David Hargreaves ponders where the turbulent forces of a falling dollar, rising fuel prices and falling business confidence may take us

By David Hargreaves

It's definitely one of the less fun 'S' words.

The awkwardly contrived 'stagflation' is of course a combination of its two apparently contradictory parts - stagnation and inflation.

And while we are a long way away from being able to say that 'stagflation' is something New Zealand faces, well, I think there are some warning signs and I think the Government needs to be careful.

Inflation figures are always obviously watched with interest although in recent years it's been easy to think of inflation as a thing of history.

The next batch of inflation figures are released on Tuesday, October 16, and these will be watched with perhaps more interest than other recent releases have. 

Inflation up

The so-called 'headline' inflation is expected to be up. Economists are now picking that inflation will rise above the Reserve Bank's targeted mid-point of 2% by early next year.

One of the key drivers of course will be the spiking oil prices. As people will be well aware, it's costing more to gas-up at the pump at the moment.

This kind of imported inflation is one that is seen as transitory and to that extent the RBNZ is happy enough to 'look through', to use economists' parlance, short-term inflation spikes thus generated while focusing on underlying inflation as dictated by costs that are within the control of price-setters.

We've already seen from new, or I guess we can now call him 'near-new' RBNZ Governor Adrian Orr that he's prepared to entertain the risk of running the economy a little 'hot' in order to keep growth going - something his predecessor Graeme Wheeler was more than loathe to do. In part this is down to the new brief that Orr has inherited to also consider employment outcomes in the setting of monetary policy.

So, it is certainly to be expected that Orr will not express undue concern with the inflation starting to spike above 2%.

The concern would be if rising petrol prices spark other cost increases - as businesses start to recoup their increased costs. 

The other matter for immediate concern is the recent sharp fall in the value of the New Zealand dollar. This too theoretically increases business' costs and these costs potentially would be added on to the consumer.

Lousy timing

In the midst of all this you've got to say that this Government's decision to impose additional fuel taxes is beginning to look like lousy timing. And when I say the Government needs to be careful, then this is probably the biggest danger zone for it at the moment.

It does seem very strange indeed for the Prime Minister to be calling out the oil companies for 'fleecing' the public when the Government is seeking to piggyback the fleecers (is that a word?) by clipping the (very expensive) petrol ticket.

Hell hath no fury like a person spending what they think is too much for a tank of gas. And I don't think I'm exaggerating to say that high petrol prices, given the Government's fuel tax moves, could cost Labour the next election.

But this could all go a bit deeper than mere public dissatisfaction.

If it's costing people more to gas up the car, they will look to save that money somewhere. Likewise if businesses do try to recoup extra costs of imported goods through raising the prices, then consumers might cut back spending on said goods.

And remember, businesses are already down on confidence, which means they may be reluctant to plan ahead and spend ahead.

So, it's all looking more than a little dicey.

A meaningful slowdown?

Potentially we could see businesses attempting to put prices up, the consumer reacting by not spending, and therefore the economy starting to slow quite meaningfully. That would then likely lead to rising unemployment.

Now, I don't think any of this is a given. I've said very recently I don't think the economy will slow as much as perhaps business confidence surveys might suggest. But there are risks there and arguably the risks are rising almost by the day.

I actually do think the Government should rethink its fuel tax strategy not because it's such a bad idea but because the timing now probably tells you it's very risky.

It's to be assumed that the RBNZ will 'look through' the imminent spike in headline inflation and so won't hike interest rates. But equally, I don't buy into the thinking of some that it will actually drop interest rates either. I think the falling dollar mitigates against that. So, the RBNZ's likely to be a bit 'stuck' I think.

If businesses can't recoup increased cost of imported goods - and evidence of recent years show that particularly retailers will struggle - then more businesses going out of business and exiting operations cutting back on staff are very likely.

What this Government really needs to do is to keep the consumer spending, not recklessly, but sufficiently to keep the economy moving.

If people do go into their shells because they don't feel they can afford a tank of gas, then the ramifications are quite large. We might see more people looking to head offshore again, reversing the migration trends of recent times.

What about the houses?

We might see less people (even less) thinking they can afford a house - this at a time when this Government is starting to ramp up house building.

I'm still expecting this Spring and Summer to be quite good for the housing market, particularly as the rest of the country continues to play some catch-up with Auckland. But I'm now seriously wondering about what happens come next winter.

I think various of the things mentioned in this article may well all come together to produce an environment where we might actually start to see some meaningful drop in house prices.

That's obviously going to be good long term particularly for the young FHBs (IF they haven't already just bought) but could be a bit rough in the short term. And as I've stated before, I think a lot of the New Zealand psyche revolves around how house prices are doing and if people are sitting on stagnating or even falling house values then the mood of the nation ain't going to be that upbeat - which of course would further fuel non-spending and a further slowing of the economy.

The Government needs to lose some of the ingrained sense deep within it that 'business is bad'. Declaring war on petrol companies doesn't look like a winning strategy to me because it's just going to help to drive the consumer into his or her shell.

And right now we need to keep the wheels turning. The sun's still going to come up tomorrow morning, but I tell you what, there might be some fairly cloudy skies in a couple of years' time if we are not careful.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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69 Comments

Stagflation is somewhere we really dont want to be .

Stagnant growth with a layer of inflation on top .

Almost as bad as deflation

Sure is Mr Boatman. And hard to see exactly where there can be any stimulation to spur the economy on. Lowest interest rates that I can ever remember look like they have done whatever dash they had & any further reduction will do nothing except weaken investment returns and make seniors like me more unhappy, if only to be subjective about it all.

If people make the choice to purchase petrol, that is up to them. Not sure why the oil industry somehow owes it to New Zealand to provide a product in demand at a price below what the market will bear?? That would be doing the shareholders a disservice. Don't like high petrol prices - no one said you had to buy it. Plenty of other ways to get around.

Also our house prices are highest in the OCED relative to income. We need a massive price correction.
https://www.imf.org/external/research/housing/images/pricetoincome_lg.jpg

"The choice to purchase petrol" Gee whiz son, what do you suggest we run our cars on? Unfortunately not all of us are lucky enough to live in the flash central suburbs where there is lots of public transport. Nor can we shell out for an EV because I'm also foolishly paying money to keep a roof over my head. Is that optional too? Never mind. I guess it's my fault for not having the lifestyle or ability to set my own hours to make things like cycling to work a viable option.

But if the choice is being stupid old me or someone who can't see a problem with projecting an upper middle class existence across an entire population then I'm pretty comfortable with where I am.

I've been living in working class areas for 3 decades, and only owned a car for about a year of that (which I didn't need to commute, as I lived close to work).

I have no idea why New Zealanders are in love with living far from where they work, or where jobs are. In provincial towns it's easy to be a 15 minute bike ride from work, and in Auckland/Wellington there are busses and trains.

The best public transport option between work and home for me is 1 hour and a bit. Or I can get in my car and be at work in 15minutes. Public transport is great if you work in the CBD or somewhere along the main road to the CBD, but cross town its complete rubbish... and thats after they have improved it massively.

Well I'm not upper middle class to own a house, I still rent. I rent where the job is.

Moving house as a renter (particularly in a flatting situation) is cheap and easy. Selling a house and moving, changing the kids school and removing them from their circle of friends etc. whole different story.

Well I live 5mins walk from the beehive, and last weekend I noticed a few,things:

1) $2.49 per litre at the pump in Wellington CBD.
2) the motorway was not clogged up with cars leading into the terrace tunnel
3) I could actually find a carpark in town
4) I had to pay to park on a weekend (thanks to Wellington city council madness to charge on weekends).
5) leaving CBD, the anzac underpass was also remarkably unclogged
6) a new yellow rent a bike scheme has popped up for 25c for 15mins hire. Nice bikes too.
7) I decided to shop fortnightly instead of weekly to reduce my amount of petrol usage.

Interesting all of these points. Yes, its human nature to save in other ways. But currently, you can be more efficient in your petrol usage if you try. Check tyre pressure, remove unwanted weight (get rid of mother in law haha).
But unrelated to this but still very pertinent is wgtn city council madness to charge $4phr on the weekend. What idiots. That will hurt business in wgtn but lower hutt and porirua will prosper.

And hey rent a bike for $1per hour...great idea that is....maybe I should fix up my bike that's in storage!

Palmy petrol prices are averaging $2.29 a litre amongst the main players. We now have Waitomo Fuel, self service at $2.16 a litre. Since leaving Auckland my weekly fuel bill is a pathetic $25 a week because I now live so close to my work it is ridiculous. Still miss Auckland though.

Did you also notice that last weekend was school holidays? Usually has a big impact of traffic because of staff taking leave to be with kids.

Stagflation is definitely not good.
But deflation is a natural part of the cycle.....a bunch of people take loans and use the money to make crap over hyped "investments"....they get burned....deflation. If you didn't follow the herd and have massive FOMO then everything gets cheaper for a bit and the spending power of your savings boosts substantially.
Whats the problem there? Just the market re-allocating wasted resources. From people who probably shouldn't have had them in the first place.

Remember for the majority of people not living in Auckland the fuel tax rise is only about 4 cents a litre after GST. If you use 25 litres a week that is $1 a week. I can't see that causing stagflation! Storm in a teacup?

add in the falling dollar and the rising price of oil and the regional fuel tax, auckland prices are up 50c in the last year. the road are notably quieter during peak hours.

My friend who is a Truck driver in Auckland says that through out the day the roads are a lot quieter, which might be great for him but it is also might be a sign of a slowdown.

time will tell I guess

add in lack of business confidence, a stagnant housing market, slower growth in tourism, slower population growth, increased wage demands, a lack of coherent policy, and - hey presto - we have stagflation.

Where did the big increases in tax take come from?

Are you talking about the OBEGAL?

That was for the year ending a few months back.

We're talking about stagflation to come. And it will.

Here's a question, perhaps driven from perspectives the likes of Murray Grimwood (PDK). Inflation is considered to be an important part of an economic system, but is this not based on a principle of infinite growth? If our system is on the verge of collapsing, or has reached a point of stability, would not stagflation or deflation be the preferred option?

Yes infinite growth is a tough ask.

The preferred option when collapsing? You could ask Venezuela but they probably dont care what you call it ... stagflation leading to a deflationary spiral (where all the purchasing power is sucked out of the economy)..

Inflation doesn't need to be connected to growth, it can just be monetary inflation. It's important for money to continuously devalue slightly to prevent deflationary feedback loops. You actually don't need physical growth for this effect to take place.

https://www.khanacademy.org/economics-finance-domain/macroeconomics/macr...

housing in oz, interesting interview

https://www.youtube.com/watch?v=R7tGkqTIqj0

Digital Finance Analytics produce some good stuff. I have been asking them to do analysis on the NZ property market.

91 octane was 1.75 l July last year. Now it's 2.30. That's 55c a litre more. Most commuters/workers in Auckland would be doing average of 300km a week. Maybe 8ltrs per 100 km average in our shitty traffic. so 24 liters = $13 week. $676 per year. So a $1000 gross income pay cut for the year for those earning over 70k

add to that the $1000 tax cut that wasn't a tax cut. that makes $2,000. My wife and I are at least $4,000 worse off. And what have we got for it? Absolutely nothing.

Same boat, but with student loan repayments still to make while the canceled tax cuts goes to kids more well off than I am now to get a tertiary education without a student loan out of 'fairness'.

You imply the fuel price increases are all Labour's doing. But only about 15c a litre is from the government - the rest is from a high USD and high oil prices.

The currency is 5-10% weaker due to the global perception of current government by the international markets. So in part we can blame the coalition too for the weak NZD! :)

I'm sure you're joking, but there's not even a kernel of truth to that. The "drop" in the NZD is virtually entirely due to a strengthening of the USD as they have begun aggressively ramping up interest rates. Every other country is in the same boat.

Leave the USD out of it and it's a different picture entirely. 1 NZD bought $0.89 AUD in September 2017. It's now buying $0.91.

Don't burden people with facts Jimmy - it ruins their perception that all of life's ills can be blamed on Jacinda and that the Nats would have magically avoided all this.

Well every aucklander is a millionaire aren't they? Those golden houses. You can't lose when you factor in the capital gains eh...and they are tax free!

A dangerous perception. Jafas, and anyone else, are not millionaires until they can sell their property and actually get that much or more in their hot little hands. The "value" of a property means nothing until you want to buy, sell or borrow against it. and Those three instances are when any tax regime should kick in. Investors and landlords should be paying tax on any revenue those properties generate, and should be prevented from holding them empty and it is really that simple.

Get a hybrid, cut your fuel use and save the pain at the pump each time you fill

Leads to - lower mortgage interest rates to ensure borrowers can keep up their payments.

Bang! you've hit the nail on the head right there!

The RBNZ indication that the next move could be up or down is 100% designed to keep the NZ dollar low. The expectation is that mortgage rates stay low which will reduce our high levels of personal debt.

The RBNZ is counting on the fact that exports bought in US dollars will bring in more money whilst importers will resist putting up prices to cover the extra costs of buying and take the hit to their margins to remain competitive.

However there is a tipping point where increased costs get passed on which hits inflation, oil prices are going up at the same time the kiwi is tanking so its already a double edged sword. Add the taxes on top of that even if all other imports dont cause inflation transportation costs will.

I have no doubt that the RBNZ's next move will have to be an increase

No it doesn't because our rates are not controlled by us so they don't care if its hurting in little old NZ.

who controls our rates then?

The banks do because we don't own them anymore. They only follow the OCR if it suits them. Reality is we can no longer control our interest rates. If things go south offshore then we are going to follow suit.

Bang on Carlos.

You don't think the RBNZ can pull other levers to get the interest rates to move in the direction it wants, it is the one that issues or withdraws banking licences? Capital reserve ratios, LVRs, and DTIs? And of course there is the public's willingness/ability to deposit money with them. If inflation is heading upwards won't that stem the flow of savings into Bank deposits anyway?

And even more Aucklanders selling up and moving to livable cities in NZ. With 10 minute cycle commutes.

Err, if you are going to quit your job, and uproot family.. why would you stay in NZ? Petrol was under $1.50 when i filled up the rental car in Oz a week back.

Why would we stay in NZ?? Because a good percentage of Aucklanders were from the regions in the first place and we still have family and connections and some of us kept our houses and just rented them out to tenants while we played and worked in Auckland for a few years. When Auckland prices reached their peak and rents were ramped up, many of us sold out and happily left Auckland to move back to the provinces and reclaim our easy and cheap lifestyle. House paid for, jobs easy to find, networks re-established fast. I actually needed to turn down job offers because I wanted to take my time to settle back in and get to know my hometown again. I had alot of boxes to unpack! lol

I love my industry in some ways, but on the other hand a software career in the provinces is really a mugs game.

What industry are you in that there's loads of regional jobs for you?

The FIRE industry: which basically stands for Finance, Insurance and Real Estate. Every town needs people in these jobs, just like every town needs a teacher, doctor, nurse, shop assistant, scientist, IT specialist, gardener and builder or plumber. To think that small rural towns exist without these people is incredible. Where I work, employs a team of professional IT experts in-house and we contracted out to this company. There are alot of IT jobs and other specialist roles available, but most people in the big cities just assume we only have farming and fruit picking jobs. We have banks and insurance companies too, that need regional sales managers etc....

I've lived in the provinces before. In fact I'm here right now, working in IT, but it looks like I'll be returning to Auckland soon for a big bump in my salary.

I wouldn't say provincial NZ has *a lot* of IT roles available. I've never heard of any in truly small rural towns, outside of a district council. I mean, how small are you talking?

Palmerston North. To me, Palmy is a small rural town compared to living in Auckland, but everyone's perception of the definition of a small rural town is different.

Flights between Palmy and Auckland are cheap! It is one hour away and I get back to Auckland for my fix every couple of months, but without the long term daily grind of living and working there. I still enjoy
Auckland for everything that it offers, but now at a welcome distance without the daily commute which ground me down to a muppet after 8 years! Auckland changed for me real fast during the last 3 years that I was there. All I could see was infrastructure crumbling under pressure and a dog eat dog world that I didn't want to be a part of and then one day on a whim, I chucked in my job and said "I'm over this BS". Never looked back. Have renovated my house, landscaped the gardens, have savings in my bank. I sleep easy without traffic waking me up at 5am every morning and ot takes me 7 minutes to get to work and find a carpark right outside my office!

Beware. It used to be like that in Hamilton and maybe Tauranga as well

I wonder whether the Auckland flight to the provincial cities is a good thing or a bad thing?
Yes, there is a lift in population growth, stimulation of business activity, house price growth, etc.
However, the working lower income local population gets priced out of their own housing pool with higher rents and family houses which are now 600k+ instead of 350k. Is that a win for the provincial cities?

Well it sounds like a decent strategy for the 90s. Buy a cheap house in the provinces, work in Auckland paying off the mortgage, come back for the 'lifestyle'.

In 2018 a decent - not great - house in Palmerston North is half a million dollars. Literally more expensive than Perth or Adelaide. What you did isn't worth doing anymore.

I bought in the Wairarapa last year, work in Wellington. House was less than $250k on 1/5 acre section. Can still be done.

The risk though is being stuck with an asset that could be difficult to sell or rent out if we want to move elsewhere. But i'll worry about that in 7 - 10 years time when we're mortgage free.

Fair enough for those that are doing that, they are returning to their roots. :)

Well written article, couldn't agree more. I think this government has already lost the next election. They lurch from one crisis to another, some of which are self inflicted. We are going to be in serious trouble with this lot at the wheel if we hit another GFC.

Because the Nats offer.....more sitting on their hands like they did for almost a decade? Dream on.

Many of the dramas now are 9 years of pent up inactivity, under-investment, wage pressures and general complacency in government.

Both parties are Centrist who fiddle around the edges with minimum wage, employment rights and welfare levels. Health care, education, superannuation, monetary policy, defence, crime, immigration and taxation are all IDENTICAL, regardless of what policy thinking might be occurring in the background.

You're spot on Carlos67, there is no leadership that I can see. Jacinda & Peters are trying hard but it's the B team in charge for sure. As for where we are heading, who knows. House prices must settle, but with the NZD heading south, that tells its own story really. First she cancels any new stuff in oil & gas and then she tells them off for fleecing us. C'mon girl. You gotta be better than that.

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And Simon Bridges fills you with confidence???

Its always been about picking the best of the worst at election time. At least he had a real job before entering politics. His biggest problem is the same as mine, he lacks an authoritative sounding voice so no one listens to you. Thing is I got so sick of telling people I told you so I don't bother anymore.

If the right wing loonies who fleeced this country of its last remaining SOEs under the smiling assassin's watch, think I would ever be convinced to vote for Simon Bridges then they are sadly mistaken.

Bridges does not come across as a smart person. Quite the opposite really. And its a turn off.

Id rather vote for Don Brash. Atleast brash has conviction.

But no, sorry, every national government runs up the national debt. (60billion under key) so now a Labour government will once again have to rebuild the family silver and repay the reckless borrowing of the tax cut and borrow nats....

New Zealand has a right wing!? Who? Where do they meet? Can I join?

If it's right wing you are after, I suggest you move to Brazil if Jair Bolsonaro becomes president.

I was only thinking stagflation is on the cards last night so good to see this article.
I've been trying to give Jacinda the benefit of the doubt(as fundamentally her heart is in the right place) but my concerns are growing by the day.

Me too. I think she's got a good heart....it's her brain that needs attention!

'What we were being told was synchronized growth was synchronized debt growth, and that massive increase in debt, that led to the highest level of global debt-to-GDP in history last year, was creating massive… internal problems in many economies that were getting used to cheap and easy money, and a very small reduction, completely minuscule and completely moderate reduction in the balance sheet of the Federal Reserve of less than $260 billion, has created this reckoning that the reality that we were seeing globally was not a reality of high growth, better productivity, and more positive surprises, but the reality that it was just a debt led bump up of a much clearer trend of secular stagnation. "
https://thesoundingline.com/daniel-lacalle-the-synchronized-growth-fallacy/

Credit bubbles create asset bubbles and when the banks pull back on credit out of fear, then we see history in the making. "Feel fear when others are greedy and be greedy when others are fearful". Tide has already turned.

David, an alternative explanation to the Gubmint's attempts to face all this down is that, deep down, they actually want us all to be driving less, buying less, polluting less, running up less debt, and producing less. I'm sure that not a few of the Greens would nod along with those notions. Call it a Work/Life Readjustment and it sounds good.

What's missing, as with so many of the common taters who offer Yet Mo' Good-Intentioned Schemes, is the foggiest notion of how to get from Here to There, without incurring one of the following Horsemen:

  • A nasty economic crash
  • A peasants' (or a Makers') Revolt
  • A takeover by those with fewer Scruples and more Armaments

There possibly isn't a way to get there without collapsing the 'economy' - but the 'economy' was physically doomed anyway,

Horse, water, nope, not yet..... must be getting thirsty, but.....

Commentators. Sorry but you have done it too many times.

Just wait until tourists realise how expensive it is to drive a camper van around NZ and stop coming. Our biggest income earner is going to take a hit as we are already considered a very expensive destination. The falling NZ$ won't save us as most tourists come from Australia, Asia and Europe.