“Considerable uncertainty” clouds the outlook as Robertson prepares to present 2022 Budget

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!