While low growth and high interest rates paint a downbeat picture, there is some light at the end of the tunnel. Photo / 123rf
While low growth and high interest rates paint a downbeat picture, there is some light at the end of the tunnel. Photo / 123rf
THREE KEY FACTS:
Financial markets have priced in two rate cuts by November
Westpac has dropped its mortgage rates
Food prices decreased 0.3% in the 12 months to June 2024, the first annual decrease in nearly six years
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.
It’s amazing how much a few subtle tweaks tohref="https://www.nzherald.co.nz/business/rate-cut-hopes-reserve-banks-tone-softens-as-downturn-deepens/QDMBXO6KKRHLLG3ZRHWAWGPUFI/" target="_blank"> a central bank’s messaging can change sentiment. Imagine what will happen when we actually get an official rate cut.
If you missed it, the Reserve Bank softened its tone on the potential for interest rate cuts to come sooner. Subtly of course. It didn’t just say cuts are coming in November.
It changed some words. It said monetary policy had “significantly reduced consumer price inflation” as opposed to previously just saying “reduced”... that sort of thing.
Optimism broke out. Financial markets priced in two interest rate cuts by November - the first in October (with outside odds on an August cut just for good measure).
Economists stroked their chins in concern at market over-exuberance before all more or less agreeing that this makes a November cut look more likely.
We saw the first major bank cut its interest rate within 24 hours of the Reserve Bank statement. Westpac dropped its mortgage (and deposit) rates by about 25 basis points. Even the beleaguered local share market rose.
Don’t get me wrong - we’re still in a downturn and it still sucks. You’ve only got to look at the latest data around retail spending to see how recessionary the economy still is.
Electronic card data on Friday showed retail spending fell for a fifth consecutive month in June. Overall spending is down 5% from this time a year ago.
And we know from a particularly gloomy NZIER Business Outlook survey earlier this month that the construction sector is in bad shape. A net 65% of the building sector firms surveyed expected a worsening in the general economic outlook.
Also on Friday the BNZ–BusinessNZ Performance of Manufacturing Index (PMI) hit its lowest (non-COVID lockdown) monthly level of activity since February 2009.
But maybe we’re in the darkest before the dawn bit?
Weirdly, all that gloomy data is where the optimism is springing from.
If things are really this bad then it seems extremely likely that domestic inflation - like wages and service sector pricing - will fall away sharply from here.
Finally, it seems we’re getting traction. After an interminable wait, we are moving towards the light.
We’re still in a bad place. But the difference between heading into the darkness and being able to see some light at the end of the tunnel is vast.
Meanwhile, we’re actually starting to enjoy some of the upsides of a downturn.
Food prices are down. Cheese is cheap again. That’s never really great for the economy long term because it means export prices are down. But consumers need a break.
Even the cost of building a new home has finally fallen.
According to the Cordell Construction Cost Index last week, the cost to build a standard, single-storey, three-bedroom, two-bathroom, brick-and-tile standalone dwelling (during a normal build-time) fell in the three months to June - for the first time in 12 years.
So what’s the catch here?
This wouldn’t be an economics column if I just gave in to unfettered optimism. I do worry that we’re at risk of getting too excited, too soon.
We need to stay alert to the risk that there’s another twist in the tale of this inflationary thriller - a Hollywood horror-style last lurch from the villain - a jump scare.
Jim Morrison (right). Photo / Supplied
What if the light at the end of that tunnel is a train? Or is it just the case, as the late great Jim Morrison once put it: “I’ve been down so goddamn long, it looks like up to me”.
Feel free to insert your preferred analogy - but you know what I mean.
We all know it. False hope is a killer.
For all the positive sentiment in the past few days, we need to remember that we haven’t seen the hard data yet.
So this isn’t the celebratory, “inflation war is won” column I’d like it to be.
We should not forget that the most powerful forces pushing the economic narrative are financial markets. They see central bank statements in binary terms no matter how hard the Governors might try to nuance them.
And they do not care about our feelings They don’t care about that fixed mortgage rate decision you’ve got coming up.
Financial markets will celebrate early and hard and then if they are wrong they’ll switch positions without a second thought.
So watch out. And watch the Consumer Price Index inflation data closely when it lands on Wednesday.
It’s expected to show another solid dip in annual inflation - from 4% to somewhere around 3.5%.
But the topline number will still be flattered by falling prices for commodities like petrol and food.
That stuff is largely out of our control and could turn upward again if something goes wrong with global supply chains, or weather, or any number of annoying events that invariably do come along.
It’s domestic inflation that we need to see falling - wage growth, rents and service sector prices - the inelegantly named ‘non-tradable inflation’.
I know this stuff is boring and technical and I want to get excited about November rate cuts. I’m excited for the potential to get the economy humming again when this cycle turns.
I’m looking forward to a lift in the national mood.
I can feel it coming. I’m ready. I’m just a bit wary.
