The Economy - Tougher Times Ahead?
By Miles Workman, Senior Economist, ANZ
Global and domestic inflation risks remain intense, but front-loaded official cash rate (OCR) hikes by the Reserve Bank of New Zealand (RBNZ) are mitigating against the risk that inflation continues to go the wrong way.
Many other central banks across the globe are now underway with their tightening cycle too and making all the right noises. ANZ Research fully expects them to tame inflation in time. The question is, how much tightening will it take and how much economic pain will it require?
War, high inflation, acute capacity constraints, falling house prices and weak consumer and business confidence all suggest downside risks to economic activity. But Covid-volatility is making it hard to separate the noise from the signal.
Provided New Zealand manages to avoid lockdowns in 2022, GDP data should settle down over the second half of the year (Q3 GDP data is released in December 2022).
That means Kiwis need to continue to look beyond GDP for a steer on economic momentum. And there are plenty of indicators suggesting underlying momentum is slipping.
Despite the very low unemployment rate, ANZ’s Consumer Confidence survey shows confidence is softer than during the 2008-09 recession, which is not a time retailers remember fondly.
While building consents are at high levels, ANZ Research’s Business Outlook suggests residential construction is poised to slow. Building cost inflation, construction delays and difficulty achieving presales as house sales and prices fall could very well see some of these consented projects scrapped. Anecdotally, that’s happening already.
There are other reasons to think tougher times lie ahead:
• While New Zealanders are now free to travel abroad, international tourism isn’t expected to start picking up meaningfully until the 2022-23 summer – so tourist operators could have to navigate through a tough winter.
• Conditions for key exporters are tough. Key export commodity prices are now slipping with global consumers less willing, or able, to pay top dollar for our produce. Soaring fertiliser prices along with difficulties in getting product to market and finding workers are also weighing on agricultural production.
• Households are going backwards financially as inflation outpaces income growth. While ANZ Research expects growth in real (CPI-adjusted) hourly earnings will be positive by the end of the year, it’s a mixed blessing for the RBNZ that is, quite rightly, concerned about the possibility of a wage-price spiral developing.
All up, the drivers of economic momentum are particularly complex right now.
Overall, 2022 (which still has some Covid-related volatility to work through) should see GDP growth come in a little below trend (2.2% over the year to December), slipping further in 2023 (2.0%) and 2024 (1.7%). Risks to growth are to the downside.
Inflation will ease; it’s just a question of how high rates need to go (and for how long)
At around 7% year on year, CPI inflation is running at a 30-year high. While there are some significant inflation pressures stemming from global developments, domestic inflation is the primary concern for the RBNZ.
Non-tradables inflation (aka domestic inflation) is running closer to 6% year on year. This is the sticky kind of inflation that tends to be difficult to tame, and right now it’s far too high to be consistent with the RBNZ’s inflation target.
ANZ Research expects OCR hikes, supported by the general monetary tightening underway globally, will successfully take the heat out of inflation in time.
Given current inflation and capacity stretch, ANZ Research expects the RBNZ to deliver more out-sized (50 basis point) hikes in the near term, before pivoting to 25 basis point hikes from October, taking the OCR to a peak of 3.5% in November 2022.
It’s a fine balance for the RBNZ as it weighs up the risk of oversteering (engineering a hard landing for housing, economic activity and inflation) against ensuring inflation pressures don’t spiral out of control.
All up, the rebalancing act the RBNZ and other central banks are currently performing is riddled with risks and uncertainties. But the one thing we can be sure of is that they will be successful in taming inflation, it’s just a question of how high (and for how long) rates need to go.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
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