade may include information, technology, investments, people, and much more. The benefits of globalization often revolve around the idea of maximum efficiency and resource allocation. For example, let’s assume Country A focuses on building cars, and Country B focuses on farming. They both specialize and through trade, their people get the best quality products at the lowest price possible. Expand this on a global level and you get the idea.
In an ideal world, this is great and promotes an increased standard of living across the board of participating countries. However, globalization doesn’t account for Covid lockdowns or wars. As we’ve seen with Russian gas and European countries, overreliance on resources from a single supplier can leave you exposed. Emily Mansfield, principal economist for EIU explains that energy prices are the main factor behind high Euro-zone inflation this year.
Exploring the complexities of globalization and current trends deserves much more attention than a subtopic in this article. This is why we’re going to save that idea and move on to some of the key events that shook global markets in 2022.
Due to multiple factors, some of which we’ll cover in this article, the cost of living has increased significantly. In many nations, inflation is still at or very close to its highest level in decades. According to IMF, global inflation is projected to be 8.8% in 2022.
Recent data for some of the world's leading economies makes for unsettling reading. Pricing pressures have surged to the greatest level in many decades. However, there are signs of a slowdown primarily due to interest rate hikes being implemented as a counteraction.
Even while the global economy is showing signs of improvement, certain global events may still affect your KiwiSaver Scheme performance. The US stock market has been riddled with instability, while the UK saw the Pound Sterling fall against the Euro. Elsewhere in Europe, there is a rise in unemployment, the war in Ukraine, and major gas shortages. These events largely have a negative impact on your KiwiSaver account depending on your investment portfolio and exposure levels.
Recently, the member states of OPEC+ decided to begin an oil production cut that would take effect in November. According to the organization, "uncertainty that surrounds the world economy and oil market outlooks" was the driving factor for the decision. After the OPEC+ decision to cut down oil production the American reaction drove instability in global markets. Now the price of oil will likely increase again and may impact overall inflation figures.
In short, while a little inflation is good (1-3%), figures like what we’re seeing now (8.8%) are bad. Generally, investors get nervous, and stock markets depreciate and become very volatile. Depending on your chosen KiwiSaver fund, you may be more or less exposed based on your investment in global stocks.
Global uncertainty and recessions (GFC 2008)
Interest rates are on the rise globally, and this is impacting KiwiSaver. Here are the figures coming from some of the leading central banks in the past year:
- The United States Federal Reserve has increased its benchmark federal funds rate to 4.5% during its December 2022 meeting.
- The Bank of England has also increased its rate to 3.5% in December.
- The Reserve Bank of Australia has raised its cash rate to 3.1% in December.
- The official cash rate by the Reserve Bank of New Zealand is 4.25% since 23 November 2022.
Retail banks will normally add a margin to reserve bank rates which means your borrowing cost is even higher. An increase in interest rates affects your KiwiSaver in two different ways.
Borrowing has become more expensive which means it costs more to borrow than in the past few years. People and companies feel the squeeze on their finances and focus on saving rather than investing or purchasing. With less confidence, investors may withdraw their investments from the stock market which leads to a drop in market value. Depending on your fund’s exposure to affected stocks, your balance may see a dip in value during this time.
Alternatives to stocks become an attractive proposition for investors with increasing interest rates.
Fears Of Recession
There’s a current debate as to whether some of the leading economies are in a recession already or not. However, most economists agree that the conditions are set for sooner rather than later.
A number of factors are leading to concerns of a recession that is to come. This includes weak growth in China and other developing economies, high levels of household debt, and rising interest rates. If these trends continue, they could reduce demand for goods and services, lower income levels, and increase unemployment.
Global economic conditions (such as a recession) have an impact on your KiwiSaver fund performance. If the economy is weak or deteriorating, people may have less money to spend and invest (either because they're earning less or increased costs). Generally, when consumer behaviour is slowing down, it has a negative impact on markets, which KiwiSaver providers typically invest in.
Russian Invasion Of Ukraine
The Russian invasion of Ukraine has caused global markets to react strongly, with stocks and currencies declining in value. Many factors can affect your KiwiSaver investment, but the Russian invasion of Ukraine has certainly been one. You have heard about it in the news a lot lately. The invasion began on 22 February 2022 and has continued ever since.
The United States and the European Union quickly responded by imposing economic sanctions on Russia. These sanctions have not only hurt the Russian economy but also economies that rely on Russian gas like the EU.
The invasion shook the global financial markets. As of now, it is unclear how this crisis will play out politically or economically. However, it will surely impact both KiwiSaver and international investment markets in the coming months and years.
The NZX 50 Index fell by 5% following the Russian invasion of Ukraine, amongst other global market valuations falling too. What this war really showed is how interconnected global markets really are. Russian gas fuels European nations, and with sanctions on Russia (a major supplier), the price of gas shoots up significantly. In turn, this adds fuel to the fire of global inflation, after the rollercoaster of Covid-19 already leaving its marks. Your KiwiSaver account is exposed to companies affected by all of this to some extent, which in turn decreases in value. All of this leads back to something we mentioned earlier, globalization.
China's Property Crash & Economic Slowdown
We mentioned how the world economy has become very interconnected. China is the number 2 economy in the world (behind the US) and therefore can have a significant impact on a global scale. China’s 2022 property crash has seen its impact spread across the Chinese economy and is subsequently making global markets nervous. The country's largest developers are struggling with large debt burdens, and consumers are losing their investments in failed construction projects.
Evergrande Group, China's second-largest property developer, reportedly told the Guangdong provincial government that it was close to running out of cash in August 2021. This was one of the first signs that a meltdown in the Chinese real estate market was imminent. Since then, Evergrande, already burdened with more than $300 billion in debt, has stopped making payments and is currently restructuring.
The Chinese economy has been slowing down for some time, with growth targets being missed in the past three years. The property crash only expedited the slowdown which has trickle-down effects across the entire world. This is because China is now a big consumer of products from all over the world. From New Zealand dairy to Australian minerals, and US technology. A drop in demand for these products means a drop in confidence in the companies that supply them to China. Your KiwiSaver scheme most likely has invested in companies like Fonterra and/or Tesla at some point. Their current investment in companies affected by the Chinese economic slowdown means you may see a dip in your balance to some degree.
Covid-19 Economic Recovery
The COVID-19 pandemic has profoundly impacted the world, both in terms of its cost and effects. The virus has caused millions of people to fall ill and is still spreading. Many lives have unfortunately succumbed to the disease.
Overall, the COVID-19 pandemic has had a significant impact on global economies and healthcare systems. In early 2022, the International Monetary Fund expected to raise its forecast that the COVID-19 impact on the global economy will cost $12.5 trillion through to 2024.
Its economic impacts have been a rollercoaster that not many really expected. Global markets had a horrendous time in 2020 as lockdowns began. Central banks began dropping interest rates to all-time lows and 2021 saw a surprising boost in confidence in markets. Plenty of companies that you would have been exposed to via KiwiSaver were seeing sharp increases in value.
The unexpectedly fast economic recovery seemed too good to be true, and it was. In 2022, headlines from all over the world have been riddled with the terms ‘inflation’, ‘high interest rates’, and ‘recession’. An economist will likely tell you that a recession is a good thing. It weeds out all the bad actors and falsely bloated companies that don’t have a good foundation to survive adversity. Thus, the recovery is led by more competitive markets and a healthy global economy.
The global economy is bouncing back after COVID-19, but there are still concerns about its long-term effects. The World Health Organization (WHO) has estimated that the coronavirus killed more than 6.6 million people. Making it one of the deadliest diseases ever. To prevent future outbreaks and economic consequences, countries are trying to improve their preparedness and response to any future outbreaks.
From war to recession, inflation, and interest rates, many will spill over as headlines for 2023 too. While they can have a negative impact on your KiwiSaver in the short to medium term, you must stay positive. KiwiSaver investment is a long-term strategy and historically speaking, it has proven to be a worthwhile investment.
The key takeaway from this article is that you shouldn’t panic based on what you hear in the news. Oftentimes, things are sensationalized for maximum exposure. You don’t need to check access your KiwiSaver login and check your balance every day. However, understanding what’s going on and how it can impact your savings, may help against any financial anxiety.
We hope this information helps you understand the impact on your investments from turbulent times.