I actually felt quite mean.
After penning my honest thoughts on the year ahead in December 2021, I wondered if I had been rather too downbeat with my assessment of how 2022 was shaping.
As it turns out though, I UNDERPLAYED how grim things were going to be.
I expressed concern about inflation, which was then tipped to peak at 6% - currently it is 6.9%. I was concerned about Omicron, which was then the new variant on the block. Well we get several thousand cases a day - though the health authorities, touch wood, do seem to be coping. I wondered about the possibility of something of a bank credit crunch in the wake of new credit rules at the end of last year - and we got one in the early part of this year. And I wondered about the possibility of falling house prices. They ARE falling.
I didn't talk about the war.
As of early December Putin had not yet clearly announced his intentions to invade Ukraine, so the war and its resultant inflationary chaos have added extra unexpected and unwelcome unpleasantness to the scenery this year. And then there's been China's problems with Omicron and more of those pesky supply chain issues.
Quite a lot to fit into what's been not quite six months of 2022.
Essentially, all the things I thought might be key negatives have turned out worse than I might have hoped - while there's been the above mentioned couple of very curvy curve balls that I didn't mention at the end of last year. It's all blended into an unsavoury mix for the first half of the year.
So what about the second half?
I'm assuming the big issues for the rest of the year will be the ones we already have. But I freely concede that given the way nasties have kept jumping out of left field, the possibility of something else emerging shouldn't be discounted. Unpleasant virus surprises or another emerging geopolitical risk are two obvious 'maybes' to consider.
But, to deal with the known risks, for me employment/the labour market remains the biggest single 'watch closely' factor for New Zealand's immediate future.
Employment is a shining beacon of positivity in a very dark environment at the moment. We are working and we are getting paid every month. That helps.
As at the end of the March quarter the unemployment rate was only 3.2%. The next official Statistics New Zealand figures, for the June quarter, are not due out till August 3, but other indicators have been suggesting that the labour market has remained very tight.
That's very good. Actually it's crucial - even if employers struggling to find staff might disagree. With interest rates going through the roof the worst thing would be for large numbers of people losing jobs. Because then they might struggle to meet mortgage payments. And that could lead to forced sale of houses. With the proportion of the NZ economy that's wrapped up in the housing market. That could be bad. Very bad.
So, keep a very close eye on those unemployment figures. For me these are absolutely the key domestic indicator to watch for the rest of this year and into next. If unemployment stays low this will be a saving grace, a vital one, amid some genuinely difficult economic conditions.
If the unemployment figures start moving up, well, that could be a problem. A big problem. That could be when we see the dreaded Stagflation. I think the world will do well to avoid it and, to be honest, I don't think we will avoid it. I think it's a very real (possibly the most likely) scenario for next year.
If we look at inflation, the RBNZ has entered into a kind of death or glory struggle with it, hence the sharp rises in Official Cash Rate. Since October last year the OCR has already been hiked from 0.25% to 2.0%, with another 50 point rise seemingly inevitable at the next review on July 13. The RBNZ's expecting annual inflation to hit 7.0%, which it thinks will be the peak, when the Consumers Price Index figures for the June quarter are released by Stats NZ on July 18.
As indicated higher up this article, inflation has unfortunately kept surprising on the high side. Will a 7% peak be the top then? I really don't think you can say that with any real confidence yet. (I would say 7% WON'T be the peak.)
In terms of the Ukraine conflict, all outcomes (some dire indeed) are still on the table. The portents are still particularly ominous for fuel prices and food availability (and hence food prices). Really, anything could happen with this situation. There are many potential bad outcomes, with the only goodish one being if the war stops very soon. But I can't see that at the moment.
Then there's China. Other countries (notably little old NZ) have followed the science when it comes to Covid. Remember, we decided very early on we would have to take our lumps with Omicron. Taiwan, Singapore and Australia were other elimination fans that have now trodden the same path. But not China. Unless there is a change of plan in China (and it's very political, so probably not), it's difficult to imagine that there won't be further lockdowns - and therefore yet more disruptions to supply chains. So, more inflation.
Regardless of whether the inflation rate keeps increasing, the die seems cast for inflation to be much more of an ongoing, structural, presence over future years than it has been for decades.
If inflation does hold up at very high levels (or even increases again), what will be the Reserve Bank's approach? At the moment it is hell bent in tightening monetary policy (IE putting up interest rates) till people are convinced and will stop expecting inflation. That's because it's the inflation expectations in people's minds that lead to actual inflation in future.
At the moment the RBNZ is signalling a high point for the OCR of about 4%. The RBNZ reckons this will see even short-term fixed mortgage rates hitting 6% (the one-year rates are already not far off 5%).
How much would mortgage holders and the housing market be able to take? My gut feeling is that if the RBNZ squeezed mortgage rates higher than 6% we could be in a world of trouble. Some economists are already suggesting that the falling house market will force the RBNZ to back off next year.
Again, a lot hinges on the labour market staying strong. But even then, even with people in full employment, the sheer size of some of those mortgages out there could get too much.
If actual inflation doesn't moderate considerably, and if those expectations of future inflation don't start coming down, the RBNZ would face a huge test. Would it need to ignore the 1%-3% official inflation target? Or just keep squeezing interest rates till something pops? But of course, if much of the inflation is imported - and the Ukraine/China situations say this might continue to be the case - merely keeping flogging a dead horse here with rate rises would be self-defeating.
This is why the RBNZ, and the rest of us for that matter, need to keep a good handle on just how well or otherwise NZers are handling the cost of living crisis. We need early warnings if things are going really wrong, so, that an evasive course of action (which could be laying off interest rates) might be taken.
Anyway, there's so much more that could be said, but that's pretty much my thoughts on where we are (nearly) halfway through the year. Things might turn out better than it looks as though they will. But I did have that hope at the start of the year as well...
Earlier this year, I invited people to strap themselves in. All I would say now is, hold that pose. Keep that buckle tightly locked. Relax. And smile. And breathe...
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