Liam Dann: Ugly economic data adds to Labour’s week of woes

Prime Minister Chris Hipkins. Photo / Mark Mitchell

Opinion

Last week was a bad one for the Government.

Two new polls showed them losing support. The results were unsurprising given their recent internal issues and, more broadly, the grim public mood.

It was also a big week for economic news, most of which just highlighted more problems that Labour faces.

Of course, it might not be “the economy, stupid” that decides the election this time.

Anyone following the post-pandemic economic story has probably decided already whether they buy it.

There are bigger, longer-term economic issues to confront, but they don’t seem to be at the forefront of the debate for any of the major parties.

So it might be that it is issues like crime, health, education and infrastructure are taking their toll on the Government’s popularity.

Mostly the short-term economic story is just about timing now. But that isn’t exactly going well for Labour either.

In the US, the timing is all playing out as hoped.

Annual consumer price inflation there is now back at three per cent. Core inflation is down to 4.8 per cent.

The US economy is responding more directly to the big falls in global commodity prices across the last 12 months.

US success in beating inflation does help us in our fight, although it does have the political side-effect of highlighting how much worse we are doing here.

We have much stickier inflation embedded in the domestic economy.

We got news on Thursday that food price inflation for the year to June 30 was back up at 12.5 per cent.

That was a grim result. Given what has already happened to global food prices, you’d think we’d be paying less at the supermarket by now.

Full consumer price index data is due next week - and economists expect it to show inflation is still easing, based on international (tradable) import prices alone.

The upside of falling US inflation is the expectations for Federal Reserve rate hikes have fallen - markets are now betting on just one more in July.

That’s seen the US dollar fall and the Kiwi dollar rise - which helps lower the relative cost of imports into New Zealand.

But a higher dollar creates some headwinds for our exporters, unfortunately at a time when commodity prices continue to fall.

There are growing concerns about slow growth in the Chinese economy.

The outlook for dairy prices is ominous, and New Zealand still has a big hole in its economy with tourism yet to fully bounce back.

Chinese tourist numbers have remained particularly low.

There was initially some hope that tourism was bouncing back quicker than expected, but that appears to have faded with the rate of growth.

We had just 160,000 tourist arrivals in May this year compared to 219,000 in May 2019.

“Tourism inflows into NZ appear to be plateauing rather than continuing to recover back to pre-Covid levels,” wrote ASB economist Chris Tennent-Brown.

“We do expect annual tourism arrivals to trend higher, but for a lower annual peak than seemed the case a few months ago. Combined with resident departures out of NZ picking up, we could see a lower net boost to the NZ economy than earlier assumed.”

If it seems like there is no good scenario here, that’s because there isn’t.

If the economy stays stronger than expected then so will inflation, which will force the Reserve Bank (RBNZ) to lift rates again.

If it falls harder into recession later this year, that will mean more New Zealanders who’ll lose their jobs.

The RBNZ left the official cash rate on hold last week, but it would be a stretch to call that economic good news given the resolve it expressed to keep the OCR at current levels.

It forecast that we won’t have our inflation back below 3 per cent until the second half of next year.

It also pointed out that mortgage pain from the rate hikes we’ve already had won’t fully flow through the economy until early next year.

The prospect of any mortgage rate relief looks a long way off.

The Government has few options around how to campaign with regard to this tough economic situation.

It is too late to try to crush inflation and get through the cycle before the election. That would have required a much tougher fiscal approach in the past 18 months or so.

But it has also run out of capacity to stimulate the economy through October.

The negative ramifications of increased spending and lower taxes - higher inflation and more debt - are just too obvious. They simply can’t keep running fiscal policy that is so at odds with monetary policy.

That leaves a more difficult challenge.

Labour has to convince the public that they are still in control of the economic cycle and that it will all come good next year as planned.

A higher interest rate environment has made purchasing more challenging, even with a drop in house prices. Photo / Alex Burton

Selling that from here requires them to be at the top of their game, displaying cool calm and collected leadership - something we just haven’t seen in the past six weeks.

On a superficial level, I still think the economy will come right next year.

Somewhat tragically (for those of us that bang on about boosting the productive economy and creating real wealth), the housing market will ride to the rescue... again.

The latest REINZ data has confirmed that house prices are finding a floor and the market is showing signs of bouncing back.

A housing market revival might be a wealth mirage, but it has been proven time and time again to have an uplifting effect on the national mood.

You can bet National won’t be shy of pulling that lever to give the economy a boost if the party wins in October.

Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist, as well as presenting and producing videos and podcasts. He joined the Herald in 2003.