The current economic turmoil may represent the high tide mark for the backwash from the Covid stimulus spend-up. Photo / Bradley Ambrose, File -
EDITORIAL
The banking meltdown that started in the United States and spread to Europe has changed the economic outlook everywhere in just a few short days.
Don’t look at your KiwiSaver balance because share prices are in retreat again.
But there is good news as the panic also sucks theinflationary pressure out of the world.
Oil prices yesterday fell to the lowest level since 2021. In fact, trading around US$75, they are now back at relatively normal pre-pandemic levels. That part of the inflation equation is gone.
Interest rates look set to peak at lower levels than were expected.
US markets are betting the Federal Reserve will pause. There is a similar sentiment in Australia and locally there will be pressure for the Reserve Bank to move more cautiously.
Local markets are now pricing just one more 25 basis point hike at the next meeting in April. Some economists see cuts coming after this year. It’s been a dramatic shift in sentiment and it’s impossible to say whether it will stick.
Will global banking woes be contained in the coming days? Or, like the Global Finance Crisis in 2008, will the contagion continue to spread?
The New Zealand economy is already in a self-inflicted retreat - technically halfway to a recession. GDP data came in worse than expected yesterday - down 0.6 per cent for the December quarter.
This week’s whopping current account deficit blowout adds another layer of complexity to the equation. The annual current account deficit was $33.8 billion (8.9 per cent of GDP) in the year ended December 31, 2022, the largest annual current account deficit-to-GDP ratio since the series began in March 1988.
It may well represent the high tide mark for New Zealand’s Covid stimulus spend-up. But it could also be a concern if we don’t see an improvement through the year.
A current account deficit simply reflects that we are spending more than we are earning overseas. With earnings from the tourism and education sectors still recovering from Covid, export revenue hasn’t been able to keep up with Kiwis’ appetite for imports.
While the number is ugly it is expected to be nearing its peak as a slowing domestic economy cools demand for imports and exports continue to rebound in the coming year.
Rising interest rates still have to take their toll on the economy. Even if the RBNZ is forced to pause, the already elevated Official Cash Rate has yet to transmit through to those coming off fixed-term mortgages. Eventually, the damage this does to consumer demand will add downward pressure to inflation.
In the next few months, we will face the most challenging part of the transition, with living costs still running high and interest rates peaking.
Unemployment is at historically low levels but is likely to rise.
Throw the inflationary impacts of the Auckland floods and Cyclone Gabrielle into the mix and it’s extremely difficult to forecast the depth of the slump and the timing of the cycle.