Reality check on recession-talk needed

Economist Tony Alexander says there needs to be some perspective on the RBNZ’s talk of a looming recession and whether the country is in one already.

His view comes after Reserve Bank chief economist Paul Conway's speech to the KangaNews New Zealand Capital Markets Forum this week, urging Kiwis to accept they are poorer so it can get inflation under control.

Alexander says first, the economy’s 0.6 per cent shrinkage in the December quarter came after 1.7 per cent growth in the September quarter and 1.6per cent growth in the June quarter.

“The economy is still 2.2per cent bigger than a year earlier, 6.6 percent bigger than before the pandemic, and the growth rate this past year all up, of 2.4 per cent, was only just below the average since 1989 of 2.7per cent.”

Second, just because people are told there is woe around them does not mean that the economy shrank during the March quarter nearly-ended and that a recession is, in fact, underway, he says. 

“The data has been highly volatile on a quarterly basis for some time and we could easily get a blip up for the latest quarter, or a blip down. Work associated with flood recovery will be a boost to economic activity.”

Third, Alexander says, part of the reason for 0.6 per cent shrinkage during the December quarter is that many businesses did not have enough staff to produce demanded output.

“We have become a capacity-constrained economy in which demand cannot be satisfied because of a shortage of people.”

The NZIER’s most recent Quarterly Survey of Business Opinion shows that a still near record number of businesses say they cannot get the skilled and unskilled staff they need to boost output.

“This situation can also be seen in response to the question about which factor is most constraining the ability of businesses to grow. On average since 1970, 61 per cent of businesses have said demand. That now stands at only 33 per cent.”

Materials are only slightly rated above average as a constraint at 7 per cent versus the average of 5 per cent, and the same for finance, 2 per cent versus the average of 5 per cent. Labour on average is cited by 11 per cent of businesses as their main constraint.

Low productivity

The Reserve Bank says businesses struggling to get staff means the country is hampered by low productivity.

“It is why Kiwis work more hours than most in the developed world but earn relatively low incomes,” says Conway.  “Better productivity will reduce long-run inflationary pressures at minimal economic cost. More productive businesses can hold or even cut prices while paying workers more and remaining competitive,” he says.

According to the central bank, one reason for poor productivity is competition may be weak in some markets, making it easier for businesses to pass on cost increases to their customers.
Instead, improving productivity is the best way to lift incomes sustainably, says Conway. “In practice, this means accepting the fact of higher prices for some producer inputs and consumption goods, meaning lower real wages and profits than otherwise.”

He says there are things people can do to enhance the power of competition and keep price pressures in check.

“Shop around for that good deal. Wait for the sales. Use price comparison websites. And go to the effort of changing banks or utility providers if it means getting a better deal.”

Target band

Although there have been some murmurs of the RBNZ’s inflation band being widened to help bring inflation down, Nikko Asset Management outgoing managing director George Carter says the ceiling is at the right level.

“It is the mandate that is muddled because the RBNZ has been given employment and housing by the Government to juggle within the mix. They should not be in the bank’s remit – inflation should be its only concern.”

With inflation above 7 per cent and far outside the target range, the RBNZ’s monetary policy committee (MPC) has been increasing the OCR to bring demand back into balance with the supply capacity of the economy.

“Ideally, and with the benefit of hindsight, monetary policy should have started tightening earlier in 2021,” Conway says. That was recognised by the Reserve Bank in its recent review of monetary policy over the past five years.

Small OCR lift expected

Westpac expects upcoming survey measures will continue to signal that households and businesses expect inflation will remain high for some time yet.

The bank’s senior economist Satish Ranchhod says the tone of Conway’s speech was hawkish.

“While the speech did not explicitly discuss how policy will be adjusted at the upcoming April policy review, the message was clear – inflation is far too high and the RBNZ remains concerned about the risk that inflation remains strong for longer.

This supports our expectation for another 25 bp hike at the upcoming April meeting.”

Ranchhod says, however, the bigger question is what the RBNZ will do further ahead. “We thought it could moderate its forward guidance given the recent weaker economic activity in New Zealand.

“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.”

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