Election year recession looms large
OPINION: The tools available to Reserve Bank governor Adrian Orr may be a poor fit for the problems facing the economy here, and elsewhere.
As Bloomberg News wryly pointed out last week, central bankers can’t bring the war in Ukraine to an end, or pilot more container ships through the Suez and Panama Canals, or find a cure for Covid.
All that central bankers can do to address the cost of living crisis is to hike up interest rates, to try and limit the extent of demanddriven inflation.
That approach worked for it in the past. Unfortunately, today’s economic problems tend to be located at the supply end of the spectrum – in the price of oil, the availability of wheat, and the blockages to global supply chains.
No doubt, the Reserve Bank felt that it had to be seen to be doing something about inflation, but a fine balance has had to be struck. Arguably, the Bank’s current commitment to hiking up interest rates in an already slowing economy may well heighten the chances of a recession next year.
An economic recession in election year 2023? That would be the government’s worst nightmare.
Last week though, BNZ economist Stephen Toplis was treating a recession as not only possible, but likely.
The chances of a soft landing are fading, Toplis claimed. In his view, the main pressures are coming from the series of supplyside shocks to the economy from offshore, from staff shortages and from Omicron forcing firms to hire temporary staff to plug the gaps.
Elsewhere, inflation appears to have peaked. Last week, US economists were celebrating the fact that gasoline prices, used car prices and global food commodity prices all fell during April. Not here, though. That’s mainly because the weakening New Zealand dollar is pushing up the price of imports.
Thanks largely to the steady decline in our dollar, the petrol price at the pump reached an alltime record high last week. There’s a squeeze going on. Since Covid arrived in 2020, the combo of government support measures, low interest rates, and the resilience of Kiwi households have all helped us to cope. Yet these worthy responses have ended up pushing demand beyond what the supply chains can currently deliver, thereby fuelling inflation.
The Reserve Bank’s response, Toplis said, has been ‘‘to crush demand to meet the new levels of supply.’’
Its all for our own good, supposedly. Even if that means the economy is likely to stall – or worse – during an election year. Gamely, Finance Minister Grant Robertson was insisting last week that ‘‘ the underpinnings of the economy are strong’’ – and strong enough in his view, to prevent that dreaded possibility of a recession next year.
It could come down to a race against time.
With luck, the opening up to tourism, the influx of overseas workers, and the healthy state of the government books will all help to prevent the looming economic slowdown from turning into something even worse.
Toplis was not entirely giving himself over to doom and gloom just yet. ‘‘Households and businesses,’’ he concluded, ‘‘would do best adopting a prepare for the worst, hope for the best strategy.’’