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Economic Prospects in 2023

COVER STORY

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Reserve Bank of New Zealand Governor Adrian Orr’s gloomy warnings late last year saw him talking up the prospects of a dismal 2023 economy and stressing the need to curb inflation.

But it wasn’t just a call for businesses to slow things down: he also warned the government to ease back on spending.

That will be difficult to do for the Labour Government when all the recent polls suggest it will face real problems winning the next election, and it has committed to maintaining generous spending to avoid defeat. The dismal economic predictions have also highlighted the country’s labour problems, and given the opposition parties a renewed opportunity to pitch their wares for the next election.

It is ironic of course that Orr himself could be considered a major cause of the inflation problem, given the government effectively encouraged him to relax spending controls to reduce pain for the beleaguered, Covid 19-affected electorate.

The reality now is that New Zealand inflation is estimated at 7.2 percent, well above what was typically considered extreme.

Facing up to economic reality

Orr appeared before Parliament’s Finance and Expenditure Select Committee late last year and effectively apologised for the state of interest rates, blaming the international situation. New Zealand had been buffeted by “very significant economic shocks” – namely Covid-19 supply chain disruptions and Russia’s invasion of Ukraine. And the bank was expecting well above its 1-3 percent target range, he acknowledged.

Green Party MP Chlöe Swarbrick reportedly asked Orr if commentary suggesting the Reserve Bank was “deliberating engineering a recession” to tame inflation was correct.

“We are deliberately trying to slow aggregate spending in the economy,” he responded.

“The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth.”

Inflation reduction likely

Nigel Tutt

As Priority One Chief Executive Nigel Tutt commented recently, drastic action in the form of a sharp increase in interest rates should see inflation reduce over time, by increasing borrowing costs for individuals and businesses, leading them to less spending and cooling prices.

“High inflation is undoubtedly bad, but unfortunately, action taken to control inflation will also come with nasty side-effects,” he commented recently.

As we know, the Reserve Bank only really has one effective weapon to control inflation, the rather blunt tool of varying the official cash rate. Essentially, the Reserve Bank is warning of a recession in the coming year.

That is assuming the business sector and individuals respond as might be predicted to increased borrowing costs by spending less and cooling prices.

And while that may help struggling households nationwide, it also suggests that businesses may be employing less people, adding to unemployment.

So far that hasn’t been a major issue, given the relatively low supply of labour and visa controls, but the situation could change.

Leading economist and property specialist Tony Alexander noted in his recent “Tony’s View” column that for the moment psychology is negative courtesy of the Reserve Bank’s scary words and rate rise.

Negative sentiment will pass

“But the negative sentiment will pass, and I would expect the larger investors with good cash reserves built up after selling their crap last year to now be actively looking to capitalise on the pessimism and make some good long-term purchases,” he commented. Alexander added that this might be the best opportunity in a generation for first home buyers to get back into the market.

In Alexander’s view, current fixed mortgage rates are probably at their peaks for this cycle.

“Suffice to say, the chances are growing that the Reserve Bank has over-cooked policy restraint after keeping things too easy last year (2021),” he commented. “Offshore inflation is easing, NZ business and consumer confidence is newly falling, the NZ dollar is rising, and the labour market is weakening.”

Cautiously optimistic

Nigel Tutt takes the view that while the Bay will feel the impact of the slowdown, it won’t be quite as bad as some other regions experience.

“An obvious area where businesses will be uncomfortable is retail and hospitality, where consumers will be less likely to part with their money than we have seen in past years,” he commented.

Tutt expects construction to see the most pain however, as residential house sales dry up and commercial projects are harder to make work.

“On the positive side, businesses in Tauranga and the Western Bay have proved strong over the past couple of years, many of our exporters have good market positions and unemployment is arguably too low anyway.

“I expect that these factors will see us through the next year in reasonable shape.”

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David Porter
David Porter
THE PORTER REPORT - A monthly update on the business world from David Porter

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