ANZ chief economist Sharon Zollner’s arguments all stacked up to me.
Learn a lesson from Covid, front-end the hikes to curb inflation early. Three hikes only take the OCR to 3%, which is considered a neutral rate and wouldn’t necessarily curb momentum in the core of the economy. You can always reduce the rate again if things improve.
Reserve Bank Governor Anna Breman made it clear that Monetary Policy Committee members discussed this idea at the last meeting.
The committee’s statement also warned that “decisive and timely increases in the OCR would be required” if core inflation and wage growth did not remain contained and medium- and long-term inflation expectations rose above around 2%.
With an opposing view, Kiwibank economists put out a note yesterday warning that early rate hikes would be counterproductive.
“Any rise in the costs of essentials will feed into inflation short term, but cost increases will push demand down and put downward pressure on growth,” chief economist Jarrod Kerr and his team wrote.
“We are likely to see a contraction in economic activity in the current quarter. And we won’t see this played out in the data for months to come.”
Well, gee … that seems reasonable too.
But if the RBNZ is discussing all this in April, then it seems reasonable to assume that – if things go the way they look like they are going right now (ie not well) – those hikes could well be on the cards.
What if things don’t go the way they look like they are right now?
Zollner is the first to admit that they might not, or even that they probably won’t.
For me, that was the most interesting part of her research note.
“Take everyone’s forecast with a generous pinch of salt – including both ours and the Reserve Bank’s. That’s just the world we find ourselves in,” she wrote.
“We can’t stress enough the uncertainty of the outlook.”
“A July kickoff for hikes is not a high-conviction view; it is just what we currently see as the single likeliest timing as we stare into the murk.”
ANZ chief economist Sharon Zollner. Photo / Corey Fleming
Refreshingly frank as always, she continued on the theme.
“In our view, there is very limited value in taking a strong view on 2027 at this point, given the extreme uncertainty.
“To be honest, one could argue there isn’t much point in taking a strong view on 2026 either!
“But forecasts tell a story and our updated story relative to our previous forecasts is more hawkish about where the OCR will go this year but relatedly, more dovish about how high it ultimately will need to head in this cycle.”
It was a timely reminder not to treat forecasts as predictions.
Unfortunately, the more uncertainty there is out there, the more the public craves some sort of insight into what is going to happen next.
The media is more than happy to oblige with headlines that often lean towards the most assertive-sounding commentary.
The point Zollner makes is that we should look at the story or narrative that forecasts imply.
That provides a framework for us to plan ahead. Things could turn out worse, or they could turn out better.
The specifics and data points that economists plug in are a movable feast at the best of times. And these are not the best of times.
ANZ’s new rate forecasts provide a timely update to the way the RBNZ seems to be thinking right now, and a plausible path based on some assumptions about what oil prices will do to inflation.
If things go badly with oil supplies from here, we could see even more inflation and the RBNZ might have to raise rates more aggressively.
But if things go really, really badly and the war triggers a global recession and financial market meltdown, the RBNZ could end up cutting rates this year.
Everything is still on the table until we get some clarity in the Middle East.
Post-war data starting to flow
One of the reasons for the lack of clarity in forecasting right now is that halfway through April and six weeks into the Iran conflict, we’re only just starting to get economic data that captures the consumer and business response to the oil price shock.
Unsurprisingly, it’s all a bit mixed.
We get the March electronic card data and Selected Price Indexes (measuring inflation of food, accommodation and transport costs) from Stats NZ on Friday.
But in the meantime, Westpac card spending data (released Monday) made interesting reading.
Per-person spending on Westpac-issued debit and credit cards was essentially flat in March.
Westpac senior economist Satish Ranchhod noted that with prices pushing higher, “that means many of us are getting less in our shopping baskets each time we go through the checkout”.
Spending on fuel rose 15% as consumers rushed to fill their tanks, Ranchhod said.
“We also saw a 0.7% rise in grocery purchases, with many households stocking up on essentials as the Middle East conflict stoked concerns about shortages and cost increases,” he said.
“But while spending on essentials lifted, higher fuel prices siphoned a large amount of cash out of New Zealanders’ wallets.”
Those cost-of-living pressures, combined with nervousness about the economic outlook, meant many households were winding back their discretionary spending, he said.
“We saw a sizeable 2% drop in spending on takeaways and in restaurants. Dining out is often the first area where households cut back their spending when fuel or other living costs rise and it could be a tough few months for the hospitality sector.”
Recovery rolls on (in some sectors)
It hasn’t all been gloomy. While ANZ’s Business and Consumer outlook surveys both showed sharp confidence falls in March, ANZ Truckometer showed that the heavy traffic index (a real‑time measure of economic activity) still rose by 0.4% and remains 2.3% higher than a year ago.
The BNZ-BusinessNZ Performance of Manufacturing Index (PMI) showed New Zealand’s manufacturing sector continued to expand in March, albeit at a slower rate than previously.
“While the PMI is no longer trending higher, it hasn’t been unduly hit by the fuel price surge and uncertainty of war. At least not yet,” BNZ senior economist Doug Steel said.
“It might simply be a case of too soon, but its resilience in March is notable.”
It seems the production end of the economy had momentum going into the conflict.
It probably won’t last, but it’s some cause for hope.
Will we see a broad-based economic contraction in the current second quarter?
Probably. Economists at Westpac and ASB have both forecast a downturn, picking contractions of 0.3% and 0.4% respectively.
But pushing in the other direction, we probably shouldn’t forget that this quarter may actually be the peak for stimulatory mortgage rates and the dairy boom payouts.
Fair winds
As the Herald’s Jamie Gray pointed out in his weekend feature, the economy is about to get a $5.4 billion shot in the arm from the dairy sector.
This week, Fonterra farmers and investors receive $3.2b – the capital repayment arising from the sale to French dairy giant Lactalis.
They will also receive $700 million from a 16c special dividend arising from Fonterra’s share of the consumer business’s earnings before the sale went through, combined with a 24c interim dividend announced last month.
Fonterra’s sale of its Mainland brands to French dairy giant Lactalis is set to boost rural balance sheets – and the wider economy. Photo / NZME
Throw in adding in monthly milk payments and the total comes to $5.4b.
“It’s definitely something that’s providing a rare tailwind at the moment, particularly as the juice from lower interest rates has effectively been running out,” ASB’s chief economist Nick Tuffley told the Weekend Herald.
ASB’s analysis of the $3.2b capital repayment alone suggests about half of that will go into farmer savings or debt repayment to shore up their balance sheets.
As for the other half, Tuffley said it will make a difference for the economy in the long run.
“As it’s spent and, when you allow for the multiplier effects through the economy, it’s potentially going to add something like 1% of GDP to activity over time.
Meanwhile, Wellington business editor Jenée Tibshraeny has reported nearly 31% of the $7b of new mortgages issued in February were fixed for two years, according to new Reserve Bank data.
Borrowers likely tried to lock in rates for longer durations in anticipation of them rising, she wrote.
Since the Reserve Bank cut the Official Cash Rate (OCR) to 2.25% at the end of November, there has been a clear shift in borrowers moving away from floating and shorter-term interest rates towards traditionally popular two-year rates.
In November, 47% of new mortgage lending was put on a floating rate, with a further 31% fixed for a year or less.
By February, only 19% was floating and a further 27% was fixed for a year or less.
The rush to fix is a reminder that the full stimulatory effect of the OCR cuts is finally upon us. Because of the way Kiwis fix their mortgages, it takes something like 18 months to two years for rate cuts to fully pass through to consumers.
We’re now about 21 months on from the first cut in this current easing cycle and the bulk of mortgage holders should have refixed on lower rates by now.
Now, as tightening financial markets push mortgage rates up and expectations grow for OCR hikes, the rest will be rushing to do so.
That combo of low mortgage rates and high export returns is a powerful fair wind for the economy as we hit the turmoil of the global oil shock.
Productivity dilemma
Q: Liam, I’m an old, retired chartered accountant, having worked in various industries for 21 years before owning a manufacturing business for 41 years. A total of 62 years with never a day unemployed and in industries that created wealth and exported products to the world.
I have a theory that the normal method of measurement of productivity does not fit the New Zealand economy, when so much of our wealth is created by the farming industries and so much of their wealth (and actual financial returns) is actually and largely out of individual farmer control.
I’m thinking of FX rates, the weather, crops or animal prices; even now, the price of fertiliser – farmers have little influence on so much of their earnings. Does normal economic theory adjust for these factors?
I really question whether the productivity comparison with other countries is valid and whether we should not be making comparisons like healthy living, care of the low socioeconomic sections of the population, care of the very young and very old, family life, for instance, compared to other similar countries. And in times like right now, just enjoy the privileges that we have living in provincial New Zealand?
David Bennett
A: Thanks, David, some really interesting questions there (and I should acknowledge I had to edit the submission down a bit).
They are also well-timed as next Thursday (April 23), we get the latest Stats NZ update of New Zealand’s productivity performance, since 1978.
There are a couple of key parts to your submission – the specifics of how we measure productivity in New Zealand and the extent to which conventional measures of productivity match the wider social goals we’re really trying to achieve.
On your first point, I don’t think we can blame measurement for New Zealand’s relatively poor performance in improving productivity in recent years.
The last Stats NZ update (to 2023) found that labour productivity fell 0.9%, multifactor productivity (MFP) fell 2.2% and capital productivity fell 3.8%.
Standard productivity measurement counts output per unit of input. It typically uses volume measures, not value measures, precisely to account for the pricing effects you mention.
Stats NZ’s multi-factor productivity methodology tries to separate what farmers actually produce (kilograms of milk solids, tonnes of beef etc) from what they earn for it.
So most of those variables around farming should be accounted for.
Accounting for weather might be more difficult, but its impact on New Zealand’s total productivity rate is mitigated when we remember that agriculture isn’t such a huge percentage of the total economy.
The primary industries are our biggest earners of export dollars and as such are vital to our economy, but only account for about 7% of GDP directly.
According to the Stats NZ report, primary industry workers actually had the highest labour productivity of any sector in 2023 – producing the equivalent of 161.1 goods and services per hour, compared with a base of 100 in 1996, and ahead of services at 147.1 and goods-producing industries at 113.6.
Anyway, I’d have some faith in the stats relative to other countries.
As to your second point, should we compare ourselves to other high-productivity countries like Switzerland and Germany?
I take your point that we are a Pacific Island nation, many thousands of kilometres from the centre of the economic and financial world.
Perhaps we should be more focused on issues like social cohesion and healthy living etc.
But I think that in the end, we want choices.
And being a wealthy nation gives us more choices. Improved productivity is one of the key pathways to being wealthy.
It shouldn’t be about working harder. It should be about working smarter. I think New Zealand has plenty of spare capacity in that respect, whether it is investment in high-tech machinery or simply investing in our young people with better systems of health and education.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.