The index that follows the US dollar compared with other currencies shows the USD is up 20 per cent compared to this time last year. Obviously, I chose to come here on holiday so I’m not going to moan too much! But the ripple effects of the strong USD aren’t just hurting tourists. And as the inflation battle continues, they’ll continue to impact countries around the world.
The Consumer Price Index numbers for New Zealand this week were yet another sobering indicator that for all our optimism and wishful thinking, we still have a lot of pain to come in the economic aftermath of the pandemic.
So far it’s tourists and a few mortgage holders who are swallowing the hardest, but I’m not convinced the New Zealand public has fully grappled with the looming alternative to high inflation.
I don’t think many of us have paused and considered how life could feel in the next 12 to 18 months as the Reserve Bank hikes again and again, and we start to see the impact of much higher borrowing costs on the labour market. We are likely headed for a recession and presuming the Reserve Bank continues raising the OCR, we are likely headed for a meaningful, painful spike in unemployment.
It’s a bit of an economic Sophie’s choice, really. What’s worse? High inflation or high unemployment? Both options are bad and although central banks and politicians are going to try to find a middle ground of sorts, there aren’t many causes for jolliness.
For incumbent politicians everywhere it presents an enormous challenge.
Liz Truss’s diabolical tenure will serve as a good warning that reckless economic policies won’t get you far. The piper has to be paid. Even if you can sell a free lunch delusion to your voting base, it’s a tougher ask selling it to the bond markets.
What do the bad numbers mean for the New Zealand election next year?
As it so often does, essentially it will all come down to voters’ back pockets and the parties’ economic credibility. But even more than by policy differences, debates and campaign strategies, the New Zealand election will be decided by the actions of the US Federal Reserve.
Stare at a crystal ball and what the Fed will do over the next 12 months, and you’ll have as good an indicator as any as to what major party will win the election.
Maybe if the Fed keeps aggressively hiking rates, Jacinda Ardern will decide it’s not worth it after all. She’ll succumb to the whispers and unfounded speculation and take a job at the UN instead of fighting another campaign.
If she does move to New York, my only advice to her would be to make sure she gets paid in greenbacks.
