Planning ahead will help you dodge the stagflation bullet
With the roar season peaking, there is another stag to consider: Is stagflation in New Zealand a looming concern for 2024-25?
While some hunt hinds and stags to supplement the rising cost of food inflation, we would do well to consider the possibility of stagflation — and what we might do to hold it at bay.
Stagflation, a term that combines the words “stagnation” and “inflation”, is an economic event that poses a unique challenge. Unlike the conventional wisdom that suggests inflation and economic growth move in opposite directions, stagflation defies these expectations.
Stagflation occurs when an economy experiences the following simultaneous conditions:
• slow growth: economic expansion stagnates, leading to sluggish or negative GDP growth;
• high unemployment: unemployment rates rise, worsening economic troubles; and
• rising prices: inflation persists, driving up the costs of goods and services.
Traditionally, economists believed high unemployment should coincide with low inflation. However, stagflation challenges this assumption because it combines the worst of both worlds: economic stagnation and price pressures.
The term gained prominence during the 1970s oil crisis. At that time, the United States faced a prolonged period of stagflation characterised by inflation surge (rates doubled and reached double digits), recession (five consecutive quarters of negative GDP growth), and a peak of 9 per cent unemployment by May 1975.
How does this tie in with New Zealand’s issues in 2024? Let’s look at some of the drivers of stagflation in our modern context.
Inflation and outlook
The United Nations predicts New Zealand’s inflation will remain “relatively high” in 2024 due to accelerating rents driven by housing supply shortages.
The consumer price index was projected in October 2023 to fall from 5.6 per cent to 3.4 per cent in 2024, and further to 2.6 per cent in 2025. We have seen the latest 4 per cent CPI reading in March 2024.
Economic growth and unemployment
New Zealand’s economic situation faces “strong headwinds”. with real GDP growth at 0.6 per cent in the December 2023 quarter, down from 3 per cent on the June 2023 quarter).
Despite record migration, the labour market remains tight, leading to rapid wage growth but eroding household purchasing power.
Unemployment is up to 4 per cent in the December quarter and likely to rise further with the March 2024 quarter to be announced.
Policy dilemma
Policymakers continue to grapple with the stagflation challenge. Attempts to address slow growth may worsen inflation, and vice versa. The scenario of higher inflation and weaker output looms, potentially affecting the recovery as central banks consider raising borrowing costs.
Much like roar season, danger looms for the unwary (or the overconfident weekend warrior). Avoiding stagflation’s impact on your investment portfolios, KiwiSaver or other retirement/ superannuation fund is much like avoiding accidents in the bush: it comes down to planning and meticulous risk management.
Some precautions stag hunting and stagflation have in common
Plan ahead and make your intentions known to others. In hunting this means telling someone where and when you are going and taking adequate supplies for first aid etc in case something goes wrong. In financial planning, it means knowing your timeframe and working with a trusted fiduciary who has all the tools you will need to succeed.
Respect the dynamic environment. Much like rivers rising with little warning, financial markets can take a sudden turn with little warning. A trusted fiduciary will be able to both position you to ride out these changes and support you should any turbulent waters start making you nervous.
Treat every firearm as loaded — or know that a bullet cannot be unloosed. Staying your course long term can feel counterintuitive when things are trending down (or stagflation is rearing up). But if you pull that trigger and pull your funds out early, you risk locking in any paper losses and potentially paying a premium to line up your next shot (re-establish a portfolio once prices start to rise again). Better to stay away from the trigger until you are certain of your target.
Another thing to consider for investors wary of stagflation is value stocks. Value stocks are shares of companies that are considered undervalued relative to their intrinsic worth. Investors seek these stocks based on fundamental analysis, looking for companies with strong financials, stable dividends, and solid assets. Unlike growth stocks, which focus on rapid expansion, value stocks emphasise stability and long-term potential.
These stocks have also typically outperformed growth stocks over time. Their stability and focus on fundamentals make them resilient during economic downturns. While the past cannot predict the future, history favours value stocks for the long haul.
Remember, as always — diversification and careful analysis remain crucial for a well-rounded portfolio. Picking your own stocks, value or otherwise, is akin to being the weekend warrior heading out with little more than a firearm and a prayer.
You might be all right, but a lot can go wrong. It is best to go with someone who knows how to navigate the environment and the hazards therein.
As New Zealand navigates economic uncertainties, the possibility of stagflation looms. Policymakers must strike a sensitive balance to mitigate rising prices without stifling growth. The lessons from history remind us that stagflation is a formidable adversary and is one that defies conventional economic theories and demands innovative solutions. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an authorised financial adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visiting our website, www.stewartgroup.co.nz