In the coming months, the economy will be vulnerable to the fickle fortunes of international markets as our macroeconomic statistics sink into “correction” territory.
If we follow the Reserve Bank’s script, the big worrying numbers - inflation and the current account deficit - ought to peak and decline as we all adjust our behaviour, spending less.
We need international markets to buy into the narrative so traders and analysts don’t put New Zealand in the “worrisome” category when they make their cursory assessments of minor economies.
If that happens, we face additional headwinds in the form of a lower Kiwi dollar and (potentially) credit rating warnings.
On Thursday, RBNZ chief economist Paul Conway did his bit to sell the narrative and remind Kiwis to stick to the script.
In a speech to the NZ Capital Markets Forum, he made the case that the rebalancing is well under way.
But he also warned that, unless we collectively lean into this process, we risk making it worse.
“The effectiveness of higher interest rates in bringing balance to the economy and lowering inflation depends on how realistic and pragmatic New Zealanders are in accepting that we are worse off than we otherwise would be given global events of the past few years and recent storms,” Conway said.
That tone suggests some concern that New Zealanders might not be realistic and pragmatic. Who, us!?
It’s a fair concern that some might say is reflected in the bearish outlook on the Kiwi currency and equity markets in the past couple of weeks.
Obviously, things turned south on the back of banking concerns in the US and Europe.
But New Zealand’s rougher-than-expected fourth-quarter GDP and record current account deficit made headlines on Bloomberg terminals at quite an awkward moment.
The Kiwi dollar is off about 5 per cent since its last peak in February.
Bloomberg has reported that the Kiwi, which it describes as one of this year’s worst-performing major currencies, “is emerging as a prime choice to hedge against potential US dollar strength should the global economic outlook darken”.
Analysts cite the prospect of a US55c Kiwi dollar (it’s currently US62c) if the US currency keeps strengthening “as a result of an economic crash-landing or should banking crises deepen”.
That would not help efforts to cut our inflated import bill.
At 8.9 per cent, New Zealand’s current account record deficit for 2022 didn’t initially cause too much market reaction.
The blowout, driven by the value of imports running well ahead of export earnings, is considered “sort of okay” as long as it is near its peak.
In theory, tough domestic economic conditions this year will see us pull back on imports and the resurgence of tourism dollars should balance it all out.
But Kiwis have been enjoying their new freedom and heading offshore on holiday - undercutting the net gain from the return of tourists.
BNZ economist Doug Steel outlined concerns in a recent report titled “Something has to give”.
He doesn’t believe the deficit has peaked and sees it pushing well through 9 per cent of GDP.
“We are not forecasting it to hit 10 per cent but that is a risk,” he said.
A 10 per cent current account deficit is one of those magic numbers that attracts unwanted attention from international rating agencies.
Last week we also got a pointed warning from international economic research unit Fitch Solutions.
It downgraded its 2023 GDP forecast for New Zealand to 1.1 per cent. That’s not actually as bad as most local bank economists have it now, to be fair.
But there was a line in the commentary that highlighted the acute risk the country faces in this kind of economic cycle.
“The impact of rising interest rates is significant for New Zealand given that household debt stood at 95.1 per cent of GDP, higher than the average of 72.9 per cent for advanced economies,” the report noted.
“Meanwhile, house prices in January 2023 have declined by 16.2 per cent since its peak in November 2021, lowering homeowners’ wealth.”
Fitch Solutions makes a point of differentiating itself from Fitch Ratings.
The report doesn’t have a direct bearing on our credit rating, but the two are part of the same group. The analysis is presumably required reading for Fitch Ratings.
Reserve Bank chief economist Paul Conway. Photo / Mark Mitchell
It’s a reminder that collectively Kiwis have some unique limits to how long we can live beyond our means because we are up to our neck in housing debt.
Reserve Bank rate hikes may push the economy to the brink of a serious recession. But at least we have some control over them.
If rating agencies downgrade us, our cost of borrowing goes up in ways we can’t control.
The Reserve Bank doesn’t want to even dice with that prospect and that’s why we’re getting serious speeches like Conway’s.
Conway’s inclusive emphasis on the need for restraint by all “New Zealanders” also cleverly throws government fiscal spending in the mix without making an explicitly political statement.
The RBNZ won’t tell the government what to do but it is safe to assume it is hoping to see some fiscal restraint in the upcoming Budget, and from both major parties in the election campaign.
Government spending cuts are no fun and I’m no fan of austerity policies.
I’d rather see the RBNZ do the heavy lifting,
But they are going to need support, and a bit of restraint now will hopefully mean we avoid more severe austerity measures further down the line.
