Is the NZ economy heading for a hard landing? As the country awaits the presentation of Budget 2022, the omens are not good.
The ANZ Bank, in its latest quarterly economic forecast, says many commentators are talking about the risks of a recession. It’s a valid concern, as it is clear that the impact of hikes in the official cash rate (OCR) has already reverberated through the housing market through higher mortgage rates. The bank’s economists say this adds an extra layer of concern over and above fears about the cost of living and sustainability of asset prices (via KiwiSaver balances and the like).
“However it is imperative that the Reserve Bank gets on top of inflation quickly. Going hard should, in theory, lessen the need to hike by more in total and that has been a key RBNZ message.
“ Raising rates aggressively while consumer confidence is around record lows and housing retreating might seem counter-intuitive, but the policy choice is between some pain now or probably more pain later. Indeed not hiking aggressively now would itself be risky.
“If bond market participants sense that central banks are going soft on containing inflation, long-term interest rates are likely to rise even more sharply over time as investors seek inflation compensation. This is what happened in the 1980’s and it is crucial that this is avoided this time around so as to avoid a deep and prolonged period of stagflation.”
The ANZ Bank economists see the economy as transitioning from domestic demand that was over- stimulated to a rapid withdrawal of monetary stimulus in order to tame the inflation beast.
The re-opening of the border will hopefully offset some of the slowing in domestic demand, but it’ll only be a partial offset.
“It’s a fine balance for the RBNZ as they weigh up the risk of oversteering (a hard landing for economic activity and inflation) against the risk that inflation pressures continue to spiral. At some point in the not-too distant future the OCR will be back at a level where these risks are a little more balanced, and decisions will be more difficult”.
In summary, the ANZ Bank economists see “considerable uncertainty” in the economic outlook “as we transition to a new normal”.
That underlines how difficult it may be to frame a budget in tune with the complex economic situation and outlook.
Don’t forget that conditions for exporters have become tough. Key export commodity prices have been elevated because of tight global supplies, but they are now slipping as the willingness and ability of global consumers to pay top dollar for NZ produce is reduced.
Will it be appropriate for Finance Minister Grant Robertson to continue with fiscal stimulation? He has talked of an extra $6bn to be outlaid on infrastructure projects and climate change measures.
But New Zealanders will be expecting him to provide additional cash for health and education, which have been under pressure during Covid.
Then there is the sore point in many households of the financial squeeze from rising interest rates on mortgages at the same time as living costs are soaring. Not much room there for an overseas jaunt!
But this has given Opposition a powerful stick to thrash the government over the cost of living “crisis” and to call for tax cuts.
Point of Order thinks the economic outlook is the most challenging a Finance Minister has had to confront in a budget in the last 30 years.
So good luck Grant!