Are Inflation And Unemployment Statistics In NZ Reflecting Ground Reality?

Tuesday, 2 August 2022, 7:01 pm
Article: Kalkine

Summary

• Higher inflation and interest rate hikes have mostly been shaping the NZ economy in the present context.
• Research suggests that the central bank’s monetary policy might have been one of the causal factors behind the inflation surge.
• The robust NZ unemployment rate fails to account for the rising brain drain and slow growth in immigration.

Higher-than-expected inflation levels, sharp rises in interest rates and a weaker consumer confidence score are some of the defining factors of the present-day New Zealand (NZ) economy. These factors largely present themselves as economic woes and threaten economic recovery. Amid these concerns, the unemployment rate has remained stable and continues to keep the economy afloat. However, the data does not justify the reality many unemployed Kiwis face.

Meanwhile, inflation has been largely labelled as the result of external factors. However, many domestic aspects have also contributed to the rising prices of goods and services. The Reserve Bank of New Zealand (RBNZ) has been under constant pressure to keep inflation in check. However, the Reserve Bank may have a role in bringing inflation levels to a boil.

Most importantly, things do not end there for the New Zealand economy, as future interest rate hikes are expected to dampen the economic outlook further. A deteriorating purview of the economic state of affairs has put New Zealand at the bottom of many people’s list of countries worth immigrating to. Amid this chaos, Kiwis have also been battling economic woes of their own. Here is a closer look at what the inflation and unemployment levels suggest about the NZ economy.

GOOD READ: Inflation worries: OECD asks NZ government to take targeted action

RBNZ to blame for inflation?

Until now, the current inflation surge was blamed on the major global events unfolding. The Russia-Ukraine war and supply chain disruptions were both factors that were behind the soaring inflation rates seen globally.

Over recent days, the blame for the rising inflation levels is being shifted to the approach taken by central banks across the globe. Some experts believe that central banks have shown an error of judgement by overdoing interest rate cuts in the previous stages.

Additionally, the RBNZ also pumped money into the system during the initial days of the pandemic, much like many other central banks did. This factor alone charged up the economy and left behind a trail of excess cash that has been difficult to eradicate. However, quantitative easing was not expected to have an inflationary impact on the economy.

At the same time, home loans were made increasingly accessible, making the economy dependent on debt. This has unfolded in a dangerous form in the era of rising interest rates as households are having trouble managing rising mortgage repayments.

To top it all off, the RBNZ has taken responsibility for the current inflation levels seen in the country.

The labour market and immigrant shortage

The record low unemployment rate of New Zealand has been labelled as the source of strength amid widespread turmoil. However, the ground situation reveals a more complex reality about the NZ labour market. While the domestic labour market seems tight, recent data suggest that many Kiwis are heading outside the country in search of better prospects. As per government data released earlier this month, net 10,674 people left NZ over the 12 months to May.

This fact highlights that the tight labour market projects a completely different view of the labour market than that is actually prevalent. Additionally, immigrants have also been hesitant to choose New Zealand as their destination, with slow economic growth being one of the reasons.

Emigration figures have increased drastically as border control eased. According to experts, annual emigration is expected to increase further by the end of this year, stoking wage inflation further. Thus, a real crisis could emerge in the labour market, with insufficient participants contributing to economic progress.

Businesses could be forced to shut down due to an inadequate labour force, and economic growth could be further pulled down. However, on the brighter side of things, immigration is expected to pick up in the upcoming months from countries such as India, China and South Africa. A rebound in immigration levels is likely to keep the economy in a more balanced state and bring back some of the lost stability.

GOOD READ: GDP fall to impact RBNZ’s monetary stance in next MPC?

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