Supply and demand in the New Zealand economy are back in balance and prices are behaving more normally, despite slow progress in domestic services inflation.
That’s the view of the Reserve Bank’s chief economist Paul Conway who leads the central bank’s research programme and sits on its Monetary Policy Committee.
“We've got an economy now where supply and demand are broadly in balance. Our output gap is pretty much zero and we're pretty much around what we used to call maximum sustainable employment in the labour market,” he said on Friday.
“So, the economy is in balance and ongoing inflation pressures are really being driven by people, that’s wage setters and price setters, not adjusting their expectations to a low inflationary future”.
Earlier this week, the committee opted to hold the Official Cash Rate at 5.50% despite forecasts showing disinflation was happening slower than expected just a few months ago.
Headline inflation was still forecast to drop into the target band by the end of the year but only just. Reserve Bank (RBNZ) projections show it scraping in at 2.9% in the December quarter.
The economy will have grown a very modest 1% across 2024, unemployment will have risen to 5%, and the first full rate cut could still be nine months away.
Conway said the central bank was still confident it was going to get inflation into the target band by the end of the year despite the “slight upwards nudge” in the projections.
Disinflation was occurring roughly as projected but with a different mix. Imported prices are back to normal—up just 1.6% year-on-year—while domestic prices have climbed 5.8%.
Down to the core
This is not unlike what has happened in other countries. The British Prime Minister called an election on Thursday, partly in response to headline inflation dropping to 2.3%.
However, core inflation in the United Kingdom remains uncomfortably high at 4%, while its services inflation was just under 6%.
Statistics NZ’s measure of core inflation shows an annual rate of about 4.5% in the most recent release and RBNZ’s flagship core measure puts it at 4.3%.
The central bank has been clear that it is targeting core inflation, as that is what defines the pace of future price increases, rather than headline Consumers Price Index inflation — which is the official target.
A rate hike to combat these sticky inflation pressures was considered in May but not delivered due to the long-term risk it would pose to the already weak economy.
“We've got the impression there are upside risks to inflation over the next couple of quarters, given we've been constantly surprised on domestic inflation, and that may persist for another few months. But beyond that we see the risks to the downside,” Conway said.
RBNZ Governor Adrian Orr said the inflation pressures were concentrated in the short-term and sectors less affected by interest rates. Another hike would hit those already hurting hardest.
Conway said you still see prices climbing in rents due to strong population growth, insurance premiums after extreme weather events, and council rates as they invest in infrastructure.
Higher interest rates mostly impact these things indirectly by limiting wages in the labour market and restricting how much people are willing or able to pay for those services.
The bank has forecast a further weakening of wage growth as employers let go of extra staff they hired when New Zealand’s border reopened after the pandemic amid a worker shortage.
“There has been a bit of [labour] hoarding and if firms come to realise that market fundamentals have changed, and we need a reallocation of workers, that could lead to further softening in the labour market,” he said.
Labour hoarding has also been hurting productivity as output has decreased faster than employment. This means more workers have been contributing to each unit of output.
Last domino to fall
Kelly Eckhold, chief economist at Westpac NZ, said the RBNZ was right to worry about both sides of the economic outlook.
It was “as likely as not” that inflation would fail to drop into the target band this calendar year, as even the smallest unexpected pressure could push the 2.9% forecast above 3%.
But on the other hand, it was very plausible that the economy could take a sudden turn for the worse and fall deeper into recession.
The message he was hearing from RBNZ was that we were “not out of the woods” on inflation, but that it really doesn’t want to hike rates unless the economy unexpectedly perks up.
Price pressures in a broad range of services were “not so easily dismissed” and were generally the so-called ‘second round effects’ that central banks try hard to prevent.
Insurance and rates were climbing not just because of capital and risk costs, but also because of all the previous wage and construction inflation that has occurred in the past two years.
The question is whether services are the last dominoes to fall at the end of the line, or whether they are still part of an ongoing inflation feedback loop.
73 Comments
No, the question is how RBNZ think they can just ease the economy out of this nosedive given that they have stalled the engines and the pilots are deliriously talking to each other about voodoo expectations, output gaps, labour hoarding, animal instincts, and getting their mojo back.
Inflation is sticky in NZ because firms are having to increase wages and prices because of the 'cost of living crisis' - mortgages, debt servicing costs, rents, rates, insurance, energy bills. Now what could Govt or RBNZ do to take the pressure off the feedback loop here?!? Kill more jobs and subjugate labour to the point of slavery, turn communities into workless ghettos, or take some action to reduce the cost of living?
Unfortunately they have no ability to reduce the cost of living....and admitting it destroys their raison d'etre.
If they reduce the OCR property values will not necessarily fall (indeed they would potentially increase), rents will not necessarily reduce and they risk a slump in demand for NZD creating further inflation from imports and little relief from the considerably lower quantity of exports.
They are as subject to market forces as the rest of us , even with the ability to issue currency, for that ability is severely constrained
It's quite astonishing how many people keep claiming that high interest rates worsen inequality when it's so obvious that low interest rates do so far more.
High interest rates are only bad for the poor if your definition of poor is "still has a mortgage on their property / properties". Never mind the approximately half of Kiwi adults who don't own a home at all and who are mostly grateful for monetary policy that, for the first time in many years, is improving their chances of doing so.
LOL. When are you going to recognize the glaring inconsistencies in your rebuttals?
Perhaps if I summarize what you just wrote it would help. Low interest rates => rich people win. High interest rates => rich people win.
Perhaps re-reading what you just wrote will help?
It's quite astonishing how many people keep claiming that high interest rates worsen inequality when it's so obvious that low interest rates do so far more.
High interest rates are only bad for the poor if your definition of poor is "still has a mortgage on their property / properties". Never mind the approximately half of Kiwi adults who don't own a home at all and who are mostly grateful for monetary policy that, for the first time in many years, is improving their chances of doing so.
I don't think you can say anything definitive either way.
Just anecdotally, countries with more expensive access to credit, seem even more financially polarized, with less ability for class mobility.
And part of the rational behind an expansive monetary supply is that wealth ends up being fairly illiquid when the supply is fixed.
I tend to think the end result ends up roughly the same, as capitalism virtually guarantees. Just the credit underpinnings allow you to stretch things out longer/over expose issues.
Nooooo! Full employment is reached when the economy is running properly and the flow of money through the economy is sufficient in quantity and velocity to keep things moving. To achieve this ideal state (as we did through almost the entire period between 1945 and 1970) requires us to direct demand inward (domestic), stop people stuffing all of the cash circulating into savings, tax the hell out of people extracting rent etc etc. We need to restructure how our economy works so it works for more than the top few per cent.
There's nothing really to say full employment is a given if an economy is "running properly". As you've alluded to though, you need to circulate money at such a rate so as to achieve high employment. So a portion of the jobs we fund, can't really sustain themselves if they need cheap debt to exist, whilst also starving more productive roles of available labour.
Given we can't economically replicate much of the technology and consumer items we rely on, what does the turn inwards for demand involve?
Why do you keep talking about debt? When the economy is functioning well and in balance, debt is a complete non-issue.
Also worth noting that the jobs that are deemed the most productive in NZ are mortgage brokers, real estate agents, and wholesalers. The least are nurses, teachers, police etc.
I keep talking about debt, because unless you have some sort of mechanism to introduce new money into an economy (which usually comes as a debt in some form), capital ultimately ends up consolidating into the hands of a few. It still does that with the monetary system we've adopted, but money is allowed to flow through the economy in such a way that allows for a high level of employment (just that most are left with no surplus).
You can have a smaller village economy with a fixed money supply that functions well and is in balance, but once you expand much past that you struggle to not end up in some sort of feudal scenario.
The least productive jobs we have are minimum wage. I see your point regarding how we "value" work, but the basic maths is you want some/many jobs that are generating a significant return, to compensate for those that aren't. Say we start paying the workers you mentioned the equivalent of say, $120k minimum, where are the additional funds being generated to pay for that?
You also haven't explained how a move towards a more insular, protectionist economy still affords the wide swathe of technology and consumer items enjoyed by the bulk of the public, that we wouldn't be able to produce internally.
'... and that people who go to work can earn enough money to support a family without govt subsidies.' Got any ideas? Because I can't see any painless route to getting to a point where supermarket or hospitality workers can earn enough to raise a family WITHOUT government assistance. What would low interest rates do to improve the situation?
"So we should go back to low interest rates and more debt?"
I find it so sad that so many many believe this is how it works. (I.e. far too many are unware of other levers that can be pulled to a) direct debt to productive uses, and b) restrain how much debt is created.)
There's a whole bunch of levers.
Debt is the bluntest, deployed most regularly.
Along with it, some surprise new levers with interesting names. Some do similar functions to debt ceilings.
I'd still put money on more debt being a primary tool used to try and get out of this mess. Sad, but predictable.
I agree that is one thing the RBNZ could do to impact real estate values and encourage investment elsewhere...where that investment would then flow (if indeed it did at all) however would be outside their control...if banks were lending less (in aggregate) to the property sector what guarantee is there that lending will increase in other areas of the economy?
Pumping, Jfoe?
That's not quite right either, is it.
Keystroking numbers, is what they do. A digital version of the von Papen approach. No more. Don't address money as if it is real - it ain't.
Which is where this piece falls down - Dan fails to ask about the real economy. Not that Conway would be able to answer him...
When, oh when, will we get to the real discussion?
We could fix the cost of living by dealing to the outrageous monopolies that infest the nation. (inc local and central govt).
They are not efficient but make their money from sheer pricing power.
"Monetary Settings" are not the only thing. Actually looking at how the economy works and the money flows would benefit us.
Never their fault - I assume you mean they never accept responsibility for their F. Ups. But they are also saying arent we wonderful everything is back in balance because of our actions - thats BS
and our BOP deficit says that we far from in the right place as does the Govt. structural deficit
Clowns one and all
The erosion of people standard of living is not in their mandate
It sits in the mandate of the government, but neither of our two major political parties actually gives a s**t. They're only bothered about keeping their loyal voters happy, which often comes at the cost of the squeezed middle.
“So, the economy is in balance and ongoing inflation pressures are really being driven by people, that’s wage setters and price setters, not adjusting their expectations to a low inflationary future”.
China's Latest Move Has Governments Freaking Out
On top of dumping Treasuries (which I covered in detail in a previous video • China Dumping Record Amounts of Treas... ), China's also dumping its excess production on the rest of the world. The tactic has become so pervasive governments worldwide are responding with more than idle threats. But what are they really worried about given this means cheaper stuff and lower prices?
Globalisation works until it destroys your local economy, then... it must be stopped....
Imagine if we had free access to Europe and USA (worldwide) to export red meat and dairy products, would be bad for the local farmers.
I imagine if you make solar panels in Mexico (for US market) you think the same of China...
until it destroys your local economy
Funny how a country such as NZ has a payments deficit with the world and yet has undying faith in globalisation.
I would rethink my business strategy urgently if it were making me insolvent but, in NZ, we don't think at all; just play along with what our political overlords say.
Balanced, economy and New Zealand are not really words that should appear in the same article, let alone sentence.
Our reliance on debt to cover a ridiculous BoP deficit with no intention of rectifying it in the foreseeable future, leaves us extremely vulnerable. And extremely unbalanced.
The housing economy still rules supreme and rbnz do have the tools to dump on it.
The BoP deficit will eventually be solved by a depreciating NZD (and our standard of living will go with it).
(It could also be solved by NZ increasing productivity ... but while a) the RBNZ insists on arrogantly creating and controlling the boom / bust cycles, and b) our government persists with a taxation system that doesn't encourage investments in productivity ... NZ's productivity isn't going anywhere fast. Ergo, the NZ peso has to head south while our standard of living goes south with it.)
Mind you - thems that are doing the exporting and earning overseas money may do okay. But I doubt it. They'll be kept in loads of debt so the banks can continue to syphon off the exporter's profits. (There are very good reasons why developing economies use locally created & funded banks to lend to their farmers. Alas, Kiwis aren't bright enough to understand these reasons so they're quite okay with neo-liberalist free market nonsense instead.)
"... and they even have a "war chest" specifically to defend it from the market deciding it's value."
That war chest you refer too is pathetically small. If the RNNZ came out "all guns blazing" it would be gone in a week, possibly even a day.
The RBNZ will probably only use it at or near the bottom to push for a floor. After that they'll be praying it climbs back up off the floor and settles a bit lower than where it was before. For sovereign issued, free floating currencies like ours there is but one way for it to go when the country backing it has a persistent, structural balance of payments deficit problem. (And god forbid 'the big one' that our geo-scientists say is near, or overdue, hits!)
If Mr Conway believes supply and demand are in balance - why isn't he addressing the fact that the OCR remains wildly constrictive and could be reduced while still remaining constrictive?
Has it not occurred to him that a reduction in the OCR would reduce the cost of living for many which is in turn pushing employees to seek higher wages which in turn pushes employers to raise prices?
Funny how everyone is expected to believe 'inflating' the cash rate will lower inflation. In my mind it was necessary to inflate the cash rate to make users of cheap credit cool their heels and nothing more....Sadly because the cash rate setting reached farcical lows... will anyone remember the effect cheap credit had on the larger economy...not likely ....because folk have had a taste of cheap credit and now will know that its all about timing .... many will have cleaned up and made a clean exit ...whilst others suffer the indignity of higher mortgage rates that they never formulated into their FOMO plan . Maybe there is wisdom in heavily taxing capital gains ...if only to keep a firm reign over the RE market. A 'balance' does not exist until cheap credit use is regulated so as to deter fast gains from what is a 'need' for all rather than a 'want'. I wouldnt like to say the odds of another rate hike are buried .... the dust hasnt settled yet....my 10 cents...
“There has been a bit of [labour] hoarding and if firms come to realise that market fundamentals have changed, and we need a reallocation of workers, that could lead to further softening in the labour market,” he [the RBNZ's Paul Conway] said.
Worth pointing out that those in the construction sector have admitted to doing that. Why? Because the last 'bust' created by the RBNZ saw companies lay off workers and then couldn't find them again when things finally returned to 'normal'. (See NZH's article, 'Rotorua commercial building consent numbers worst in decades - developer' [paywalled].) And the longer the RBNZ's MPC keeps the OCR higher than it needs to be ... the more workers will disappear.
So, Mr Conway, when are you going to recognize it is a problem that you and the RBNZ's MPC have created? Could you also explain while you're blaming businesses for this problem?
When are Kiwis going to wise up to the FACT that these boom / bust cycles serve only to distort market functioning in NZ and result in 'lost years' where we go next to nowhere due to the arrogance and slavish devotion to failed economic theory implemented by ghouls at the RBNZ?
This is interesting, https://www.theguardian.com/lifeandstyle/2024/mar/19/end-of-landlords-s…
I know this thread is not about housing but lets face it, everything is about housing on this site :-P
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