This month marks the one-year anniversary of the Official Cash Rate being held at 5.5% but its effects are only just starting to be felt at their full intensity.
Monetary policy works with long and variable lags. It can take more than 18-months for the full impact of high interest rates to hit the real economy.
While retail banks have begun to lower their new rates, the average mortgage rate has been steadily climbing as home-owners refix their loans.
Last week, the Reserve Bank of NZ said the average mortgage rate had reached 85% of its estimated peak at 6.5% in the latter half of this year: crunch time for the NZ economy.
Already we are seeing parts of the economy breaking under the pressure. The property and construction sectors have fallen into serious trouble, with investors unable to finance projects.
Unemployment has risen an entire percentage point in the year ended March. That's a 30,000 increase in the number of people who can’t find work.
Two NZX-listed companies downgraded their earnings forecasts this week, citing challenging economic conditions, sending their share prices sliding.
Spark NZ, a telecommunications firm, said it was facing weaker demand from its enterprise and government customers as spending cuts had deepened.
It is one visible example of how a reduction in Government spending will be felt in the private sector — and there is more where that came from.
Treasury’s chief economic adviser, Dominick Stephens recently said the agency was in the process of “successively downgrading” its forecasts ahead of the Budget.
NZ was in the depths of recession equal to the 3.9% decline in per capita gross domestic product that followed the Global Financial Crisis, he reportedly said.
Four thousand cuts
The Coalition Government’s first budget will outline the details of cuts to public sector spending to pay for income and property tax cuts.
Like monetary policy, the full impact of job losses won’t be felt immediately as it takes time for redundancies to be actioned and laid off employees to adjust to their new situation.
RNZ has reported approximately 4020 job cuts have been announced so far, while Act Party leader David Seymour has said it could hit 7500.
Even though that upper estimate would be only 0.2% of NZ’s total workforce, it will still add some extra heft to the economic crunch coming at the end of this year.
Finance Minister Nicola Willis has little choice, however. She has committed to cutting income tax and has to offset that cost with spending cuts, or else be accused of Trussonomics.
A recent visit from OECD economists reiterated the constant refrain: do not borrow for tax cuts. They must be fully funded by new revenue or spending cuts.
Willis has repeatedly promised that the revised tax package, set to be the centerpiece of Budget 2024, will meet that criteria. Critics will be watching closely, ready to pounce.
Of course, there are others who argue that even fully-funded tax cuts aren’t appropriate when the Government is facing structural fiscal challenges.
The OECD recommended considering a capital gains tax and increasing revenue to tackle unsustainable cost pressure that will begin to build up in the 2030s.
“There is no silver bullet for increasing revenues or containing spending, but the medium-to-long run fiscal balance will remain a pressing challenge for years ahead,” it said.
But that is a problem for another day. Willis’ immediate job is to shepherd voters and Crown finances through the economic crunch coming at the end of this year.
Scraping the barrel
Mike Jones, chief economist at BNZ, said some forward-looking indicators had shriveled up and there was little hope of economic recovery until 2025.
Some factors that had been sheltering households from the storm were wearing off, he said.
“The savings buffers of some households are being chewed through, fiscal support is being withdrawn, and the labour market is no longer in a strong state”.
New Zealand was “scraping along the bottom of the business cycle” and households wouldn’t feel any improvement until “well into 2025”.
Jones expected the RBNZ would begin to cut interest rates in November, the 18-month anniversary of the 5.5% Official Cash Rate and when inflation is forecast to be well below 3%.
Clare Lombardelli, the visiting OECD economist, said NZ should be able to bounce back to its normal growth rate once monetary policy was loosened.
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