Is there such a thing as a rapid slowdown?
I guess so, but it seems funny to say it.
Anyway, that deliciously contradictory-sounding expression appears to be exactly what is happening to the New Zealand economy at the moment. We are cooling off. Fast.
Nobody should be particularly surprised, given that the Reserve Bank (RBNZ) has been hell-bent on slowing the economy down in order to take the sting out of rampaging inflation, which peaked at 7.3% last year and was still at an elevated 6.7% (annual rate) as at the March quarter of 2023.
The RBNZ has been hitting us with everything it has got, hiking its weapon of choice, the Official Cash Rate, up from 0.25% in October 2021 to 5.5% now.
In the same period mortgage interest rates have gone from two-point-something percent to six-point-something percent or even worse depending on your choice of fixed term or if you are on floating.
What has stood out though is that large parts of the general public have (outwardly anyway) appeared almost impervious to soaring costs and ramping interest rates. Eating out and travelling have been on the menu, for example. We did save up a fair bit of money during the pandemic.
All this has gone on while the official figures suggest that (by the narrowest of margins) the country went into a 'technical recession' as of the March quarter.
But I guess it is the way of these things that when conditions turn, they turn slowly enough that you don't necessarily notice, and then suddenly things will seemingly happen in a rush. Remember how the housing market appeared to go from white hot in November 2021 to suddenly cold as ice just a month later?
Well, all that pumping of the OCR throttle by the RBNZ was sure to have a more noticeable effect eventually - and now here we are.
Consider some of the developments of the past week:
• The Reserve Bank's latest statistics for May showed a sharp rise in the number of non-performing mortgage loans, albeit from a very low base.
• The long-running and much followed NZIER Quarterly Survey of Business Opinion showed some marked declines in labour market and capacity pressures.
• Credit bureau Centrix's latest monthly Credit Indicator Report showed that some Kiwi households and businesses are "walking an economic tightrope" - with higher consumer arrears and mortgage delinquencies.
• The latest Crown Accounts for the 11 months to May 2023 showed a deteriorating financial position, with tax revenues coming up more than $2 billion short of projections - a clear sign of a slowing economy.
There might be other things I haven't mentioned there too. But I think you probably get the point. 'Suddenly' it's slowdown time.
I'm sure the RBNZ won't be 'pleased' with these developments as such. But there has to be at least a sense of satisfaction, dare I say interspersed with big dollops of relief, that tangible signs are emerging of the heat coming out of the economy after all the work the RBNZ has been putting in to engineer such an outcome.
However, life wouldn't be life if it didn't have complications attached.
And for all that we are now seeing clear enough signs of slowing demand in the economy, the target of all this attention - inflation - is still looking like it might want to hang around for far longer than anybody wants.
The NZIER survey mentioned above, for all that it showed real signs of slowing momentum in the economy, also highlighted that firms are still facing strong cost pressures.
It would be the worst of all worlds if we were now to see the economy grinding to a halt, BUT inflation stays stubbornly high.
The next Consumers Price Index reading of inflation (June quarter) is due to be released on July 19. The RBNZ is forecasting that the annual rate will fall to 6.1% from that previous 6.7% level in March, and it reckons inflation will be down to 4.9% by the end of the year.
Fingers crossed that there is such a fall. We do need to see it. Because obviously the whole point of us being put into an economic downturn is to kill inflation.
If we do end up with the dreaded combination of a stagnating economy and still too-high inflation then life might not be fun at all for a while and it would become a tough balancing act for the RBNZ.
Personally, while I reckon we will see inflation come down appreciably in the second half of this year, I'm still concerned that it may remain higher and for longer than anybody hopes. The RBNZ is currently forecasting that inflation will be back into its 1%-3% target range by the second half of next year.
I really hope the RBNZ is right. If it is wrong and inflation persists outside of that 1%-3% zone for too long, what does the central bank do? Does it reach for the shotgun and have another blast on the OCR?
At what point does a slowing economy become something rather more serious? After all in terms of what we are seeing with the economy at the moment, well - what are we seeing? Are we seeing the full extent of a slowdown now?
The amount of interest rate hiking the RBNZ has implemented is unprecedented in such a short space of time. There has to be more than element of 'experimentation' about this. Nobody can be absolutely certain what will transpire. Has the RBNZ already done much more than 'enough' in slowing the economy? There's always the danger with a blunt instrument like the OCR, which has such a 'lag' in terms of its impact, that 'enough' might actually have been several OCR hikes ago.
Will we see this slowdown gain a life of its own and extend beyond the hoped-for 'soft landing'?
As the signs of economic decline, such as rising mortgage stress, become obvious does this put us into a kind of negative feedback loop where, from being buoyant, resilient and seemingly impervious to all the RBNZ was doing, we instead now get very down, stop spending and really do make the economy grind to halt? I know the general consensus among economists is that we are going to be able to get away with a relatively mild downturn. But I'm still nervous about the situation. Particularly if inflation doesn't play ball.
I think the danger is that the increased stratification we've seen since the pandemic - the gap between haves and have nots - will only increase from here. Pressures are falling unevenly. Annual food price inflation running at over 12% is clearly going to affect the lower income households much more badly.
Remember too that the RBNZ's OCR hikes are most directly affecting households with mortgages - and by RBNZ estimates only about 38% of households have a mortgage. So, the impact of the downturn is being felt very unevenly across the population and, indeed, that's probably why much of the slowing of the economy to date hasn't necessarily been that visible.
As I have said before, I think the labour market is the key to everything at the moment. Unemployment has been amazingly low. It is 3.4% currently and has been well under 4% since the second half of 2021. The next labour market figures (June quarter) are due to be released on August 2. The RBNZ's forecasting a slight lift - to 3.5%, but with much more to come later. It sees the rate being 4.6% by the end of the year and then rising further next year to be 5.4% by the end of 2024.
With some of us already experiencing mortgage stress even with this unemployment rate so low, the unemployment figures are going to need to be watched. We can't be absolutely certain how well contained mortgage stress will be, even with the full work force we have at the moment.
A lot of people have yet to switch to the higher mortgage rates of now. Exactly two years ago you could still get a two-year fixed rate at 2.59%. Now you might possibly be refixing at 6.79% and be facing a more than 50% increase in your monthly payments.
We are now into the 'slowdown proper'. The phony war period while people watched on placidly as the RBNZ hiked the OCR till it was blue in the face with apparently little impact is now over.
This is where it gets real.
*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.
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