Reserve Bank Governor Adrian Orr

With a little bit of help from international forces, the Reserve Bank Governor looks likely to achieve his goal of trying to engineer a recession.

And he admits that in doing that it could get ugly.

The Bank’s latest Monetary Policy Statement (MPS), released yesterday, continues to forecast two consecutive quarters of negative growth (the technical definition of a recession) starting in December.

The Bank had moved its forecast from the previous MPS when it said the negative growth would start in the June quarter.

But yesterday, as well as the forecast, Governor Adrian Orr was using more negative language to describe the economic outlook.

The Bank, as predicted, held the official Cash Rate at 5.5 per cent.

Orr’s announcement that the Bank might be trying to engineer a recession came during a Select Committee hearing last November.

“I mean, we are deliberately trying to slow aggregate spending in the economy,” he said.

“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. “

Since he spoke to the Committee, the Bank has raised the Official Cash Rate from 4.25 to 5.5 per cent, and inflation has come down from an annual 7.2 per cent to six per cent currently.


And to a certain extent, Orr claimed a partial victory yesterday in his Policy Assessment in the MPS: “The current level of interest rates is constraining spending and hence inflation pressure, as anticipated and required.

“The New Zealand economy is evolving broadly as anticipated,” he said.

“Activity continues to slow in parts of the economy that are more sensitive to interest rates.”

But that wasn’t enough: “Headline inflation and inflation expectations have declined, but measures of core inflation remain too high.”

However: “Globally, economic growth remains below trend and headline inflation has eased for most of our trading partners.”

That meant weakening global economic growth was putting downward pressure on New Zealand’s export prices.

“However, a prolonged period of subdued spending growth is still required to better match the supply capacity of the economy and reduce inflation pressure,” he said.

Speaking at the MPS press conference, however, he issued an ominous warning.

“Economic growth is slowing, inflation pressures are coming off, the labour market constraints are easing up,” he said.

“A lot of these data observations that we are seeing are really indicators of what we expected to see; a much slower economy both domestically and globally and inflation pressures coming off.

“It could be ugly in a good sense that monetary policy is working.”

But that “ugliness” will impact via the recession he promised.

“The impact of the global slowdown and rising interest rates will not be even across all sectors of the economy,” he said.

“Some sectors are going to be doing it harder than others; the agricultural commodity sector will be one, commercial property another sector doing it tough and construction.”

The drop in agricultural commodity prices will hit the New Zealand dairy industry.

Overnight the Global Dairy Trade auction saw prices drop on Whole milk Powder drop by 10.9 per cent, continuing a slide that began in March.

“We have a pretty subdued path for international commodity prices and our projections ahead for exactly the reasons that we’re seeing slower overall demand internationally, leading to weaker prices,” he said.

And he had concerns about the future.

“There is the risk of a greater slowdown in global economic demand, particularly in China, weighing more heavily on commodity prices and New Zealand’s export revenues,” he said.

The GDT whole milk price drop has sent a shockwave through New Zealand farming which is likely to slow the economy down.

The President of Federated Farmers, Wayne Langford, last night told POLITIK that it would be likely to mean that the Fonterra payout would be below breakeven for most farmers.

“It just means that we shut up our chequebooks and stop spending; definitely no discretionary spending plus also some other costs like fertilizer and trimming maintenance back to, and all kinds of things on the farm, really just to get by, “he said.

Langford said the price drop would be felt in the provincial towns.

“If farmers have maxed out their overdraft, then they will be delaying a month or two, paying servicemen and whatnot, which of course, then follows on for those servicemen.

“They’ve got bills to pay as well. S

“I think that the Feds have been warning that this is coming for quite some time, and now it’s finally here, and we’re all going to have to batten down the hatches a little bit.

“It’s going to be a pretty rough ride.”

Agriculture Minister Damien O’Connor told Parliament yesterday that he had sought advice from his Ministry on the price drop.

“This will have a big impact on our economy, and this Government commits to working with the dairy industry to ensure that market opportunities are opened up and that we assist them with the vital infrastructure that they and their farmers need,” he said.

However, whether the dairy price drop and the forecast next two-quarters of negative growth is enough to bring inflation down and thus see the Reserve Bak start to reduce interest rates is another matter.

Yesterday’s Bank forecasts have inflation getting inside the Bank’s 0 -3 per cent target in the September quarter of next year.

The Bank is forecasting that it will have to raise interest rates to get there; it is saying the OCR will go to 5.6 per cent in the March quarter of next year.

However, ANZ economists Sharon Zollner and David Croy are forecasting that the Bank will move to 5.75 per cent in November.

The brutal reality is that only a small recession can avoid that.