Food prices went up by 8.3 per cent over the past year; another reason why the next two years will be tough for households.
And because of that next year’s election is now up for grabs.
Infometrics Chief Forecaster, Gareth Kiernan, said yesterday that the battle to get inflation back under control, both globally and in New Zealand, is set to stunt economic growth throughout the next two years.
The IMF yesterday launched its annual World Economic Outlook and made similar comments.
It forecast that more than a third of the global economy would contract this year or next, while the three largest economies—the United States, the European Union, and China—would continue to stall.
“In short, the worst is yet to come, and for many people 2023 will feel like a recession,” said Pierre-Olivier Gourinchas, IMF Chief economist.
The food price rise was typical of what is happening everywhere.
StatsNZ said Food prices were 8.3 percent higher in September 2022 compared with September 2021.
The annual increase was also 8.3 percent in August 2022, the highest since July 2009.
However the ANZ Bank economists Finn Robinson and Miles Workman are expecting the main inflation measure, the consumers’ price index to show a fall from the third quarter measure of 7.3 per cent when it is released next Tuesday
The bulk of the decline in headline inflation is expected to come from a sharp drop in petrol prices.
“While that’s absolutely welcome, the fact that there’s unlikely to be any sign of a broad-based easing in underlying inflation pressures means monetary policy makers can take only limited comfort from the headline fall,” they said.
Next week’s inflation report is unlikely to contain the evidence needed to convince the Reserve Bank that underlying inflation has turned the corner.
“Unless there’s a step change in the outlook, we see the RBNZ on track to lift the OCR to a peak of 4.75% in May 2023,” they said.
Kiernan said Infometrics believed higher mortgage rates would drag household spending growth down to an average of just 1.1% pa during 2023 and 2024 and flow through into weaker outcomes throughout the domestic economy.
“We’re not painting an entirely bleak picture but I guess the issue is that after two years of very good over-exuberant growth, a couple of years of weak growth will feel that much worse,” he told POLITIK.
““The effects of skills shortages and supply chain disruptions have been amplified by excessive spending over the last two years, and inflation is set to persist outside the Reserve Bank’s target band until the end of 2024.
“Wage and pricing pressures will only ease when demand softens, and businesses have to compete harder to make sales.”
Kiernan said domestically focussed businesses would be hardest hit.
“ I think that’s where the bulk of the slowdown is going to be focused,” he said.
“Businesses have been enjoying strong household spending over the last couple of years.
“I think opening up that will open up a gap between domestically focused businesses and more export focused operators who obviously are going to benefit from the reopening of the border and tourist numbers picking back up over the next couple of years.”
Kiernan has previously been critical of high fiscal spending by the Government but he believes they be in a difficult position.
“I feel like the government is between a rock and a hard place because they’ve done so much spending over the last couple of years and across the various sort of platforms under various guises,” he said.
“The current accounts last week were much better than had been forecast by Treasury but there is still pressure there on the government to start moving that fiscal position back into the place.
“And, let’s be honest, part of the reason that we need slower growth now is because we have had such a expansionary fiscal policy.
“So, the Reserve Bank at the moment is very much owning, its actions and saying we need slower growth, it’s too much inflation, we need to reduce the stimulus to the government.”
The political problem with that is the Government is already behind in some polls and as the economy slows going into next year the conventional Government response in an election year would be to increase spending.
But Kiernan said there were dangers if it did that.
“If the government were to come out and push in the other direction against that (the slow down) with more stimulus or more spending in next year’s budget, that would seem a little bit irresponsible to me, given the starting point that we’ve got.
“Having said that, of course, if the economy was performing better next year, then they could probably afford to take a more laissez faire approach to fiscal policy hitting into the election later in the year.
“I think there will be a consciousness there that they don’t want to be putting too much more pain or squeeze on households than is already there.”
Since March the Government has reduced its excise tax take off petrol by 25 cents a litre. It is topping up the Land Transport Fund to replace the missing revenue from the tax. But the tax is due to be reviewed early next year.
“That is a challenge for the Government,” said Kiernan.
“It would seem a given the position we’re in that it would seem quite possible to me that they would keep that in place because removing that really in an election year, given where we are, would be not great for their polling both chances.”
That epitomizes the dilemma facing the Government; every extra dollar they spend will put pressure on the Reserve Bank to keep interest rates high to try and slow inflation.
The IMF says Increasing price pressures remain the most immediate threat to current and future prosperity by squeezing real incomes and undermining macroeconomic stability.
“Central banks around the world are now laser-focused on restoring price stability, and the pace of tightening has accelerated sharply,” said Gourinchas.
“There are risks of both under and over-tightening.
“Under-tightening would entrench further the inflation process, erode the credibility of central banks, and de-anchor inflation expectations.
“As history repeatedly teaches us, this would only increase the eventual cost of bringing inflation under control.
“Over-tightening risks pushing the global economy into an unnecessarily harsh recession.“
In New Zealand, because of the independence of the Reserve Bank, the Government must sit on the sidelines while this process plays out. All the Government can do is watch its spending.
IMF chief economist Pierre-Olivier Gourinchas at a press conference during the World Bank/IMF annual meeting this week in Washington, DC.