Reserve Bank Governor Adrian Orr is presiding over an era of rising inflation and interest rates. Photo / Mark Mitchell
Reserve Bank Governor Adrian Orr is presiding over an era of rising inflation and interest rates. Photo / Mark Mitchell
OPINION:
New Zealanders have embraced the Reserve Bank’s latest recessionary forecasts with great enthusiasm.
Phew, everything is officially terrible. What a relief.
After all the criticism it’s actually something of a surprise endorsement of the RBNZ’s credibility and reputation that the forecast recession has captured the public’s imagination, in away numerous similar forecasts by other economists did not.
Even National Party leader Christopher Luxon, who previously struggled to express confidence in Governor Adrian Orr, decided the RBNZ does now know what it’s talking about.
He cited the RBNZ’s outlook for the year ahead as a reason to drop National’s proposed tax cut for high-wage earners.
Orr certainly has the country primed for a grim 2023. That’s what he’d have hoped for.
If we can slow the economy down and get on top of inflation without the need to push interest rates to mortgage-crushing heights, he’ll be as happy as anyone.
I worry that central banks, including ours, are going to overdo it with the hikes and cause a financial crash or deeper recession than is necessary.
I’ll concede that view is born of my experience of recession in the early 1990s and the cycle of rate hikes ahead of the GFC in 2008.
But, regardless, I can take some heart that the forecasts will probably be wrong.
That’s not a slight on the RBNZ economists, it’s just the way forecasts work.
The future holds numerous potential scenarios. You can try and pick the most likely but, as soon you put it on paper, reality comes along and changes the equations.
When it comes to forecasting, commercial bank economists have an advantage over the RBNZ in that they can update their outlook any time they like.
Effectively, market economists put out new forecasts every day, the RBNZ only puts out forecasts every two to three months.
If we look at the current forecasts in binary terms, then they give us a good guide to the direction the economy is travelling.
We have a broad consensus that the economy will slow next year, interest rates will keep rising, inflation will fall and unemployment will rise.
That’s the base case we should all be working off. It’s what should happen unless unexpected events unfold - although they often do.
Even if the general trend is right, the timing and extent to which things will happen are so uncertain it makes specific predictions for next year almost irrelevant.
The RBNZ forecasts give us a line in the sand. But the odds are very strong that things will fall on either side of that line - they’ll either be better or worse.
Complicating it all further is that what constitutes better and what constitutes worse isn’t straightforward these days.
As Kiwibank economist Jeremy Couchman wrote last week, both tourism and immigration numbers are actually picking up much faster than has previously been forecast.
Kiwibank senior economist Jeremy Couchman.
Kiwibank has upgraded its net migration forecasts and now expects a net gain of 36,000 migrants in a year’s time.
A meaningful trend is developing, he said.
If that trend involves the rebound continuing to accelerate ahead of expectations then this will seriously alter the economic outlook.
More immigrants and tourists would add to economic growth in 2023. That might help us avoid recession.
But, as we’re constantly reminded, that might not be a good thing.
More people means more cash, more demand in the economy and more inflation and for longer.
Then again, more immigrants should also ease pressure on the labour market, helping to reduce wage inflation.
Trying to forecast the net result as strong inflationary and deflationary forces collide becomes very difficult very fast.
China’s Covid struggle provides another example.
If things go well in China and the economy bounces back, is that good?
It means global demand rising and higher commodity prices. That means more money pouring into New Zealand by way of dairy receipts and less recession risk
But that’s inflationary.
A resurgent China would also push up prices for oil and other commodities that we import.
Conversely, if China fails to open up smoothly, if its economy slumps and demand for commodities plunges, then we face an external shock just as we’re putting the big interest rate squeeze on our domestic economy.
The same goes for a Wall Street crash or a bad turn in the Ukraine war.
ANZ chief economist Sharon Zollner ran through all these scenarios in a report last week looking at the risks to the RBNZ forecasts.
Zollner sees upside risks (the possibility that inflation is worse than expected) in stronger-than-expected wage growth, unemployment taking longer to rise, and global inflation.
She sees downside risks (the possibility of a harder recession) in all the global risks and adds the possibility that rate hikes hit people harder than expected next year as they roll off fixed rates.
Almost 60 per cent of mortgage debt is still on a mortgage rate of less than 4 per cent, and roughly half of mortgage debt is due to re-price in the next 12 months, she notes.
“The risk of oversteering at this point is absolutely real,” she warns
“The uncertainty is enormous, and even if policy is actually set perfectly to achieve the best possible outcome, it won’t look like it in real-time and will never be known after the fact either.”
In other words, we’ll never get to see where other policy choices might have led.
