The economy appears to be in danger of heading back to the 1970s and the Muldoon years.
A series of economic indicators yesterday and now an analysis from a leading economics consultancy all point to the frightening similarity between the state of the economy now and what it was like back in the 70s.
Inflation, stoked by big government spending, is back.
That spending is underpinned by massive government borrowing.
And to complete the picture, even oil prices are at record highs.
The worry must now be that if the spending and borrowing is not brought under control then once again the country could face the kind of brutal economic measures that Roger Douglas and Ruth Richardson had to introduce when they faced similar blowouts.
Two headlines dominated the day; first StatsNZ reported that food prices were 7.6 percent higher in March 2022 compared with March 2021..
This was the largest increase since the year ended July 2011 when prices increased 7.9 percent.
However that period covered a GST increase from 12.5% to 15% in October 2010.
Consumer prices manager Katrina Dewbery said grocery food prices were the main contributor to the rise.
“This was mainly influenced by higher prices for yoghurt, canned spaghetti, chilled meat pies, and tomato sauce,” she said.
But fruit, vegetables, meat poultry and fish also showed large increases.
The Reserve Bank’s Monetary Policy Committee did not acknowledge the food price increase in its meeting record published yesterday along with the announcement that the Bank was lifting the Official Cash Rate (OCR) from one to 1.5 per cent.
However they did say that the Committee noted that the OCR was stimulatory at its current level.(before the OCR lift).
“Economic capacity pressures remain, with a broad range of indicators highlighting domestic capacity constraints and ongoing inflation pressures,” the Bank said in a statement.
“Employment is above its maximum sustainable level and labour shortages are impacting many businesses.
The Reserve Bank’s core inflation measures are at or above 3 percent.
“Inflationary pressure is being further accentuated by current high imported energy and commodity prices, which are lifting headline CPI inflation.
“The Committee will remain focused on ensuring that current high consumer price inflation does not become embedded into longer-term inflation expectations.”
The question of how much stimulation the economy is getting has also been addressed by Infometrics Chief Economist, Gareth Kiernan, with the release this morning of Infometrics latest economic forecast and he is blaming both the Bank itself and the Government.
“The Reserve Bank has failed to meet its inflation mandate and has been too slow to recognise that its emergency monetary policy settings were no longer required,” he said.
“The irony is that the Bank will now need to take firmer action to try and regain some of its inflation fighting credibility, with the official cash rate set to reach 3.25% in 2023.
Household budgets are being squeezed considerably by rising mortgage rates and higher living costs.
“Government policy is also exacerbating demand pressures. Despite there being little rationale for further spending increases, growth in government consumption is still accelerating and has reached its fastest rate since the late 1970s.”
National’s Finance spokesperson, Nicola Willis, questioned Finance Minister, Grant Robertson, about the food price inflation during Question Time in Parliament yesterday and he blamed international factors.
“Rising food prices are a global phenomenon,” he said.
“For example, the United States reported overnight that food prices rose 1 percent in March 2022, compared with the previous month, and 8.8 percent for the year.
“The environment continues to remain volatile with the ongoing COVID-19 disruptions and Russia’s invasion of Ukraine pushing up prices.”
But then he trumpeted the Government’s fiscal assistane to lowand middle income earners; part of the increased spending that Kiernan said is boosting the inflation.
“ We acknowledge that the rising cost of living is a crisis for some New Zealanders, and that’s why we have supported low and middle income earners through reductions in their fuel bills and income increases,” he said.
Kiernan said that the level of Government assistance provided over the past two years to compensate people for Covid was based on forecasts from early 2020 that proved to be too pessimistic.
He said the economy the economy had become stretched to breaking point, with demand pumped to unsustainable levels by monetary and fiscal stimulus over the last two years.
“This support for the economy was implemented in the expectation of a major recession caused by COVID-19,” he said.
“But with supply constraints and disruptions a more persistent outcome from the pandemic, the consequences of excess demand are now becoming all too evident.”
Kiernan said there were some similarities with the 1970s; the Muldoon years.
“You can you can draw quite a few similarities between between the two periods,even the fact that oil prices are spiking up to record highs,” he said
“But it’s not as bad, I don’t think, as in the oil stocks in the seventies, but neverthelessyou look at what is actually really being achieved at the moment in terms of genuine, good, solid economic growth and you say, well, a lot of the spending over the last couple of years has been fueled by debt, essentially government debt.
“But it’s private sector debt around the housing market as well.
“So there’s not a really good solid foundation for it.
“And that does concern that there are elements of that 1970s story there.”
The late 70s and early 80s were typified by high inflation, widespread government spending on subsidies and industry assistance and growing government debt.
“I don’t think the government has got quite the same profligate approach, you know, and maybe undisciplined approaches as it was back in the 70s, but nevertheless there are risks.”
Treasury has pointed out that those risks are intensified by the ageing population and the pressure that will put on health costs and superannuatiomn payments in the short term.
Without any substantial cuts in government spending or alternatively an increase I nrevenue, Treasury expects net debt as a percentage of GDP to start blowing out from 2030.
If Natiomnal were to gain power at the next election they might reasonably expect to still be the government in 2030.
Willis acknowleged the Treasury projectin during a debate on the document which originally contained it, the Long Term Fiscal Statement.
But she weas unwilling to accept either of Treasury’s presecriptions for a cure.
“When we look at the demographic challenges we face—the rising cost of superannuation, the rising cost of healthcare, the challenges that we will face with climate change—it becomes abundantly clear that the only way New Zealand will be able to face these challenges well while taking people with us will be if we have a growing, more productive, wealthier, more prosperous economy,” she said.
Kiernan said growth would not be easy to achieve.
“The economy will find it harder, and more expensive, to achieve the 2.1% per anum growth we expect over the next three years,” he said.
“We face some tough choices about our spending priorities as we shift away from emergency COVID supports, and the hard reality of unwinding stimulus begins.”
Get it wrong and we could see the ghost of Muldoon