It will be a case of 'hold your horses - not yet' when the GDP figures for the September quarter are released this week.
The Reserve Bank's surprisingly frank concession that is is actually seeking to engineer a recession has got everybody expecting that this is going to happen tomorrow. It isn't. If the RBNZ is right with its current economic forecasts, we will find out that we are in recession in about a year from now. Seriously.
Remember, the 'technical' description of a recession is two consecutive quarters of negative GDP growth. As things stand the first quarter next year in which we see the economy shrink is likely to be the June quarter, followed by the September quarter - the results of which will be known in December 2023.
So, as I've said before the RBNZ's engineered economic downturn is going to be much more of a story for 2024.
In the meantime, in the here and now, it's to be expected that the extremely strong labour market, the return of tourism, and the for-now still strong building sector will keep things buzzing on pretty well over summer and well into next year.
So, the September GDP figures to be released by Statistics New Zealand on Thursday, December 15 should show reasonable strength once again.
The RBNZ's picking 0.8% GDP growth for the quarter. Bank economists who have the benefit of having seen somewhat later data are picking somewhat higher than that. I reckon we may well see something over 1.0%
We can get some clues ahead of time how the GDP figure is going to look through the release of what the economists like to call 'partial indicators'.
Retail trade volumes held up very well in the quarter. with a 0.4% rise, while sales were up a bumper 2.5% - but remember the latter figure would be blown up by rising prices in the face of a 7.2% annual inflation rate.
And while the business confidence surveys are showing us that particularly the residential building sector is very pessimistic about the immediate future, the building work put in place figures, for the September quarter were again very strong, with a 3.8% quarterly rise, well ahead of economists' forecasts.
Stats NZ's quarterly manufacturing survey showed volumes up 3.1% in the September quarter after a 4.8% decline in the June quarter. After adjusting for price changes, wholesale trade rose about 1.5%.
One thing I'm interested to see - although these September quarter figures will be a little 'early' for that - is how the impact of tourists in the country for the first time since early 2020 plays out. The indications so far are that the bounce-back of tourism has been stronger than expected, which has ramifications both for the revenues of companies - and the impact on an already beyond-strained labour market capacity.
For the record, the last time we were in a 'technical recession' was in 2020, when the March and June quarters both recorded negative growth. Of course we did that to ourselves by locking everybody up, with the result that March GDP slid back 1.2%, while the June figure plummeted 10.3%. But this was followed by a supercharged bounce-back of 13.7% in the September 2020 quarter.
The last time we strung together more than two consecutive GDP drops was in the 2008-09 period - when the economy shrank for no less than six consecutive quarters. Now that's a recession.
I'm sure given the considerable publicity that the RBNZ has received for its efforts, seemingly to talk us into one of those 'R' things that there will be some perplexed expressions when the figures come out this week.
But remember, GDP figures are very much a reflection of what has happened - not what is going to happen. And of course our quarterly figures don't generally appear till the next quarter is almost finished, so, they are in some respects very much 'historic'.
What the economists therefore will be poring over this week is not what happened in the September on a 'headline' basis - but what they can glean looking through the cracks about what might be ahead.
Well, in other words, expect a lot of people looking under the hood at signs that the NZ Inc engine's about to stop running on all cylinders.
The RBNZ has of course cranked the Official Cash Rate up now to 4.25% (from just 0.25% as at the start of October 2021) and this, to keep using the car analogy, is expected to apply some serious handbraking to our economy. And of course the RBNZ is currently projecting that the OCR may go as high as 5.5% next year.
How quickly the anticipated slowdown occurs will be most interesting to see. And it is possible it won't happen as quickly as the RBNZ is hoping for if employment levels stay as incredibly strong as they are at the moment, and if wage increases keep coming.
ASB economist Nat Keall is seeing NZ growth "slowing to a crawl over 2023 and early 2024".
"Given that sluggish pace, the possibility that overall economic activity contracts and the NZ economy enters recession, can’t be ruled out.
"In a sense this is a bit of an academic distinction – an economy growing at a snail’s pace will feel very similar to an economy that’s contracting a little. And even a weakly positive headline growth rate will conceal real pockets of weakness within individual GDP components – conditions for the household sector will very likely be recessionary whatever that headline GDP figure is."
He cautions that we shouldn't expect interest rates to start coming down just because growth is slowing.
"Getting inflation back into the target band is still priority number one for the RBNZ, and its comments at the time of the November MPS [Monetary Policy Statement] suggests it won’t be shy about helping push growth into negative territory if that’s what it takes.
"The RBNZ will want to see clear evidence that slowing growth is pushing employment back below its maximum sustainable level and inflation back to target before it pivots to an easing bias.
"We think it will be mid-2023 before the Bank will be comfortable with where OCR settings are sitting to pause the tightening cycle, and mid-2024 before its prepared to start bringing the OCR down.
"The actual timing of when OCR hikes will be delivered is uncertain, but the higher the OCR moves relative to circa 3% neutral levels, the earlier potential OCR cuts could come into consideration. But remember growth is only one part of the equation – the labour market is so tight at the moment due to a shortage of workers rather than a skyrocketing demand for labour. Changes in the size and composition of the labour force and working age population will be just as important over the coming years."
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54 Comments
"The RBNZ will want.... employment back below its maximum sustainable level and inflation back to target before it pivots to an easing bias."
Sounds about right. But I'm sure we know how difficult that will be given the demographic and social changes we have going on. Given that, 'pivoting' may be from some level far higher than that which most people, possibly even including the RBNZ, expect.
(NB: Both of those Variables are just that, of course; variable. So can we expect the new UE level a 2% and the new CPI 6%?)
I agree, a lot higher and for longer. I think we are looking at climbing the Himalayas, not Mount Fuji. Ie lots of up and down, not just one peak and pivot, and we need a long period to get inflation under control.
Ive been thinking on and off about this for awhile, but how should max sustainable employment be measured, actually? Is it measured in any real sense at this time?
RBNZ states:
We interpret the term 'maximum sustainable employment' (MSE) or full employment to mean the level of employment at which the job market is tight, but not so tight that inflation is rising out of control.
If they are simply using inflation as the only measure, what purpose does MSE actually achieve, beyond muddying the water. It seems like it should have a target range at least, but what do I know.
It’s pretty clear employment has actually been too high to produce a balanced economy for quite some time.
One real life example I faced: I went to a favourite restaraunt last week after not having been to it for a number of months. When I got there, it turns out they closed early November due to a chef leaving and being unable to fill the role. They were not able to find another that whole time and from Google, it looks like they are still temporarily closed. I went to another place in the end.
It turns out there's a goldilocks zone for employment generally.
The world isn't so black and white in aggregate, I'm sure some sectors are just fine whereas with others there's an intense shortage.
That's kinda my point, the people who do the actual work benefit from low unemployment, those who don't do the actual work benefit from high unemployment. If my staff left, I would really struggle to replace them and end up having to do a LOT more work myself - which I can do, but I don't want to. So I try and treat my staff very well and give them a great deal so they don't want to leave. It's a lesson I have had to learn but I think I have learnt it well.
I have a lot of respect for people who go out and do the hard grind every day and not a lot of sympathy for people who want high unemployment just so they can eat a favorite restaurant, now I'm not saying that's you because I'm sure it's not - I'm just illustrating my point.
Higher for longer is going to be very, very likely. An OCR peak of at least 6%, very possibly higher, and staying at around that level (or maybe a bit lower) for many quarters, is now the central scenario, in my opinion. Swaps are still assuming an OCR peak at 5.5%, but I think that after the Feb, OCR review they will jump higher to reflect the new reality. Mortgage rates over 7% for the foreseeable future are very likely.
When inflation is low, wage rises are low as employers look to match inflation. Now that inflation is higher the RBNZ wants wage rises to be low and people out of work in order to ward off further inflation. How do wage earners ever get ahead? No wonder people piled into investment properties. Have we now given up on Well Being Budgets and gone back to putting the interests of the markets ahead of the interests of the people?
Amazing how the 'Wage Price Spiral' argument comes out to justify low or no pay increases, but the same companies are quite happy to put up prices to maintain or extend existing margins' that trigger the pay demands - which, as I like to point out - are made in response to living cost increases, not in anticipation of them.
The argument seems to be that workers just have to accept falling further and further behind, no matter the prevailing economic sentiment. And we now have the civil service deliberately promoting those outcomes. Who do they work for again?
GV 27.,
You seem to be confusing the RBNZ and the 'civil service'.
Most demographic sectors will suffer from a recession.
The group that are currently suffering the most from inflation are those who have their wealth at the bank. That includes young people who still have to get on the property ladder and many senior citizens. Most wage earners have been well protected until now unless they have been in those groups.
In a recession there will be loss of wealth felt by businesses as well as wage earners. Returns to capital will decrease.
Unfortunately there is no alternative way of controlling inflation without a focus on wage and salary constraint. The only way to prevent what is now upon us would have been to prevent the inflationary forces unleashed over the last 3 years.
History will look back and note the excessive QE across most of the Western World, and the nature of the lags between cause and effect. Those issues are still with us.
KeithW
The group that are currently suffering the most from inflation are those who have their wealth at the bank. That includes young people who still have to get on the property ladder
Would you rather have your $300k in the bank or sunk into a home purchased last year?
FHB's with cash at bank are in a prime position.
Inflation is only hitting their wages and ability to meet cost of living, not their home savings account.
Thanks for the reply KW; was genuinely unsure as to whether RBNZ counted as 'civil service' or not, but can appreciate there are a lot of civil servants who took a 'lose the battle, win the war' approach with Government for pay increases pre-Covid who are now well behind the 8 ball.
Agree, however, we have not resolved our issues with cheap money. Discussion still seems to be couched in terms of more QE being inevitable and a 'when' instead of the main question, which should be 'why'.
Unfortunately there is no alternative way of controlling inflation without a focus on wage and salary constraint.
This assumes a demand problem, not a supply problem.
We would not have inflation if we reduced our expenditure, i.e. saved more. Those at the bottom of the rung who spend all there wages on the necessities in life do not cause inflation. The salary gap has grown to far, those that have excess funds have had there overseas travel curtailed, this effect was underestimated by the RBNZ, this money that went overseas does not find a home in a bank account, it is looking to be spent. The balance that used to exist has been altered, a new equilibrium has to be found, however when the new equilibrium is found and the borders open there will be a double whammy of reduced demand in these areas and a new rebalancing will need to occur. Again those at the bottom will suffer the most for the expenditure at the top end of town.
Income distribution is no longer a single camel hump, it is a double hump, wherein lies the problem, as the solution assumes a single hump and you can move along the medium and get a result, doesn't work with a double hump.
Wages/Salaries are only a part of the cost make up of products or services. Yes constraining wages will reduce the rate of inflation, but letting wages stagnate is far more damaging than having wages double or triple in a short space of time.
If wages are 70% cost of goods for a $100 item, and you triple the wage then the COG becomes $240 ($210 + $30). The wage earner now has 87.5% buying power instead of 70%, and is probably more likely to be a consumer of your product.
In capitalism effectively workers will always fall relatively behind. Full employment is a model that's been adopted because it strikes a decent balance of the state not having to forgo the costs of support the unemployed, and keeping the population occupied.
Trouble is we now have high employment, but taken up with a large amount of low value jobs.
Agreed. Despite being low value, the labour cost of those jobs in NZ is fairly high by international standards. NZ has a minimum-to-median wage ratio higher than the OECD average, sitting behind only Turkey and Chile.
This is particularly a problem because the high wages borne by employers here is to cover high living costs, not to compensate workers for their skill or talent premium.
@ Advisor
Nonsense
- the share of GDP going to workers has not fallen since New Zealand’s labour markets were freed in 1991. In fact, it has risen. As a result, market income inequality has fallen in New Zealand since the early 1990s;
- wage growth has not lagged behind productivity growth;
- wages have not fallen as a result of a race-to-the-bottom in any industry. Indeed, wages in every wage decile have risen; and
- New Zealand’s productivity growth has been insipid for more than half-a-century, and it has been higher since the labour market reforms than in the preceding two decades.
www.nzinitiative.org.nz/reports-and-media/opinion/mbies-fair-pay-agreem…
Page 13 (15 of document) has a graph showing Labour Income Share. They actually fell in the 1990s, recovered in the 2000's peaking about 08 - 09, and then have been on a gradual downward. Also tracking below the OECD average.
https://www.mbie.govt.nz/dmsdocument/17166-do-workers-share-in-firm-suc…
Like many other countries, New Zealand has seen a long-run decline in the labour income share.
However, the long-run trend in New Zealand’s labour income share is one of decline. Rosenberg (2010) shows that, over the period 1978-2006, average wages grew by 44% while labour productivity grew by 90%, giving an aggregate pass-through elasticity of 0.49 over the period.
The way to get a pay rise is to change jobs, for one that pays more. Works in the private sector not as much in some fields, ie police, fire fighhters, teachers. In bigger corporates the job churn is high at the moment as people move roles for the next 8-10% pay increase.
I think FED goes 50 but talkd like Mr Orr, higher for longer.
Keith - add very loose fiscal policy as well......
I’m more worried now. The housing market is going to be in a hostile environment for longer while the OCR stays at this sort of level for longer. The negative wealth effect of lost equity will be gathering momentum and will be hard to integrate into the economic data in order to orchestrate a soft landing.
It will be a case of 'hold your horses - not yet' when the GDP figures for the September quarter are released this week.
I think so too. Remember though that when the Y axis is measured in percent, a horizontal line on the graph represents exponential growth, which is unsustainable. So at some point we have to go negative again. It is inevitable.
The only question is by how much, and for how long.
Consumers Shocked
A recession has either started or is very close if Tony Alexanders spending intentions survey is any indication
www.tonyalexander.nz/wp-content/uploads/TV-Spending-Plans-Survey-Decemb…
The provisional net migration loss of 4,100 in the year ended October 2022 was made up of a net loss of 15,100 New Zealand citizens, partly offset by a net gain of 11,000 non-New Zealand citizens
The Herald posted last month's migration stats headlined "Brain drain gone away?". These morons probably think brain gain/drain is the number of human brains we gain or lose each month.
Jokes aside, the pent-up demand for visit, study and work in NZ could keep the economy out of the red zone for the time being.
Students and workers tend to be more "economically active" in the first few months of their arrival in paying for big ticket items such as tuition fees, international flights, temporary accommodation, consumer durables, etc.), which could artificially prop up the economy. By the time these expenses tail off in favour of BAU, you'll have the next big batch arriving.
NZ loses doctors, nurses, teachers, engineers, accountants etc to Australia and the UK, and replaces them with hotel cleaners, waiters, and bottle shop attendants from the third world. I don't see that as a "brain gain". I see a loss of professional skills that are almost impossible to replace due to our low wages and high cost of living, and a gain of people who weren't skilled enough to get in to Australia or Canada.
I see that what has been self-evident in NZ for some time; and still applies, is now emerging in the UK.
Interest rates will have to climb far higher than most people think. We have not yet grasped the scale of tightening necessary to bring inflation under control
https://www.telegraph.co.uk/business/2022/12/11/interest-rates-will-hav…
Agree . Interest rates will rise until inflation falls. The problem in nz vs the rest of the world is that we have fixed rate mortgages. So whilst overseas an interest rate hike affects most mortgage holders immediately (and thus lowers spending and inflation within a couple of months). In nz the rise affects maybe 1 in 36 households in that given month.. (assuming we have average 3 year durations of fixed rate mortgages and that most are fixed). So for us we have to hike and hike the rates but in a year i a averaged-out 1% rate rise has about 1/6 the impact on spend of a 1% rise at the start of the year overseas? So to match the reduxed spend of a 1% rise in jan ina country with 100% floating rate mortgages we would need a 3% rise in jan or a 6% rise spread over that year(?)
Not sure the math is 100% but would explain why we are seeing gdp and spend continue to rise and only house prices fall.
IF we used real time measures, instead of year ago measures, all the necessary adjustments could be much more subtle and the economy could be much more stable. In the past we didn't have the technology to do this but now we do and there is no excuse. It wouldn't take too much effort to set up a new database that tracks all our data points in real time. It would in fact be more accurate.
Ever notice how GDP figures never have error bars? It's a ridiculous assumption to think that sampled data is 100% accurate, same with inflation, unemployment etc.
For example fuel prices are currently deflationary but by the time they show up in inflation the RB will have already engineered a recession that we didn't even need because our demand for fuel is totally unrelated to the price of fuel.
Valid point.
But that assumes that the RBNZ is trying to tame Inflation as the ultimate objective.
Perhaps if we stand back, and look at what it might alternatively be trying to do e.g. Fundamentally change the way New Zealand heads into the future; its economy and its financial settings, then it might make better sense.
Nothing gets changed without a reason. And in "Inflation", we have one.
(PS I know it's not in the RBNZ job description to address that matter, but as we have been shown over the last 20 years and more, politicians - any of them - are incapable of doing what they are in fact paid to do. ie: all of the above. Let's hope that in their absence we have a quasi benevolent dictator in Adrian Orr)
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