The Government might feel that the walls are closing in on them after yesterday’s run of bad news.
StatisticsNZ reported that inflation for the 2021 calendar year reached 5.9 per cent, a figure not seen since 1990.
POLITIK understands that there now are also real fears that the so-called Auckland Omicron cluster could pitch the country into Phase Two of the three-phase management plan as soon as the weekend, which would expose the lack of preparedness in part of the health sector and the shortage of Rapid Antigen Tests.
And to top things off, last night’s One News Kantar poll shows a National-Act coalition government is now only six points behind a Labour-Greens government.
But it is the inflation figures which must worry the Beehive the most.
StatsNZ reported that the consumers’ price index increased 5.9 per cent from the December 2020 quarter to the December 2021 quarter, the biggest movement since a 7.6 per cent annual increase in the year to the June 1990 quarter.
It was only in May 1990 that the Reserve Bank began operating under a Policy Targets Agreement, which then-Governor Don Brash signed with Finance Minister David Caygill requiring the Bank to limit inflation to two per cent. Brash met the terms of the agreement in the 1991 calendar year.
But to do so, he had to use a big monetary axe; 90-day bill rates (used as a measure before the introduction of the Official Cash Rate in 1999) ranged from 10 – 14 per cent in 1990 – 91 and did not come down below 10 per cent till mid-way through 1991.
Nevertheless, inflation stayed low within the target range over the following three decades until yesterday’s figure.
The main driver for the increase was the housing and household utilities group, with prices for construction and rentals for housing increasing in the year to the December 2021 quarter.
Prices for the construction of new dwellings increased 16 per cent in the December 2021 quarter compared with the December 2020 quarter.
The next largest contribution was from the transport group, with increased prices for petrol and second-hand cars.
Petrol prices increased 30 per cent in the year to December 2021 quarter. The average price of 1 litre of 91 octane petrol was $2.45 compared with $1.87 per litre in the December 2020 quarter.
Bank economists are becoming convinced that inflation is now settling in, that it is no longer a temporary phenomenon induced by Covid lockdowns and supply chain disruptions.
The ANZ Bank is now expecting the Reserve Bank to raise the Official Cash Rate from its current 0.75 per cent to three per cent by April 2023.
The political implication of that is simple; higher mortgage costs.
Core Logic, in a report earlier this week said that about 60% of existing loans would need to be refinanced within the next 12 months.
“Anybody who fixed for a year in about April/May 2021 could easily see their mortgage rate double when they review mid-this year,” their Quarterly Property Market and Economic Update said.
“It wouldn’t be a surprise to see (mortgage) rates typically above 5% or 5.5% later in 2022, but the chances of going above 6% aren’t as high.
“Of course, it will take some time for some borrowers to feel this effect, given most people have fixed for 1-2 years.
“And the low unemployment rate offers some insulation too.
“However, rising mortgage rates will still be a significant handbrake for property sales volumes and values in 2022.”
Matt Henry, the head of Wealth Management Research at Forsyth Barr in a research note published last Friday, said mortgage rate increases over the past few months had been the largest jump in nearly 15 years.
“Until recently, lower and lower mortgage rates offset higher and higher house prices meaning the share of income required to service a mortgage had been broadly stable … until recently,” he said.
“The recent surge in mortgage rates means debt servicing will now consume a lot more of household incomes.”
This is likely to have a substantial political impact among 30+ urban dwellers. That could cost Labour and play into National’s perceived political strength as a better economic manager in Government.
The ANZ Bank says that “growth risks are to the downside as the housing market slows, business and consumer confidence look vulnerable, and Omicron hits both demand and supply.”
In the Half Yearly Economic and Fiscal Update last December, Treasury forecast growth this year at only 0.8 per cent, but it was picking a big jump to 4.9 per cent next year; election year. That may now be at risk.
ASB Bank senior economist, Mark Smith, rejects the argument that the current inflation is temporary.
“Inflation is expected to remain elevated,” he said.
“Our view has long been that high inflation in NZ is not transitory.
“Capacity bottlenecks, supply constraints and resilient demand conditions are expected to keep inflation elevated.
“We see the risk of high inflation being more persistent, which will erode the purchasing power of households unless offset by higher incomes.”
Wages will be an issue over the next two years.
CTU Chief Economist Craig Renney said what was needed now was to make sure that we were protecting those with the least ability to incur higher costs.
“Businesses can help by making sure that those with the lowest incomes see wage increases that are matching inflation,” he said.
“Government can help by making sure that the minimum wage and welfare at levels that doesn’t see workers fall further behind.”
This sort of pressure will need to be set against a political background that is becoming increasingly fragile.
The One News Kantar poll last night might have shown only small movements in the vote shares for the main parties but what is now clear is that the centre-right and centre-left blocks are converging on each other and are now only six per cent apart, which means that Labour can only afford to lose another four per cent support to National before it falls into second place.
So while National has put on six per cent since the election, Labour has lost nine per cent support. In that context, a movement of four per cent over the next 20 months or so is entirely feasible.
Of course, it is Covid that has changed all this.
It would be a supreme irony if the virus which swept Labour to its landslide victory in 2020 now becomes the force that threatens their continued occupancy of the Beehive.