The economy has spoken. We just don't know what it said.
Yes, the economists promised us 'noise' ahead of the release of the latest GDP figures. And we got that. In spades. But clarity? Not so much.
As a non-economist, I like to try to keep things simple. So, amid the data released by Statistics New Zealand last week that showed various parts of the economy seemingly going in different directions, there were two standouts.
First, the service industries grew a whacking 2.7%. Second, household spending slumped 3.2%.
Okay, on the first one, let's face it, we would have hoped like hell there would be something of a reasonable bounce. The March quarter was affected by the soaring outbreak of Omicron, and of course, GDP as a whole shrank by 0.2%.
The June quarter saw Omicron subsiding and a consequent easing of restrictions. Crucially the June quarter also saw the easing of travel restrictions. If you are going to let people travel freely for the first time in over two years, you would hope that at least some people are going to do that! A big surge for the travel-related industries should not be an almighty surprise! As I say, it would have been a very nasty surprise indeed if we had not seen something of a surge.
So, in terms of services, we are talking about a bounce off the floor. I don't personally think this shows us a raging economy. It shows some pent up demand being released. But I don't think it tells us too much about spending patterns in the immediate months ahead. As I say, we would be worried about the future of the travel industry if people didn't start to travel again once allowed. And likewise a few tourists here spending hard-earned will all help too.
Better therefore to not talk about 'strength' in those service industry figures. Talk about 'recovery'.
Right, before I talk specifically about the drop in household spending, it is worth going back to what the expectations were for the June quarter GDP.
Economists' forecasts were unusually widely spread, highlighting the difficulty in trying to read how an economy that's been as buffeted as it has is performing.
Apparently the range of forecasts straddled from 0.0% to 1.8%, remembering of course that the actual figure came in at 1.7%. And who was the 'outlier' at 1.8%? Well, it was... The Reserve Bank (RBNZ).
That's right, the folk that are currently physically trying to take heat out of the economy by hiking interest rates, were the folk that had the 'hottest' prediction for how the economy fared in the June quarter. In terms of predicting the outcome of GDP for the quarter, RBNZ shared the chocolate fish with Westpac economists (who said 1.6%).
So, think about that. The RBNZ, which is charged with trying to slow the economy and get inflation (annual rate last seen at 7.3% as of June quarter), back into a 1% to 3% range, was the organisation that had the most bullish view of how the economy was travelling in the June quarter.
It would be very interesting to know just what the breakdown was of that RBNZ 1.8% pick, but I'm happy to speculate that it may well have been somewhat how things turned out - IE, service industries bouncing, but household spending falling.
The latter is EXACTLY what the RBNZ would want to see. It indicates that the screwing up of interest rates is having an impact.
Now, what would the RBNZ want to see in the immediate future? Well, more of the same on the household spending front. And then a 'settling' of activity in the service industries.
Those GDP figures released last week, 'noisy' and all over the place as they are, have had quite a market impact. ASB economists immediately raised their expectation of a peak Official Cash Rate to 4.25% from 4% previously, and the following day economists at the country's largest bank, ANZ, came out with a market leading forecast of an OCR peak of 4.75% next year.
The wholesale interest rate markets have been moving up also - though of course expectations for what might happen with the latest US Fed decision will have been helping fuel this. The wholesale markets are now fully 'pricing in' an OCR peak of 4.5% by the middle of next year.
For its part, the RBNZ in its most recent Monetary Policy Statement in August forecast a peak OCR of just over 4.0% next year. The OCR forecasts are the column on the extreme right of the below table:
At the moment the OCR is at 3.0%, having been hiked massively from just 0.25% as at the start of October 2021. Each of the last five OCR reviews have seen 50-point hikes and I think it is virtually guaranteed that we will see another 50-pointer at the next review on October 5 and then one more 50-pointer for good measure at the final review for the year on November 23.
Now, remember, these forecasts by the RBNZ were arrived with it thinking that GDP would grow by 1.8% in the June quarter. So, the actual 1.7% result is NO surprise to the RBNZ, even if it is to some economists.
Why, therefore, would the RBNZ see the need at this stage for a higher OCR than it has already forecast?
I don't know how good I am at reading body language, but it seemed to me that during the August OCR review the RBNZ folk were very comfortable with how they were placed in terms of starting to get a handle on the big job of bringing inflation down. And they expected GDP to rise 1.8% in the June quarter.
What are they expecting for GDP in future? Well, those picks are in the left-hand side column of the above table. In short, the RBNZ is not forecasting the death of GDP, but close. There's no forecast of a recession, which is good.
But on the other hand, could we reasonably expect that a central bank that's currently grabbing the economy by the gonads to bring down inflation WOULD forecast a recession? Well, I wouldn't.
If you look at the figures above from June 2023 to September 2024 they range from 0.0% growth to 0.2% growth, IE hardly any growth at all. And indeed, it would only take very small downside misses on those forecasts to see us rack up six consecutive quarters of negative GDP growth. Now that, people, is a recession. A real one.
And, at the risk of labouring a point, the RBNZ, having expected GDP growth of 1.8% in the June quarter, is making these forecasts based on its current forecast trajectory for the OCR with a peak of maybe 4% or a little more. But crucially, it is now pushing the point that the OCR may stay at such levels for quite a while. So, in other words a slow and gradual squeeze of the economy, rather than a knockout punch.
The fact that the 'market' is now assaying the possibility of a 4.5% OCR, with wholesale interest rate pricing to match, means we may well see some upward moves quite soon from the banks on fixed mortgage rates - since of course it is the wholesale interest rates that have the most direct influence on the banks' cost of funds.
Would the RBNZ mind the banks getting ahead of themselves (again) a bit? I don't think so. Remember, fixed rates have eased a little since early July (when the average one-year mortgage rate was about 5.25% and the average two-year about 5.6%) to around 5.1% and 5.45% at time of writing.
The point is, at the moment, I think the RBNZ believes it has 'got this' (better late than never!) and that an OCR of around 4% for some time will do the trick, the economy will slow, and inflation will dwindle.
The big, big thing that could derail all this is the labour market. And I will get back to you on that one with a fulsome examination and explanation.
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"The big, big thing that could derail all this is the labour market", which is code for "Watch out for demands for much higher wages"?, and if fulfilled, that will prompt an OCR far higher than 4.75%.
The whole World is caught in a demographic vice. The cohort of retirees is not being replaced by productive workers. Our social choices to delay or negate procreation arrived in the 60's. China, especially, is going to suffer terribly when the One Child Policy takes its inevitable toll. And as such, we are all going to be competing for a smaller and smaller pool of mobile workers; one who will travel to where the pay is the best. And that could give rise, literally, to a global interest rate regime that could make the 70's look tame. Unless we hit it hard with the monetary club - now.
Yes I know a number of babyboomers who have called it quits the last 2 years since the COVID pandemic arrived. They've had enough of the work place so have now transitioned into retirement.
So they now are producing no goods or services in the economy to offset in the enormous increase in money supply that central banks have just unleashed in the global economy. They are consumers, not producers. And this must be happening everywhere across the anglosphere on a large scale.
Its quite possible that 2020 was the turning point of a 40 year interest rate cycle, or the shift in the 80 year long debt cycle. i.e. 1946/Bretton Woods through to now.
While I am utterly convinced that the OCR peak will be 4.75%, possibly 5%, I am very reluctant to assume a higher peak than 5%. The simple reason is that an OCR peak over 5% will transform the current ongoing significant correction to the NZ housing Ponzi into a complete rout, which the RBNZ does not want to happen. I think that the most likely scenario will be that of a RBNZ keeping rates at around 4.75% (or slightly less) for a long amount of time (years), so to keep mortgage holders just about surviving, and forcing debtors to see a great reduction to disposable net income and therefore significantly reduce their lifestyle and spending patterns until inflation is put back under some control.
If the Chicago feds calculation that to tame inflation interest needs to be 2-2.5% higher than CPI but uncertain if they were looking at OCR or commercial rates - I hope commercial rates, in this case mortgage rates in the 9% region seem possible and business rates higher - 12-15% all of which will reduce economic activity and tax take at a time Govt expenditures on benefits will increase and debt issuance to pay for increase Govt interest pays for new money and on roll over Bonds. The TWI is already below the June 2021 RBNZ estimate so the market is already predicting pessimism in the NZ$ although some comfort in exports will produce more NZ$ subject to volume. The perfect storm ahead will see NZ get wet but the current captain and first mate have been drinking 100% proof coolaid and are now drunk & asleep, I hope a new crew are elected to steer NZ to calmer waters.
Really sobering when you consider that allowing inflation to run high to protect property owners is perpetuating earlier wealth transfers from workers' wages and pensioners' savings, to land owners. And still we've suggesting property is "too big to fail" so such wealth transfers to prop it up must occur.
It must surely be our most generous welfare scheme ever, by now.
Yvil - inflation occurs when money supply increases at a faster rate than the goods and services produced by the economy.
The other way to fix inflation is to reduce money supply, to match the quantity of goods and services the economy can produce with the workforce it has.
Across the globe we created too much money in 2020-2021 (actually from 2008...) to prevent debt defaults from happening. But unfortunately we don't have enough people to produce sufficient goods/services to match the demand that this additional money has created.
So we need to reduce money supply - and demand for workers. Increasing the cost of capital (interest rates) will do that.
All I can say about GDP headline annoucements is that it's annoying that the MSM and govt sycophants turn it into a sports meet medal count comparing NZ with the OECD average and other countries. So amatuer and more about inferiority complex and the 'punching above our weight' mentality. NZ has to get over this nonsense.
Michael Reddell shows a graph of real GDP per capita for the past 12 months and NZ was 2nd from the bottom. The sycophants don't like this behavior.
https://www.oneroof.co.nz/news/42254: Ouch! Couple prepared to take $550,000 hit on Hamilton Lake house
And that is without taking inflation into account. I wonder what it will be worth next year with a 4.5% OCR and a recession?
Ten successive GDP projections from Dec 22 to Mar 25 of between 0.0% and 0.4% is laughable.
Let me translate this in simple, straightforward terms. GDP is going to go down a lot, into negative territory, NZ will enter a recession but we (the RBNZ) don't want to scare the sheeple so we'll "predict" 0.0 to 0.4% growth.
The GDP figure for the June quarter was the result of almost half a million people suddenly being able to access goods and services again, after being locked out of society for over 4 months (from Dec to April). That's a lot of hairdresser/beauty appointments, veterinary visits, dental/physio/optometry appointments, catch up with friends at the pub/restaurants, and whatever else they hadn't been able to do for 4 months. But that effect won't be present in the Sept quarter. So I expect we will be back to negative GDP again.
This Govt can no longer rely on lockdowns and lockouts ending to juice the economy, which is what has resulted in GDP being negative, positive, negative, positive over the last 4 quarters.
I feel you are right KW about spending on "hairdresser....pubs/restaurants" In reality what actual use is our focus on GDP? It measures commercial activity but certainly not just useful commercial activity.
In the context of NZ as a tiny trading nation reliant on imports outside of most food items....ie a need to earn hard currency, not local 'monoploy money', shouldn't our economists be concentrating on balance of payments, or productivity of potential exporting industries? Adding yet more cafe's, vaping shops, taking in one another's' washing etc., all increase GDP but are largely irrelevant to making our way in the big bad world.
I may have said exactly the below words on this forum when the GDP was released last Thursday.
It would be very interesting to know just what the breakdown was of that RBNZ 1.8% pick, but I'm happy to speculate that it may well have been somewhat how things turned out - IE, service industries bouncing, but household spending falling.
The latter is EXACTLY what the RBNZ would want to see. It indicates that the screwing up of interest rates is having an impact
I'm not saying its my IP ....but
Inflation is likely to stay higher for longer because of increased fiscal spending in election year.
The government has artificially propped up GDP with excessive spending. When you live on borrowed money for a couple of years how can the economy be ok? It is just an illusion & someone will have to pay the debt back.
Since the government plans to significantly increase its spending in election year, the Reserve Bank will be forced to counter this by increasing OCR higher than its forecasted 4.1%
For the next 13 quarters the Reserve Bank forecasts GDP growth between 0.0% and 0.6%. With inflation likely to stay higher for longer, the most likely scenario now is stagflation (no GDP growth, high inflation).
Robertson needs to go as his plan for continued excessive government spending will take years to fix. We need a Finance Minister that is going to reign in spending until inflation is under control.
It has nothing to do with the $320 billion that the banks have created to lend on housing then? The government could repay its debt tomorrow, after all that is what QE did. Borrowing is not necessary in the first place and has nothing to do with financing spending. It is an archaic activity that should have ended with the gold standard as there is no longer a fixed exchange rate to defend.
Mark my words. Monetary policy is going to have to get a whole lot tighter to have any material effect on inflation pressures. You need to create a massive hole in demand to kneecap pricing power in order to take the wind out of inflation's sails. That is borne out by history - just look at any disinflation case study. When the OCR was raised to 8.25% in 2007 inflation was only half what it was today and that period was certainly no cakewalk. Over the past 10 years, the woke brigade have somehow convinced themselves that monetary policy is like pixie dust - sprinkle a little here and there and inflation gently dissipates! But it is just not the case.
Over the next 12 months the story will go like this - "inflation pressures have been stronger and more robust than we anticipated ... additional increases in the OCR are required."
I think it will be more like this:
"inflation pressures have been stronger and more robust than we anticipated … but inflation target of 3 - 5% is fine, we can live with it (in truth because we cannot kill the economy any more), additional increases in the OCR are NOT required."
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