3-decade High Inflation: Is NZ's Economy Really In Bad Shape

Wednesday, 20 July 2022, 6:40 am
Press Release: Kalkine

Summary

• Annual inflation in New Zealand reached an eye-watering level of 7.3% in the quarter ending 30 June 2022. 
• Wages may rise as businesses struggle to keep staff in place at a time when the labour market is extremely tight. 
• Interest rate hikes and fears surrounding a recession are some of the potential challenges that can hit the New Zealand economy.

Inflation in New Zealand has taken a worrisome route as Statistics NZ reports that the annual consumer price index reached 7.3% in the April-June quarter of 2022. This is the highest annual inflation rate in 32 years, as stated by Stats NZ. The inflation data has clouded the outlook for the New Zealand economy, leaving economists to wonder if a recession is underway. However, optimism is still riding high among a certain group of experts. 

The current inflation rate follows an annual inflation rate of 6.9% in the March 2022 quarter, which was also one of the largest movements in many years. June's inflation surge can be attributed to the housing and household utilities group. The rise in construction and rentals prices drove the current inflation surge. However, larger issues in the backdrop have largely contributed to inflationary pressures, leading to a worrisome situation. 

Supply-chain disruptions, rising labour costs and constantly high demand have been factors due to which inflation levels have risen. These factors have also affected the construction sector, which has ultimately seen the highest impact of rising prices. However, this CPI data is expected to impact other aspects of the economy, which include wages, interest rates and economic growth. 

ALSO READ: New Zealand inflation hits 32-year high at 7.3%

Here is a closer look at the potential impact of rising inflation on these areas.

Upward pressure on wages

Despite the ongoing economic challenges, the labour market has remained tight and has been a constant source of strength. This has resulted from the rising demand for goods and services that has kept the economy afloat since COVID-related restrictions were lifted. 

Higher demand has forced businesses to continue producing goods and services, even as labour shortages have been a persistent issue. Consequently, businesses have become desperate to retain their workforce, leading to a record drop in the unemployment rate. 

Thus, low unemployment is often a gateway to higher wages, as the workforce obtains higher bargaining grounds in the market. Thus, businesses fear workers may quit their jobs and shift to higher-paying jobs. This has created upward pressure on wages, as it should be at par with rising inflation. However, higher wages often lead to higher inflation, a challenge the government would have to wager. 

Recession fears loom

A drop in consumer and business sentiment is already visible across the NZ economy. With inflation surging even higher, households may develop a more cautionary approach, reduce spending, and postpone high-value purchases. Economists fear that a technical recession might be a real possibility under the present circumstances. 

However, a series of overlapping factors have further complicated the scenario. While the labour market remains tight, an uptick in inflation could signal a drop in consumer demand. Lower demand would mean losses for businesses, forcing them to cut back on the workforce. Thus, as workers are laid off, there would be a further drop in spending and demand. 

Alternatively, some experts believe that the economy might skirt a recession if price increases are limited to a manageable level. A revival of the tourism sector would also provide much-needed strength during this time.

Interest rate hikes

The Reserve Bank of New Zealand (RBNZ) has been raising interest rates to curb inflation. The current rise in inflation has fuelled speculations that the RBNZ would take an even more aggressive approach to interest rate tightening in the near term. 

The RBNZ has already delivered three back-to-back 50-basis-point rate hikes, taking the official cash rate to 2.5%. However, the current pace of inflation might have exceeded the expectations of the RBNZ. Consequently, the central bank may be forced to devise a new strategy in the coming period. 

The RBNZ has highlighted that it expects consumer demand to soften over second half of the year. Thus, the central bank has more work to do. Experts believe that RBNZ would go for 50 basis points rate hike for three consecutive months ahead. Thus, the OCR may reach 4%, instead of 3.5%. 

GOOD READ: RBNZ delivers another rate hike, OCR up 50 bps

© Scoop Media