By Jason Walls
Finance Minister Grant Robertson has been talking about “transitioning the economy” for some time now.
This has been his go-to line whenever he’s asked about negative economic data.
Rising unemployment? “We’re in a transition period.”
Lower economic growth expectations? “It’s part of the transition.”
Plummeting business confidence? You guessed it – “transition.”
“We are going to transition away from an economy that even the member's former leader is now acknowledging was built on population growth and housing speculation,” he said earlier this month in response to National’s Amy Adams in the House.
This week, the effects of this transition were on full display.
The Reserve Bank’s Monetary Policy Statement (MPS) and subsequent press conference were blockbuster events for economy watchers.
Governor Adrian Orr pushed out any expected movements to the Official Cash Rate (OCR) by an entire year.
The dollar dropped like a sack of flour as the market reacted to, what one economist described as a “stridently dovish” MPS.
The “shock and Orr” factor of the dramatic change in the OCR track, as Kiwibank put it, grabbed the headlines but the Governor’s comments on economic growth were equally fascinating.
He is so sure the economy will continue growing above 3% in the coming years, he promised to cut the OCR to 0.75% if GDP growth falls below, and stays under, 3% starting next year.
This is a big call – north of 3% growth is a very healthy and enviable position for many OECD economies.
Fiscal and monetary stimulus take the wheel
The Governor was not shy in pointing out where he thinks this growth will be coming from either.
“Fiscal and monetary stimulus underpin this growth outlook,” Orr says.
Essentially, the combination of the Government’s spending plans – through the Families Package and KiwiBuild – as well as the Reserve Bank keeping the OCR at record low levels for another two years, will keep New Zealand’s economy growing strongly.
In other words, we can thank the Government and the Governor for the strong levels of expected growth.
The retail banks immediately snapped into action to adjust their forecasts. Kiwibank Chief Economist Jarrod Kerr says the lion’s share of his forecast lift in economic growth comes from the fiscal stimulus.
As well as stimulating economic growth through keeping the OCR lower for a lot longer, Orr also had another trick up his sleeve – the dollar.
The markedly dovish statement sent the Kiwi to a two-year low against the greenback.
Orr was clearly chuffed to see the dollar drop so dramatically, saying he was “very pleased with the performance of the currency. It’s as close to fair value as it gets.”
A lower dollar is better for our exporters, it means they can sell more and help lift the economy in the process.
Speaking to MPs at the Finance and Expenditure Select Committee, Reserve Bank Head of Economics John McDermott underscored how important exporters will be for growth over the coming years.
But the MPS document made it clear that some of the factors New Zealand had leaned on so heavily to bolster economic growth, such as immigration and housing, have well and truly taken a back seat.
Fiscal and monetary stimulus appears to have taken their place, at least for now.
Not everyone is convinced this is good – National’s Finance Spokeswoman Amy Adams says the stimulus is masking the underlying picture of the economy.
But Robertson is undeterred.
Making his way to the House on Thursday, he was stopped by media and asked for his reaction to the MPS.
“It’s all part,” he said with a smile, “of New Zealand’s economic transition.”