Summary of key points: -
- How will New Zealand get its economic mojo back
- 2023, the year the Kiwi dollar “carry-trade” returns
- Employment data will not the stop the Fed moderating
- US money supply plummets – so will their inflation rate
How will New Zealand get its economic mojo back
As the volatile, confusing, and frustrating year 2022 draws to a close, in economic and financial market respects, it is timely to reflect on how we have got to this position and where things may travel in 2023.
Remember the “Rockstar economy”, the description of our economic performance and position coined by HSBC economist, Paul Bloxham back in 2014. To be fair, dairy export commodity prices collapsed shortly after we all enjoyed that label, however the New Zealand economy certainly out-performed Australia in the GDP growth stakes from 2014 to 2020. In economic terms, New Zealand was very much on the front-foot in the years following the disruption and costs of the GFC (2009) and Christchurch earthquakes (2011).
Today, we could not be further away from rockstar status, and we appear to have really lost our way as a nation and as an economy. There is more to the current malaise than just a post-Covid hangover. Business confidence remains at very low levels and business investment is falling away as corporate board tables look ahead at recessionary economic conditions, sharply higher interest rates, acute labour shortages and unjustifiably high labour cost increases. The inevitable result is a hunkering down, not increasing production and riding the storm out until conditions improve. The current environment is a very long way from “the best health outcome, is the best economic outcome” the Prime Minister vowed in 2020.
They call it “covid fatigue” from having to deal with constant battles with supply chains and labour shortages. The previous zest, confidence and aspiration displayed in growing global businesses from a New Zealand base has been ground down by the aforementioned tough business conditions. On top of that, business-folk have had to endure a government hell-bent on implementing their ideological-driven policies of centralisation of control, reduced immigration and increased employment costs which have all contributed to the frustrations. Covid should no longer be used as an excuse, but it seems it is convenient to do so.
The way forward to a more prosperous New Zealand that benefits all, is a government working in tandem with business with their toes pointing in the same direction. We do not have that in New Zealand. Instead of the Government forcing climate change policies on farmers by reducing sheep and beef livestock numbers to reduce methane emissions, the smarter route is the Government and the private sector working together on the science that changes grasses, livestock feed and animal breeding to reduce methane emissions. Sadly, the relationship and trust between the Ardern Government and business was destroyed early on when they halted oil and gas exploration without warning or consultation. They also rejected Sam Morgan’s brilliant Bluetooth covid identifier plan, as God forbid, he might have made a profit out of it!
A good way to measure the business and economic vibe going on in New Zealand is external and impartial observations. My lifetime friend, Al has been visiting New Zealand for a few weeks every year for the last 30 years. He is a Kiwi, but he lives and works in the UK in agri-business and makes business trips to New Zealand to negotiate annual supply arrangements and contracts. Last December on his trip here, he made the observation to me that for the first time ever he felt that New Zealand businesspeople and farmers he had been talking to had lost their always positive confidence about the future and seemed defeated. I trust Al’s judgement from the coalface of the heartland much more than the other external reports you read on the NZ economy compiled by the OECD, IMF or the credit rating agencies. Those institutions just talk to the Government, the RBNZ and Wellington-based economists who are all somewhat removed from what is really going on.
So, how does the New Zealand economy get its mojo back?
It will require political and economic leadership that understands our predicament and stops blaming external events. Strong leadership and innovative economic policies will be needed to pull us out of the current stagflation and to reinvigorate business investment and confidence.
2023, the year the Kiwi dollar “carry-trade” returns
On the surface, the picture painted here suggests a deteriorating economic performance for New Zealand in 2023 and therefore a weaker NZ dollar value. To the contrary, the NZ dollar is forecast to outperform other currencies against a generally depreciating US dollar due to the forecast widening interest rate differential between NZ and US interest rates. NZ interest rates held higher for longer by the RBNZ at 5.00%, US interest rates at 3.00% later next year as the Fed eventually has to cut rates and the recipe is one for the return of the “carry-trade” pushing up the NZ dollar value on its own account i.e. global hedge funds parking funds in the Kiwi dollar as they get a 2.00% yield return pick-up and likely FX gains as well as the NZD appreciates from the combined capital inflows. Eventually, NZ interest rates will reduce on lower inflation and if the economic performance is still poor at that time the Kiwi dollar will go back down. However, it may take 18 to 24 months for that to occur.
Employment data will not the stop the Fed moderating
The unwinding of speculative long-USD positions in the FX markets has continued over recent weeks as both financial market pricing and Fed boss, Jerome Powell, confirm that US interest rate increase can be moderated from here. The NZD/USD exchange rate has posted strong gains to 0.6400 as a result. Not too much should be read into the stronger than expected US Non-Farm Payrolls (NFP”) employment result for November where the 263,000 increase in jobs was well above the 200,000 forecast. The NFP measure is a survey of jobs, whereas the related household HLFS employment survey is a survey of people and for November there were 138,000 jobs lost in the HLFS measure. The labour market outcomes for November should not change the Fed from lifting interest rates by a lower 0.50% at their next meeting on 14 December. Historically, the household HLFS series has been much more accurate at signalling turning points in the US labour market and economy than the NFP data.
US money supply plummets – so will their inflation rate
Managing the money supply as a method to control inflation has been out of vogue with central banks around the world for a number of decades now. Interest rates is the blunt monetary tool that is applied instead. However, the massive increase in US M2 money supply in 2020 (refer chart below) when the Fed implemented QE and printed billions of dollars has brought money supply measures back into focus. As the chart shows, the M2 money supply has plummeted to negative territory over the last 12 months as QE is wound back. The last time M2 money supply contracted in this fashion was in the early 1990’s when the US economy was in recession and inflation tumbled. Look for US core inflation to print lower than the forecast +0.40% for the month of November when the data is released on Tuesday 13th December.
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*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.