Reserve Bank (RBNZ) chief economist Paul Conway’s speech this week suggested that New Zealand was stuck in an inflationary wage-price spiral and only a recession can break the mania.
The central banker told the KangaNews-ANZ Capital Markets Forum that inflation had become widespread as businesses passed on higher costs and workers sought wage increases.
And he warned that returning inflation to target would be more difficult if the two groups were unwilling to recognise the pandemic, the war, and the storms had made everyone worse off.
What Conway barely acknowledged was the Reserve Bank’s role in creating inflation, which may have been triggered by these events but was escalated by a torrent of cheap money.
His explanation for inflation was that the pandemic, and Russia’s invasion of Ukraine two years later, reduced the ability of the global economy to produce goods and services.
Supply chains were clogged up, people were home sick, non-essential services were periodically put on pause, and a raft of workers chose to retire early.
All this meant there were less things available to buy and it was harder to deliver items around the world. This was when we saw empty supermarket shelves and had online purchases arriving weeks later than expected.
Meanwhile, the Treasury was forecasting double digit unemployment and the government pumped money into households to stave off a second Great Depression.
The Wage Subsidy Scheme kept most workers employed, the Official Cash Rate was cut to near-zero, and the central bank bought government bonds to increase the money supply.
Production in the global economy had contracted dramatically and yet the average person on the street felt better off than before. Personal savings and asset values soared during lockdown — for some it felt like a cash prize at the end of a race and euphoria set in.
It was a glorious era of takeaway treats, regional holidays, home renovations, and wardrobe resets for the majority of the middle-class.
Conway described it like this: “While lockdowns were tough going — especially for people living in Auckland — economic life for New Zealanders was surprisingly normal for many months during the global pandemic.”
But fiscal and monetary policy settings were anything but normal. Policymakers threw the kitchen sink at the economy and were dreaming up ways to toss the dishwasher as well.
Plans were made for negative interest rates and direct cash payments, although neither were ever implemented.
All this fiscal and monetary stimulus papered over the economic reality of what had happened and created an unsustainable financial bubble — which is only now deflating.
New Zealand’s current account deficit, which has blown out to its largest reading since the quarterly data started back in 1987, shows the country has been living well beyond its means.
Conway’s speech on Thursday was intended to be a reality check: the pandemic, the war, and the storms have not magically made us richer and our assets more valuable.
Rather, they have lessened our purchasing power and the sooner we accept that the better.
Widespread, persistent
In 2021, inflation was driven by significant price increases across a few specific products, but the following year it was mostly due to small increases across a broad range of things.
Conway said some of this was because businesses passed on higher input costs and workers tried to maintain spending power by seeking higher pay.
“These second-round effects create ongoing inflation, even after the original stimulus – a relative price shock for specific products like petrol or plasterboard – has died away”.
Inflation also spreads through an economy as some businesses increase their prices simply because they see other businesses doing so.
Customers are much more likely to accept price increases when there is inflation in the economy and profit-maximising firms can take advantage of that.
Healthy corporate profits over the past couple of years suggest that some businesses are doing more than just passing on increased costs to consumers; some are expanding margins.
The Reserve Bank wants consumers to baulk at price increases, refuse to buy the product, seek out a cheaper alternative; and not accept high prices as fait accompli.
It will keep lifting interest rates until demand for goods and services falls, businesses are forced to eat into their profit margins, and price-stability returns to the economy.
This will not be a painless process. Low-income households won’t turn on the heater even when it gets cold this winter, middle-income people might cut their budgets and wear last-season’s fashion, while high-income earners could miss an overseas holiday.
Businesses who want these groups to part with their limited cash will need to offer the best deal they can; not simply shrug and blame prices on inflation. Everyone will be a bit worse off.
Conway said monetary policy cannot do anything about the loss of real income stemming from global events and natural disasters, but it can stop inflation from self-sustaining.
“In short, monetary policy shifts demand in the economy through time… Higher interest rates push economic activity into the future whereas lower interest rates pull activity into the present.”
The Reserve Bank’s loose policy during the first two years of the pandemic pulled large amounts of economic activity into that period, disguising the real costs of what happened.
Thursday’s speech suggested the central bank didn’t want to make the same mistake twice and was willing to keep increasing interest rates, even as the economy slows.
Satish Ranchhod, a senior economist at Westpac NZ, said some thought RBNZ might moderate its forward guidance given the recent weaker economic data.
“For instance, the RBNZ might highlight that future rate decisions would be dependent on the evolution of economic conditions. Instead, the tone of today’s speech suggests that the RBNZ is likely to continue talking tough on inflation and inflation expectations”.
85 Comments
Healthy corporate profits over the past couple of years suggest that some businesses are doing more than just passing on increased costs to consumers; some are expanding margins.
This is very true. I think kiwis have been getting absolutely ripped off on many fronts for years and with people drunk on cheap debt in recent times this just exacerbated the issue, as there was FOMO for many products/services and of course this was often taken advantage of by retailers.
Hopefully we will return to a more balanced approach where consumers do become more savvy with their finances, look for value and stop just throwing money (debt) around like confetti. Retailers will have to work to get peoples money and who knows, they may even have to provide some reasonably good service to get people in the doors?
The country is full of monopolies and oligopolies - the consumer is screwed.
Government is gutless and too slow to legislate to force ComCom to give greater weight to competition.
e.g. The supermarket duopoly should have been broken up. The Warehouse cant even negotiate wholesale access with them.
If we look around the world, true competition is actually scarce, most production and retailing is done by a small handful of companies. 4 companies produce 85% of meat in America, for instance.
This is the nature of capitalism but we still want to pretend otherwise.
Yes, because politics is corrupt, especially in the US. Politicians are bought by big business and the regulations favour corporate mergers and acquisitions, and inadequate regulations.
NZ is as bad if not worse.
https://www.rnz.co.nz/news/lobbying/486670/lobbyists-in-new-zealand-enj…
Yes, because politics is corrupt
No, because the nature of capitalism dictates that it usually proliferates. While true that these large entities will also try and exert leverage on government, the chips fall in a mostly uniform way.
NZ gets it a bit worse because it's such a small market.
"NZ.. its such a small market"
Yes that is why we should know what is happening.
Instead close-knit lobbyists are chummy with labour leaders and inviting them to birthday bashes. Then later its harder to say no to a friend who asks something.
A register records gifts from foreign govts for some pretty mundane stuff and the public are fooled thinking all is above board. There is no corruption in nz, yeah nah
You may very well think that...
corruption
/kəˈrʌpʃn/
noun
1.
dishonest or fraudulent conduct by those in power, typically involving bribery.
"the journalist who wants to expose corruption in high places"
Similar:
dishonesty
dishonest dealings
unscrupulousness
deceit
deception
duplicity
double-dealing
fraud
fraudulence
misconduct
lawbreaking
crime
criminality
delinquency
wrongdoing
villainy
bribery
bribing
subornation
venality
graft
extortion
jobbery
profiteering
payola
crookedness
shadiness
sleaze
palm-greasing
malfeasance
misfeasance
knavery
malversation
Opposite:
honesty
2.
the process by which a word or expression is changed from its original state to one regarded as erroneous or debased.
"a record of a word's corruption"
Agreed, however I am talking more about the way we spend and what we prioritise. Yes we have limited options for some things but there are ways to do better. How many people always ask if the retailer can do better with their price? Ask the bank to do better with their mortgage rates (we always did this when we had a mortgage and always got a rate better than advertised). How many people buy second hand? How many people think before buying rubbish they don't need?
The Reserve Bank wants consumers to baulk at price increases, refuse to buy the product, seek out a cheaper alternative; and not accept high prices as fait accompli.
Lol because NZ has soo many alternatives with lots of healthy competition, right? Really need to restrict what these RBNZ fkers are allowed to do. It's a fkin joke allowing them to stealing time, life and productivity from NZers, its offspring and the future generations.
Thursday’s speech suggested the central bank didn’t want to make the same mistake twice and was willing to keep increasing interest rates, even as the economy slows.
Yeah, not the same mistake, maybe another mistake?
Plans were made for negative interest rates and direct cash payments, although neither were ever implemented.
Naturally this encouraged people to borrow more.
Low-income households won’t turn on the heater even when it gets cold this winter, middle-income people might cut their budgets and wear last-season’s fashion, while high-income earners could miss an overseas holiday.
Crickey..the horror!
In early 2020, one of my first instincts outside of "is this the zombie apocalypse or what", was "we're gonna pay pay hard for this".
And it's coming through in some mundane ways, all adding to cost. One that I can see prevalently in various businesses and industries I deal with is a re-assessment over the importance to attend work. Gone is the "just battle through it" mentality, and instead workers are just not turning up for even the most minor issues. Straight away that one shift is contributing significantly to labour costs, and someone's got to pay for it.
We're 3 years into this now and I'm seeing what I thought were temporary blips becoming long term trends. For decades I could go to a supplier and pull whatever I wanted off the shelf, when I wanted. Now for a lot of things I have to give weeks or months notice, and then I still might not get it. It all really has a soviet era Russia vibe about it.
Now for a lot of things I have to give weeks or months notice, and then I still might not get it.
So why is this? Can we still blame this on supply chain issues? Recently I have tried to purchase a few things and although a website states "In Stock" I receive an email to say "Sorry this item is out of stock" once I have paid. Tried to order a chair and was assured that it would arrive "within 3 months" only to be told after 3 months that it would be at least another 2 months (I canceled the order and got my deposit back). This seems to now be the norm. Is it companies changing the way they operate to cut costs of stock sitting around?
I think it's mainly because we made a super efficient, just in time supply network that has very little elasticity to shifts in demand and the changing nature of covid era industry. There's more stuff being moved around than ever, but also more disruption than ever.
I'm also seeing what should be finished items arrive with many defects and build flaws. Indicating the manufacturers have less experienced people putting it together, less quality assurance, or things are being done in a rush - likely all 3.
Great headline on this article, very happy to see a dose of reality coming back, and so true about staff attitudes - we've managed people out for exactly this, and now when interviewees ask me about WFH I just don't contact them again. Employers have been treated like mummies and daddies - but we aren't, and we don't have to take it.
I feel that across the board, having governments entertain the idea that there is no consequence from turning most industry off altogether has set a fairly bad precedent.
That said, I think the transition from "quiet quitting" to quietly doing something else that rhymes with "quitting" could be swift.
Interest rates come and go. IMHO, what was the most ridiculous measure considered was RBNZ arbitrarily dropping the LVR ratio restrictions for no clearly articulated benefit or logic.
When they went out for consultation on that measure, I sent an email to RBNZ voicing my opposition and talking of the consequences. This email was greeted with a response that although they acknowledged my email, they were not consulting with the general public and were only seeking responses from the banking sector.
And the rest is history, documented by the spike in REINZ HPI and volatile comedown
They were not meeting the inflation rate target for years before Covid. It was completely incompetent.
I believe that RBNZ has had huge turnover of middle management. But what it needs now is a cleanout right at the top. Unfortunately Robertson has appointed Orr for another long stint. Hopefully when Robertson is history, that appointment contract can be reviewed and broken early. Maybe he could be encouraged to resign.
I must say though that I think that this recent change to taking the inflation target a bit more seriously is the correct one. Unfortunately existing mortgage holders and businesses loan holders are the collateral damage due to the govt/RBNZ earlier mistakes.
It seems at this point the only solution available is a considerable downturn in economic outlook and activity. The labour price spiral has taken hold which needs to be dampened through unemployment. Inevitably at some point this leads to central bank panic so they decide to stimulate again. From where we're at now the old order of relative neutrality looks distant and potentially unreachable. What a mess.
Sometimes the Scorched Earth solution is the only one left.
That's where we probably are. Tinkering around the edges isn't going to do anything except exacerbate the situation. Chasing the CPI up with the OCR make little sense.
Regardless of previous RBNZ policy settings, at least we've been warned for many, many months of what's coming and what to do about it (as is noted above).
Time has run out for our tiny economy. And the sooner we get this mess out of the way, the faster we can get on with a rebalanced economy.
April 5th looms large. And to repeat, we've been told what's coming.
Many think the RB is taking a hardline but all it is doing is increasing lenders profit margins....which in turn is ramping up the cost to consumers....which in turn is leaving folk with a sickly feeling when they leave the supermarket. Soon there will be more cars that have been running on empty stalled on the roadside (fuel tax return)...the premise that raising unemployment will solve anything carries a big negative...that is it puts reduced staff / employees under the pump and that stress runs into unproductive time off...carry on squeezing the bottom feeders thinking you are making ground....raise the OCR to 20% for all I care , it wont achieve anything positive for the presently rather silent majority. If anything the current moves and their wide acceptance with largely nominal push back is reflective of how weak the unions and lower end workforce have become.. Are they too lazy to sound out there concerns? Are they not aware that the folk peddling these policies are on incomes that make a weeks minimum wage look like an absurdity. Monetary policy should be conducive to growing an economy ...not bringing it to its knees....Is it the monopolies , I dont think so , I think its folk living high and mighty asking others to walk where they would rather not venture themselves....
If you thought the OCR had to go to 20% or CPI would get there first and obliterate your Real Income/Savings, would you suggest dragging out that event, or getting out of the way, so we could redo the economy? That's pretty much what we are facing. Frankly - everyone is. That's what happens when a demographic time-bomb goes off, and why unemployment is unlikely to be part of our problem - there just aren't enough new entrants to fill the shoes of those of us who've passed our use by date.
The Bank of Japan has proven that monetary policy has no effect on inflation as it has capped its own rates at a half a percent and Japans inflation rate is less than in many other countries.
Economist Bill Mitchell talks about this on his blog here. https://billmitchell.org/blog/?p=60731
From a very dated article, but the maths and sentiment still applies across the Developed World:
By the end of the (this) millennium, Tokyo will be a ghost town, and Japan will be empty. The country's population will be just 500 by the year 3000, and just one by 3500. When that person dies, the Japanese nation will be no more. These apocalyptic predictions aren't the rantings of a doomsday cult, or of a maverick academic out to gain some publicity, but of the Japanese government itself.
This 'we need to tear it down before we can fix it' mentality isnt gonna win any battles. The problems go beyond economics . Weak is everywhere....sentences handed out, medical system, education system, land use, social policy, media... etc etc and much of it, sadly could be argued is designed to deter change and maintain the current disorder. Until efficiency enters the mainstream it will be more of the same...Roads that take years to build when in other countries its weeks or days....parallel this and that systems ...minority influence.... Could it be the electoral process that lays at the heart of much of what we are seeing...? Can we afford to be so liberal?
So becoming less liberal (becoming more like China?) isn't tearing down what we have?
We CAN FIX THIS with what we have. But we need the courage to do it. As you suggest politicians aren't going to fix it - because they can't if they want to get elected. So it's down to your illiberal alternative - the unelected RBNZ to do the necessary dirty work for us - and they are.
Without a doubt.
But trying to rebuild and sustain 'what we had' it utter madness. 40 years ago we changed the financial system - dropped pegged currencies; removed exchange and trade controls and freed interest rates and Debt creation to the private banks. There's nothing to say we can't do something similar again - perhaps going back to the future. But what we have, has had its time.
It’s a weak system where short-term politics rules… overlay this with the engrained comfort and the rise of the pre-eminent individualism from The Net with all its apps and networks; gave birth to woke culture and identity politics
people need a dose “of the real” to remind us of what really matters… sadly I think society has regressed over the last 70 years in many ways.
The RBNZ rewriting history is something to behold. A couple of things I find particularly irritating:
Firstly, it was obvious that dropping interest rates to the floor into a pandemic slowdown would stimulate the economy by boosting the value of speculative assets (houses and shares). There was zero chance of low rates encouraging businesses to borrow money to expand their productive capacity (as per the monetarist playbook). Paul Conway had the nerve in his speech to blame the house price boom on 'restricted supply and excess demand'!!!
Secondly, and probably more importantly, the lack of coordination between monetary and fiscal policy was a disaster. The Govt fiscal response (around $30bn net Govt spending in 2020, and another $20bn or so in 2021) did all the heavy lifting on things that mattered - keeping people employed and businesses in business etc. The RBNZ did not need to do much at all. The country would be a better place now if they had simply shut up shop for two years and done nothing.
Whilst I am ranting, it is also worth noting that Paul's speech (and this article in the main) make the mistake of treating NZ households 'in aggregate'. As if we all have an average $110,000 in the bank. What we have is a section of society (rentiers) that have done very well over the last two years - the people who have cashed out of inflated assets, and seen a hotter economy drive up their dividends and rents. This rentier class have been (and are) over-consuming - importing Teslas by the shipload, hiring builders that could be repairing flood damage homes to do renos, pumping up AirNZ profits etc. We now need a Govt brave enough to say this out loud - and take action to reduce over-consumption - without punishing the people who are only consuming what they need. If we get this right, we can keep the positives of a hot economy (low unemployment) without the negatives. Sadly, this Govt is going to stand aside and let RBNZ take us into a deep recession instead.
I agree 100% with this
"We now need a Govt brave enough to say this out loud - and take action to reduce over-consumption - without punishing the people who are only consuming what they need. If we get this right, we can keep the positives of a hot economy (low unemployment) without the negatives."
You'll find that over half the commentators here would oppose this vehemently as they are in the group that are overconsuming but are completely unaware they are. Hence the love-in for National and Act which promise to protect their right to overconsume at the expense of the rest of society.
Really well said.
Tbh even as someone who has more or less exactly the 'average' $110k bank balance what the RBNZ did only made my life harder (including seeing our home get sold and nearly flipped again). There are many other circumstances that need to be in place before debt is even accessible in any useful way.
I remember thinking the same thing about overconsumption around 2017 or 18, when the housing crisis was big news and there were not enough tradespeople. My friends who were plumbers and builders were doing most of their work on McMansions north of Auckland, the kind of places with 5 bathrooms, more than one kitchen, and a home cinema.
Follow the money.
"There are for sale signs up in almost every street. I’ve been coming to Ōmaha for years and years, and I’ve never seen so many houses up for sale. The attitude has always been, if you’re lucky enough to get in on a property, you hang on to it if you can. That’s what made the recent string of “for sale” signs so surprising. I keep saying, Oh my god, look there’s another one for sale, now another one."
Bars going under. They go first. We will see more restaurants go under soon, mostly mid-range ones (cheap eats and luxury establishments will do ok)
https://i.stuff.co.nz/sunday-star-times/131579710/wellington-nightlife-…
And he warned that returning inflation to target would be more difficult if the two groups were unwilling to recognise the pandemic, the war, and the storms had made everyone worse off.
What Conway barely acknowledged was the Reserve Bank’s role in creating inflation, which may have been triggered by these events but was escalated by a torrent of cheap money.
Pleasant Sunday read (:
Like a double dose of cough syrup from the CB at the first sniffle. Plus an extra dose from the govt. Now the high has worn off and we all have the real flu.
We have to be the laughing stock of international economies right now. Credit creation for speculative assets which continue to pull money out of the economy via increasing rent, severely dampening economic productivity. Now it’s all over and we have sfa to show for it but a bunch of old houses and failing public systems. These sure have been the good times!
The thing I don't understand with Japan's QE, as I understand it, the government purchases all the debt so is not owed to anyone else, but surely there has to be an end, currently their debt as a percentage of GDP is 240% what about 1000%. Can there be too much debt when you owe yourself?
https://www.worldeconomics.com/Debt/
Or have I miss understood?
I feel a bit for Paul. I have worked for a government agency where I had to write and say things which I didn’t believe in. Tow the party line.
Hard to know whether he truly believes some of the nonsense he is spouting- or whether it is him obediently following the script.
Can anyone on here recommend a decent economist that is worth following? I get really tired of all the BS the mainstream economists spout. It's actually dangerous advice for the naive. Sharon Zoller is good and Bagrie seems OK. The main guy (TA) seems on a mission to ruin his reputation and is a laughing stock...
i blew out a side window of my motorhome on 4th Feb -- quote of $5500 to replace it ( glad its insurance job) -- its just perspex FFS - due into the country on 5th April -- first available date to fit 3rd may! --
Everywhere i turn -- same thing massive price increases gouging and of course huge delays as no workforce to do anything and what workforce there is hardly working at 100% post covid
Screwed is a pretty good term -- just glad i fixed at 2.99 for 5 years and still have 3 years left -- !!
He's kind of right. The NZ middle class need to get crushed. The poor won't be any worse off because they own no assets anyway, and government will keep underwriting their income.
We the middle class have simply become too profligate, too unproductive, too woke.
Nothing like a period of material deprivation to restore your moral compass and remind you of the important things in life.
While the general expectation is that the post-Covid economy "should" revert to the stability of 2019, this ignores what was already unravelling in 2019. The global economy experienced fundamental shifts in technology, production, energy, capital flows, labour, currencies and geopolitics in the past 25 years, and all these forces are not just in motion but accelerating in ways that are destabilizing the status quo. The necessity of adaptation and evolution can be summed up very simply: adapt or die.
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