Tough times ahead for NZ economy: Nikko economist

Not only is NZ's major trading partner, China, in economic strife, “but there's a guy at the Reserve Bank who wanted to see if he could break the financial system,” Hunt said at an investment forum in Wellington hosted by Nikko Asset Management.

The central bank has raised its official cash rate (OCR) from 0.25% to 5.5% between October 2021 and now and the economy already officially  went into a shallow recession in the December 2022 and March 2023 quarters.

In its latest monetary policy statement last month, RBNZ forecast a small amount of economic growth in the June quarter followed by declines in both the September and December quarters.

Hunt said the central bank's actions will have the desired effect.

“Yes, it will be disinflationary, but not terribly pleasant,” he said.

NZ's fiscal problems may also turn out to be a bit worse than expected, he said.

By contrast, the Reserve Bank of Australia “haven't stressed their financial system.”

The RBA has raised its cash rate from 0.1% to 4.1% between May 2022 and July this year and has held it steady since.

Weakness in China's spending on Australia's exports “will solve their problem” of Australia's inflation – China is Australia's largest trading partner while Australia is NZ's second-largest trading partner.

NZ's inflation rate in the year ended June was 6% while Australia's annual rate was 4.9% in July.

Hunt says interest rates in China are compounding at three times the rate of GDP growth but that China won't reduce its interest rates because it doesn't want the same kind of currency collapse that Thailand suffered in 1997.

While central banks were printing money through the pandemic, China's banks were able to borrow US dollars at 1% and lend that money at 6%.

But Chinese households have bought 1.5 times the amount of property that's been constructed and some of those properties will never be build.

Now the Chinese banks are paying anywhere between 8% and 13% on borrowed US dollars and their indebtedness is somewhere between US$2.5 trillion and US$4 trillion.

Western countries are now buying US$1 trillion more from China than China is buying from the West and China is using the difference to pay down debt.

“That's a huge headwind for the rest of the world,” Hunt said.