OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up to my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
With markets and economists picking another 50-basis-point (bps) rate cut as a near certainty when the Reserve Bank meets again in November, talk has now turned to whether it will consider a 75bps mega-cut.
Singapore-based Abhijit Surya of Capital Economics says 75bps will now be on the table.
“We think that the bank’s concerns about the state of the economy are well founded, especially with new data showing that household incomes continue to be squeezed by the ongoing downturn,” he writes.
“Against this backdrop, there is a growing risk that the RBNZ will pull the trigger on a 75bps cut in November, as opposed to the 50bps cut that both we and markets are anticipating.”
Mega-cut isn’t a technical term. I just made it up because it sounds like a catchy headline. But looking back, that size cut is a really big deal. The RBNZ last cut by 75 basis points in March 2020 as the global pandemic hit.
It only cut by 50bps after the Christchurch earthquake (literally) rocked the economy in February 2011.
The height of the Global Financial Crisis (GFC) was the only time rates have come off faster than they are (projected to) now. Back in 2008, the RBNZ delivered rate cuts of 100 and 150bps in October and December as it sought to address the biggest collapse in economic confidence since the Great Depression.
The question for the RBNZ might be: Is the economy really so bad it requires such a radical response?
Well, hopefully not. Unemployment is not rising as fast and businesses aren’t failing at the same rate. And nobody is worried about a major bank collapse.
But it is also true that different starting points warrant different courses of action.
When Covid hit, the Official Cash Rate (OCR) was already sitting at just 1%, which didn’t exactly leave much room for the RBNZ to swing its infamous “blunt axe”.
When the GFC began to get serious in mid-2008, the economy was running hot. The OCR was 8.25% in June 2008. By June 2009 it was just 2.5%. That’s some serious monetary policy hacking.
This time around, inflation created by the pandemic stimulus required a heavyweight monetary policy response. A case can be made that it worked, it has done its job and it should be unwound as quickly as possible.
Assuming of course that today’s inflation data confirms it is really under control.
Speaking of inflation ... today’s Consumers Price Index data (due 10.45am) is expected to show the annual rate back below 3% and safely inside the Reserve Bank’s target band.
Economists are picking it will land about 2.2% or 2.3%. Many now expect it will fall to the RBNZ’s mid-point target of 2% by the end of the year.
So is it time to start worrying about deflation? No? Too soon?
Well, the European Central Bank (ECB) is already wrestling with the risk of overshooting its 2% target this year. And in China, the economy is on the brink of outright deflation. Prices for many goods are actually falling. That always sounds like a good thing. Maybe it is for some consumers but for the economy as a whole it is bad news.
I’ve written on this before in response to reader questions about falling prices:
“The biggest issue is that deflation, like inflation, tends to spiral and become self-perpetuating.
Falling prices tend to discourage consumers from spending. People think, why buy now if you can purchase what you want – cars, furniture, appliances, vacations – at a lower price later?
But as prices fall, business margins are squeezed, production falls and businesses contract. Jobs are lost and new jobs are not created. Wages fall and people are poorer so they can afford to spend even less.
Without growth and momentum, opportunity is removed from the economy ... and opportunity is one of capitalism’s most powerful drivers.”
Why we’re not there yet
The Consumer Price Index is likely to show some actual price deflation in imported goods at least.
“We expect tradeable (largely imported) inflation to come in at -0.2% q/q (-1.6% y/y), in line with the RBNZ’s forecast. Lower petrol prices are expected to be the weak spot (aided by the removal of Auckland’s regional fuel tax),” wrote ANZ senior economist Miles Workman in his preview.
But Workman expects non-tradeable (domestically driven) inflation to be 1.5% for the quarter and 5.2% annually. That would only be a slight fall from the 5.4% annual rate recorded in the second quarter.
That’s the problem with popping the champagne and declaring the war on inflation over. Many consumers will still feel they are battling inflation because of ongoing price rises for things like council rates, insurance, and any number of service sector costs.
Non-tradeable inflation has historically tracked higher than tradeable. It’s the bit of the economy where we want a bit of elevation because it includes our wages.
It does need to come down a bit more but, with the economy in recession, it almost certainly will.
Europe and China battle deflationary forces
The Financial Times has run articles on deflationary risk for both China and Europe in recent days.
“Avoiding a fall back into the pre-Covid world [of inflation below 2%] will be one of the ECB’s biggest challenges,” Jens Eisenschmidt, chief Europe economist at Morgan Stanley told the FT.
Historically, too little rather than too much inflation had been the ECB’s bigger problem, the FT says.
Meanwhile, deflationary issues are more serious in China, where the Consumers Price Index was up just 0.4% year on year in September.
“China’s deflationary pressures picked up in September with weaker-than-expected consumer and factory prices, underlining calls for Beijing to deliver a bigger package of measures to lift the economy,” the FT reported.
The weak inflation readings highlight how China’s economy is suffering from a deep property crisis that has hit household wealth and consumer confidence.
Compounding things in the short term has been confusion about when and if officials in Beijing will unveil fiscal stimulus.
As I wrote a couple of weeks ago, the central bank delivered monetary stimulus, sparking a rally on its stock markets. But, as the FT reports, sharemarkets have fallen back sharply.
As the FT reports, “investors are waiting for Beijing to detail extra fiscal spending plans to back up the monetary stimulus but have been disappointed by a lack of detail in subsequent government announcements”.
Reuters had sourced officials in Beijing talking up large-scale bond issues to fund all sorts of stimulus – including payments for families who have a second child.
But only a fraction of that promised fiscal stimulus has eventuated. Perhaps Beijing was hoping the monetary policy loosening would be enough to do the job.
One suspects there may be more announcements to come before the end of the year.
About nine years ago I wrote a folksy column based on a chat with my 10-year-old as we drove into the Auckland CBD and she remarked on the large number of cranes on the skyline. We counted nine.
‘Look at all the cranes,” my daughter said.
“Yes,” I said to my daughter, “there’ll probably be even more soon and then the market will crash and there will be none.”
Such was my faith in the boom-and-bust nature of Auckland property cycles. But it didn’t quite turn out that way.
We’re in a bust right now but there are still a lot more cranes up than there were back then.
In fact in late 2015, as Herald Property Editor Anne Gibson reported: “Auckland had 33 cranes dotting its skyline, with the construction sector in full swing.”
The Rider Levett Bucknall Crane Index showed that there were 79 cranes up nationally and the busiest sectors were commercial followed by multi-level residential buildings.
Undoubtedly the boom in multi-level residential has fuelled crane use across the decade.
By 2018, an unprecedented 140 long-term cranes were operating around New Zealand, Gibson reported.
By comparison, the latest Rider Levett Bucknall Crane Index shows the number of long-term cranes operating on sites fell 11% from 139 to 124 (in the third quarter of the year compared with Q1).
New Zealand had a record high of 157 cranes in the first quarter of 2023.
That’s a reminder of how relative our notions of a downturn are and how much the direction the numbers are moving affects sentiment.
If you told an economist in 2015 that we’d have 56% more cranes operating in less than a decade, they might have assumed we’d be in another boom.
It will be interesting to see if the construction downturn takes the index below the 79 cranes operating in the upbeat era of 2015. I certainly hope not.
Q: A statistics-obsessed reader (James K.) noticed a quirky change to the latest Consumers Price Index, around the cost of early childhood education and the new Government rebate.
The FamilyBoost early childhood education (ECE) rebate scheme began on July 1, 2024. So the September 2024 quarter consumers price index (CPI), includes an adjustment to reflect that. In a release, Stats NZ says a fall of about $174 million is expected in CPI expenditure on ECE.
The movement for the ECE subgroup in the September 2024 quarter will incorporate the regular price changes for ECE and this adjustment.
“I’d love to know if anything like this has been done before,” James writes ...
A: Stats NZ has clarified: “Previous changes incorporated in the CPI based on government policy include the Community Connect public transport subsidy, which decreased the advertised price of public transport fares for under 25-year-olds, and the Clean Car Discount fee and rebate scheme where individuals who purchased low emission vehicles were eligible for a rebate and those who purchased high emission vehicles were charged a fee.
“It is standard for us to incorporate these types of changes that impact consumers into the CPI. The early childhood education sub-group contributes 0.55% to the total CPI.”
UPDATE: The policy change did make a material difference to September quarter CPI. ANZ senior economist Miles Workman notes:
“Non-tradable inflation (largely domestic driven) slowed 0.5% pts to 4.9%, below our forecast of 5.2% and the RBNZ’s expectation of 5.1%...This miss is largely owing to the one-off impact of the FamilyBoost rebate, which saw the early childhood education class fall 22.8% q/q (vs +6.9% excluding the rebate). Had this not occurred, non-tradable inflation would have come in at 5.2% y/y.”
The 2024 Nobel Prize for economics has been awarded to academics Daron Acemoglu, Simon Johnson and James Robinson for their work on wealth disparities between nations.
“The trio’s work highlights that institutions set up during colonisation have had an enduring impact on economic outcomes in the countries affected,” the FT reports.
“Their research also indicates that more economically inclusive and politically democratic systems prove more conducive to technological innovation and long-run growth.
“Places that were prosperous before colonisation, which were often more densely populated and in tropical climates, were more dangerous for European settlers. In these places, colonisers responded by setting up ‘extractive’ systems protecting the interests of a small elite.
“In poorer, less densely populated regions, often with more temperate weather, colonisers came in greater numbers and were more likely to introduce inclusive institutions that benefited the majority.”
And yes, if you were wondering, New Zealand fits in the latter category.
In their research paper Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution authors Acemoglu, Johnson and Robinson write: “The Mughals in India and the Aztecs and Incas in the Americas were among the richest civilisations in 1500, while the civilisations in North America, New Zealand, and Australia were less developed. Today the United States, Canada, New Zealand, and Australia are an order of magnitude richer than the countries now occupying the territories of the Mughal, Aztec, and Inca Empires.”
That’s potentially a controversial take in this country where many take a less favourable view of colonisation in general.
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. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
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