Liam Dann: As the curtain falls on Covid economics ... a new dawn for Luxon and Willis?

Prime Minister Christopher Luxon and FInance Minister Nicola Willis talk to media about the lowering of the official cash rate to 5.25%. Photo / Mark Mitchell

THREE KEY FACTS:

• The Reserve Bank has cut the official cash rate to 5.25%
• RBNZ forecasts suggest annual CPI inflation will be below 3% this quarter
• The Prime Minister and Finance Minister celebrated the news with a press conference

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.

OPINION

The horrible inflationary economic cycle is done. That’s something to celebrate. With Wednesday’s rate cut the curtain is finally falling on the era of Covid economics. We’re looking out at the tantalising prospect of things being a bit normal for a while - touch wood.

Before we think about that, should we take time to reflect? We could look back and learn. We could run the past four and a half years of wild monetary and fiscal policy back through our minds as a movie montage-style flashback.

What’s the soundtrack? REM’s Everybody Hurts springs quickly to my mind. Michael Stipe painfully crooning “hold on” over and over again sounds about right.

No? Too turgid? How about a rapid-fire compilation of Adrian Orr’s press conferences, set to Motorhead’s Ace of Spades?

(I get that this joke doesn’t work if you’re not familiar with the heavy-metal anthem. You could use The Gambler by Kenny Rogers to a similar effect but it wouldn’t be as good.)

Lemmy of Motorhead sings of high stakes gambling in the song Ace of Spades. Photo / Richard Robinson

I’m sorry to say that might be my best contribution to the debate about flip-flops and u-turns this week.

There will be time enough for serious academic economists to sift through the wreckage of the past five years and come to conclusions about the decisions and what we learn for next time.

For now, I’ll take two lessons to heart: 1) Monetary Policy still works 2) People really hate inflation

Regardless - whether or not you think the Reserve Bank deserves a brickbat or a bouquet, or how good bad or ugly you consider the choices of the last Government (or this one) - it looks like we’ve finally arrived somewhere.

It would be wrong to suggest we’re no longer paying a price for the pandemic and the choices made to mitigate its impact.

Crown debt needs to be paid down to less nose-bleeding heights, interest rates will remain restrictive for a while and New Zealand (by the Reserve Bank’s forecasts) has slipped into its third recession in two years.

In fact, it will be the fourth recession since the pandemic began.

We should probably include the one in 2020 in case people forget why we unleashed all the stimulus in the first place. With the borders closed and the country in lockdown, the June quarter of 2020 the economy saw a quarterly GDP contraction of 10.1%.

Things looked truly calamitous until the fiscal and monetary cavalry arrived.

But enough. I can hear the mournful strains of REM picking up. I’m very ready to start looking forward.

The reality of history is that events bleed into each other. As the last war ends it sows the seeds of the next one. That’s just not particularly helpful for getting on with things. To get on with things humans rule lines and turn pages.

You could make the case for waiting until we get out of recession before we turn the pandemic page. That could be as soon as the fourth quarter (so pop the champagne on October 1!)

Or we could wait until we see inflation officially land below 3% - we get that data on October 16.

We could wait until we see unemployment peak north of 5% next year and then debate the relative human toll of it all.

Or perhaps we should take a global outlook and wait for the US Federal Reserve to cut US rates next month and send warm fuzzy signals of recovery through global markets.

I’m certainly not waiting for our Net Core Crown debt to GDP ratio to drop back below 30% (currently forecast by the Treasury for the mid to late 2030s) or for a return to Budget surplus (forecast for 2027/28). From here those horizons are so distant as to be almost hypothetical.

It’s all a bit arbitrary in the end. I reckon the first cut in the interest rate easing cycle is as good as anything. We need a lift and spring is around the corner.

It was good enough for PM Christopher Luxon and Finance Minister Nicola Willis. “The era of extreme price increases is over”, Willis declared on Wednesday with a carefully worded statement that made good headlines but left the onus on the Reserve Bank to deliver on the promise. (Full quote: “I am pleased the Reserve Bank’s decision to lower the OCR today shows it has confidence that inflation is under control and the era of extreme price increases is over.)

I’m with them though. The sooner we acknowledge the pandemic years are behind us the sooner we can focus on what needs to be done to turn this economy around.

The windows between economic shocks are painfully small in this country. Who knows when we’ll cop the next earthquake or global financial meltdown?

So we need to embrace the new normal. And lean into a period of policy setting that isn’t based in crisis mode.

I think the Government sees this and is not wasting time in pushing long-term plans through at pace. Commentators are arguing they are going too far. There are commentators saying they are not going far enough. But at least they’re doing stuff.

This economy needs more than lower interest rates to get it back into shape.

It faces big challenges with China, its largest export market, in the doldrums. Dairy is reaching the limits of its export growth potential. Many columns have been written about what comes next but it’s suffice to say that the next few years need to be focused on fostering innovation and investment to drive New Zealand’s productivity up.

This is stuff I’ve heard the Prime Minister talk passionately about many times. He gets it. And I think he gets the urgency.

I’m hopeful he’ll get some time to create drive fresh economic momentum before the next big catastrophe inevitably unfolds.

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