Inflation will slip through NZ’s barricaded borders
Govt’s limits on the supply of workers will push up prices — and interest rates, writes
We’re at the end of the beginning of New Zealand’s new Government-sponsored fortress economy, and the strains are already appearing.
This week alone we’ve had thousands of restaurants turning the lights off in protest at not being able to hire staff, more talk of labour shortages in the farming community, and pleas from the broader export sector for border crossings for key workers. Nurses are heading back on strike, partly because of money and partly because of chronic understaffing.
More broadly, we are seeing record numbers of job ads as employers throughout the country can’t find staff.
The most notable aspect of this week’s benchmark Quarterly Survey of Business Opinion is that businesses are reporting more difficulty hiring skilled people than ever before — dating back to the 1970s when the survey first began.
In short, our labour market is seizing up. Bumper sticker exhortations to “just hire more Kiwis” won’t cut it. We’re running out of people for the jobs we have, and the people who are available either have the wrong skills for the jobs that are going, or are not prepared to work in those jobs.
And that’s a problem for more than just the affected businesses. It is a problem for all of us. A highly restricted labour market creates two direct impacts: constraints on our economic capacity and increased wage inflation.
Wage inflation sounds like a good idea. After all, who would argue with a wage rise? Indeed, the Government sees wage inflation as a feature of their fortress economy approach. They make no secret of the fact that they are using our barricaded borders to force up wages higher than they would otherwise be.
However, if an increase in wages is not matched by increased productivity, then that wage increase quickly feeds into inflation. The person with the extra money in their pocket finds it disappearing into increased living costs, mortgage costs and rents, leaving them no better off and often worse off.
What we are looking for as a society is real wage increases as a result of using our time more cleverly, not wage inflation.
On broader economic activity, two Government policies are about to run headlong into each other.
As we know, the Finance Minister has opened the spending spigot and been throwing money around like confetti to prop up the place since the pandemic began. He has been ably supported by the Reserve Bank, which cut interest rates to practically zero and flooded the country with even more money to help keep us all in the manner to which we have become accustomed, and to encourage us all to borrow more. And many of us have.
That is how we feel like we are going okay despite, for example, a 25 per cent reduction in our goods and services exports to the world so far this year.
There have been warning lights for some time that both the Government and the Reserve Bank may have overshot the mark with these interventions and could be prematurely stoking inflation. Construction costs, energy costs and retail prices are all starting to increase. House prices and other asset prices have shot through the roof. Imported inflation, too, is not helping.
A massively constrained labour market can only make things worse. If firms can’t hire people to expand and soak up the consumer demand created by all this government stimulus, then we reach our economic capacity much sooner. Then all the extra money floating around feeds even more into increased prices as people chase goods and services in limited supply.
The twin prospects of wage inflation and price inflation are one of the reasons we are now seeing talk of interest rate increases as early as the end of this year, before nearly every other country in the developed world. That’s a big change from even a few months ago.
And interest rates won’t have to go up too much to really hurt, coming off the current very low base. A 1 per cent rate increase on a 6 per cent mortgage back in the day would put your interest bill up by around 16 per cent. A 1 per cent increase on a 3 per cent mortgage whacks your interest costs up by a third.
Our peculiar policy mix of outsized stimulus and hermetically sealed isolation threatens to drive inflation and interest rate increases harder and earlier here than anywhere else.
Nobody is arguing against border restrictions while we get the vaccines rolled out, although a hurry-up on that front would be more than in order, as countless people have said.
The problem is that our current Government is deliberately using the Covid border restrictions as a convenient excuse for their attempt to deliberately decouple our labour market from the rest of the world. That’s why we have an “immigration reset”, the cancellation of tens of thousands of short-term visas, and hundreds of empty MIQ spaces every week.
Let’s be under no illusion. Their approach, if carried through, will permanently restrict the growth rate of New Zealand companies, and therefore, our country.
One of the great benefits of our bipartisan economic approach of the past 30 years is that this small and isolated country has increased its wealth partly by attracting people to help do the work we are collectively unable or unwilling to do. In the last decade alone, we have grown our incomes at a faster rate than many developed countries, while at the same time keeping a higher percentage of us productively employed than ever before.
The Government should be working to sustain that increase in prosperity by restoring our labour markets as soon as it safely can, and in encouraging the building of the supporting infrastructure we need to continue to grow. Not shutting the door and barricading us off at the first opportunity.
That way leads to stunted growth, inflationary pressures, higher interest rates, and a poorer country that can’t afford the infrastructure and services we need.
Our peculiar policy mix of outsized stimulus and hermetically-sealed isolation threatens to drive inflation and interest rate increases harder and earlier here than anywhere else.