Editorial: Reserve Bank signals economy coming off the boil

Editorial

COMMENT: The Reserve Bank delivered a shock to the economy on Wednesday, announcing a "weaker global economic outlook and reduced momentum in domestic spending" makes it likely the next move in the official cash rate will be downward. It was a change of tune for Governor Adrian Orr, who has been singing a bullish song to business about the health of the economy since he took up his position more than a year ago.

But the shift should not be overstated. It is the first serious note of caution the economy has received since its present growth phase gathered force in 2013, driven by earthquake reconstruction, immigration and house prices. Five years is a long time without a downturn.

Figures now show growth slowed last year as the new Government curbed immigration slightly and took actions to arrest house prices. Business confidence has not returned to pre-election levels and the Reserve Bank is worried about weak investment activity.

After five years the business cycle would have been expected to slow. New Zealand moved into its "rock star" growth phase while the United States and Europe were still struggling to revive their economies after the recession that followed the 2008 financial crisis. The US began to recover well in 2015, though Europe still languishes.

The US got a further boost from Donald Trump's tax cuts in 2017 but that seems to be fizzling now. The US Federal Reserve has cancelled plans to continue raising its base interest rate this year.

Reserve Bank of NZ Governor Adrian Orr. Photo / Mark Mitchell

Our Reserve Bank had no such plans, the Governor has been projecting no change in the official cash rate through this year and next year. But previously he has said the next move in the rate could be up or down, now he expects it to be down.

We should note he did not say when that might happen, the outlook is obviously not bad enough to warrant a more specific signal. His message was calibrated to match the recently altered monetary policy stances of central banks in Australia, Europe and China. It was designed to prevent the dollar rising against the currencies of those trading partners which would have increased prices of imports and further slowed the New Zealand economy.

The bank, however, still expects annual inflation to rise towards 2 per cent, the middle of its target band, because the economy is running close to its capacity, it says. The bank has been given the additional target of maximum sustainable employment, which it believes we have reached. It has no reason to lower interest rates yet.

Business investment may be low but the bank is expecting a stimulus from the Government's intended spending this year. The Finance Minister, now well into his 2019 Budget preparations, should not take this as a cue to relax fiscal control. If business confidence is be lifted it needs to see a Budget in surplus. That becomes more important if the planned "wellness Budget" is going to promote a range of social and environmental measurements and seek to downplay GDP projections.

The global and domestic economies are entering an uncertain period. New Zealand has weathered several such phases on sound monetary and fiscal settings. Those need to be maintained.