The recession has been averted and we’ve passed the Omicron wave, but when it comes to the economy, let’s not forget that we’re only halfway through our prescribed dose of medicine. Photo / 123RF
New Zealand took an important step last week by removing the last widespread public restrictions aimed at curbing the spread of Covid-19.
Economically too, we marked the end of the Covid era with, what
should hopefully be the last set of GDP data that is directly affected by the virus.
Second-quarter GDP showed a big rebound from the Omicron wave (a 1.7% rise), with returning tourists flying to the rescue and precipitating a recession at the pass.
Good news, then.
But recession or not, there is no getting around the economic downturn we will face in the coming months.
Unfortunately, labor shortages and price rises do not subside with the linear progression of Covid infection rates.
This is because there is always an epic battle at play between the forces of inflation and deflation.
And it’s a complicated business because these forces are really part of the same beast.
When one side gains the upper hand, it immediately gives strength to the other.
So when the U.S. reports higher than expected inflation, markets crash because that means higher interest rates will be needed…meaning the economic downturn could be deeper, which which means commodity prices (including oil) fall, reducing pressure on inflation, which means higher interest rates may not be needed, causing markets to rebound. ..
And it all revolves around like an ancient Greek parable that I wasn’t smart enough to remember and couldn’t find in a quick Google search.
What this means is that a straight recovery is really not possible.
Taking two steps forward and one step back is the best we can hope for until eventually the global economy returns to equilibrium.
This leaves us free to take comfort in bad news about the slowing economy or worry about its recovery in almost equal measure.
This is something that should satisfy both tribes of the political playing field – there is certainly no shortage of opinion and debate.
This was evident in the major question raised by the GDP data last week.
Was it too strong? Did this simply highlight a heightened risk of inflation and the need for the Reserve Bank to raise interest rates?
The SBA and ANZ economists thought so and raised their forecast peaks for the official exchange rate to 4.25 and 4.75% respectively.
But others suggested there was enough bad economic news to provide reassurance.
Household consumption fell more than 3% for the quarter, which could give the Reserve Bank some courage as their rate hikes start to bite.
Either way, the RBNZ already had an upbeat growth forecast of 1.8% for the quarter – so 1.7% shouldn’t cloud its rate outlook.
And ultimately, money markets took the data in their stride.
But those of us worried that the national data is still too strong can rejoice at a new report from the World Bank that paints a very bleak picture of the global outlook for the year ahead.
Even a “moderate impact on the global economy over the next year could tip it into recession,” the report said.
A quick glance at the world news pages is enough to highlight several things that could deliver this “moderate hit”.
European warfare, extreme weather, and the bizarre zero-Covid wedge that China has retreated into all stand out.
A slump in Chinese economic growth is a serious risk for New Zealand, as it would hit commodity export prices hard.
Although, as mentioned above, this would probably be good news for global inflation.
Meanwhile, we will continue to follow the same inflation-fighting policy path as the Americans.
That means no more self-inflicted pain from rising rates, no matter what happens in the world.
The complication is that – no matter how warmongering the RBNZ is – we are at the mercy of the Americans.
This is because of the global dominance of the US dollar.
When the Fed raises rates, it drives up the US dollar. Which is good for fighting inflation in the US – making imports cheaper there.
But that’s bad news for all the other countries that are seeing their currencies fall relatively.
Despite an aggressive cycle of rate hikes, the Kiwi Dollar fell below US60c last week.
Some currency analysts see it falling to around 57c US in the near future.
This makes our import costs higher and goes against our fight against inflation.
So until inflation soars in America and the greenback subsides, it will be a tough job for the rest of the world.
Unfortunately, in addition to runaway inflation and recessionary crises, there is a third risk.
This economic recovery is a balancing act where even too much of a balance can be a problem.
The World Bank report warns of “widespread stagflation”.
In other words, there is a risk that if policymakers are too cautious, everything will stop, with inflation still too high to be comfortable, but with growth too weak to stimulate the creation of new wealth.
There is an important political element to this, as the need for real economic pain to defeat inflation runs counter to the cautious approach of the current governments.
Voters don’t like economic pain. It doesn’t matter if they are on the left or on the right, no government wants to tip its country into recession.
That’s why we have independent central banks – to provide nasty drugs.
So, hooray for jumping the recession, hooray for putting the Omicron wave behind us.
But unfortunately, when it comes to economics, let’s not forget that we are only half the prescribed dose.
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