Going Up, Going Down – Summer 2023
Economist Cameron Bagrie takes a good, hard look at New Zealand and how we’re going as a nation.
10 January 2023
There is no other way to describe the latest inflation figures, which have the annual rate of inflation at 7.2 per cent and domestic, or what we call non-tradable inflation, at 6.6 per cent. Core measures of inflation, which strip out volatile items such as fuel, continue to rise.
Inflation is one thief. It siphons spending power. Fiscal drag or bracket creep, as inflation pushes people into higher tax brackets, is another. The government gets a cool $500 million a year from it, and more now given stronger inflation. Forget about changing tax rates, stop the tax thievery.
Bitter medicine No.1
More inflation equates to higher interest rates and fixed lending rates look set to push above 6 per cent. That is not high historically, but a big lift from the lows in interest rates. The interest rate on banks’ fixed-rate lending book was 3.8 per cent in August. Fixed rates are a lot higher than that. There is a lot of mortgage pain yet to come. Monetary policy takes time to work. Rate hikes over coming months will not fully impact the economy for 18 months.
Bitter medicine No.2
House prices are falling, down 8.1 per cent across NZ, and 11.2 per cent in Auckland on a year ago. They are down more from their late 2021 peak. Rising interest rates, rising supply, tighter credit conditions and removal of tax deductibility for some interest costs is a harsh combination. Mind you, house prices are up an average of 7.2 per cent over five years.
Building consents remain strong with around 50,000 residential consents issued in the past year. The construction sector can build around 35,000 in a year, so that looks a strong pipeline of work. But with construction cost inflation rising more than 15 per cent in the past year, the pricing reality could see many parked. That would help contain inflation.
Rents were up strongly (4.6 per cent on last year) in the latest inflation figures, but Statistics NZ’s flow measure of rents has declined three months in a row and fallen for four of the past five months. Annual growth in the flow measure has dropped 1.3 per cent on a year ago. Flow measurement uses recently lodged tenancy data and is useful for showing turning points in the market. Falling rents are a sign of disappearing house shortages (although affordable housing remains a huge problem).
There are many battles to be won in the war against inflation, but one stands above all others. It’s jobs. Job demand is strong, reflecting economic strength. The Reserve Bank describes the labour market as being above maximum sustainable employment, which is a fancy way of saying we have scant people to employ, wage and job growth is too strong, the unemployment rate is too low, and it is adding to inflation. Curing one evil creates another. Cracking the back of inflation involves job losses.
Top down or bottom up?
The top-down approach for containing inflation is bludgeoning the economy by rising interest rates. The bottom-up approach involves stimulating supply which involves freeing up labour resources (i.e. better immigration policy), driving more competition to help contain prices, lowering business costs and boosting productivity. The latter is the more friendly approach, but involves being bold. If we want to mitigate job losses, then we need to improve the availability and efficiency of labour.
The new Prime Minister of the United Kingdom’s economic plan of spending big and tax cuts was firmly rejected by financial markets with interest rates rising and the pound dropping. Such was the reaction that the policy prescription was dropped, and the government’s credibility is in tatters. Stepping back, market forces have now sent a message. The era of sugar-candy economic prescriptions is coming to an end. Governments need to get their house in order and deliver substance.
Statistics NZ estimates we have had a net migration exodus of 11,000 people for the 12 months ended August 2022. We have lost 21,000 in the past two years. That dents a hole in the workforce.
A hefty price
The Crown’s indemnity for the Reserve Bank’s money printing was $9.5 billion as at the end of September, and interest rates are still on the rise. That is a huge capital loss and price for taxpayers to pay for injecting just under $60 billion into the economy to navigate Covid.
Top of the pile
The latest Ipsos Issues Monitor – a key survey on the mood of the nation – has inflation/cost of living as households’ key concern, a reflection of what inflation does to household purchasing power. Housing and healthcare are second and third. Crime/law and order is now number four. Crime/law and order is number two when people are asked what their biggest concerns are over the next five years.
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