Deciphering NZ Economy Is Anything But Easy At The Moment

Saturday, 12 November 2022, 4:52 am
Press Release: Kalkine

Highlights

• Low joblessness, robust wage growth, and the economy having reentered the growth phase are positive signs
• Cost of living, on the other hand, is a big worry and has become a socio-political concern in New Zealand
• Interest rate hikes haven’t yet produced the desired outcomes in terms of inflation, but the coming year could change this

Nothing is more complex right now than accurately deciphering the global and domestic macroeconomic landscape. Joblessness is at a startlingly low level across the developed world, and businesses are paying more to workers to keep them away from accepting better job offers. Any country and its government would love a scene where most members of the labour force can land a job. But even amid record-high employment levels, economists are nervous, and so are other participants -- businesses to households to stock market investors.

Now consider this -- the main equity benchmark of New Zealand, the S&P/NZX 50 Index, has lost approximately 14% since the start of the year. This is comparable to other markets. Australia's ASX 200 and America's S&P 500 index are also trading in losses, with most experts pinning the blame on the hawkish mood of respective central banks. Higher interest rates become necessary when inflation in the economy climbs to alarming levels. High inflation is now a reality, with Kiwis, Australians, Britons, and Americans all facing a cost of living crisis in their respective countries.

Is the NZ economy in good shape?

Neither the stock market nor the unemployment rate nor inflation is the primary barometer of the economy. Gross Domestic Product (GDP) is broadly considered the gauge of economic activity within the country. In the first quarter of this year, the NZ economy contracted by 0.2%, data by Statistics NZ shows. In the quarter ending June, however, the economy made a comeback to reflect an addition to the GDP of 1.7%. Lately, the rebound in the US economy in its third quarter also became a positive talk of the town.

On the other hand, retail sales in the NZ economy are under immense pressure, with volume dropping over the past few quarters. Surveys also point toward weak consumer sentiment and household anxieties regarding inflationary pressures. Again, these conditions are comparable to other developed economies, including Australia. Besides, the housing markets of these countries have lost steam, with prices remarkably down from their peak levels. From food to fuel to accommodation, virtually every non-discretionary and discretionary expense has people concerned at the moment. Add to this the frequent mention of a looming global recession, which makes families even more anxious.

Also read: Inflation higher in NZ than Australia: Check out responses of central banks

But isn’t unemployment so low?

Yes, it is. Joblessness is so low that it is shattering records in almost every advanced economy. In NZ, data confirms that unemployment was at 3.3% in the third quarter, thanks to businesses facing an unprecedented labour market shortage. 'Too tight' is the term presently being used by many economists to define the labour market. One element contributing to this is a shortage of immigrant workers in NZ, which has yet to show signs of improvement even after the complete removal of border restrictions imposed in the wake of the pandemic's spread.

Even wage growth has been phenomenal. Median weekly earnings in the economy rose a whopping 8.8% in June year, the biggest jump in more than two decades. Both low unemployment and higher wage growth are not restricted to NZ alone but are present in North America and rich European countries. Some view the rise in GDP, coupled with high employment, as a definite indication of the robustness of the NZ economy. But on the other hand, this has compelled the Reserve Bank of New Zealand (RBNZ) to tilt toward monetary tightening so that high inflation can be tackled. Not to forget, inflation in the third quarter was at 7.2%. The RBNZ has raised the benchmark rate several times to bring it down.

Also read: Housing imbalances & inflation causes of worry in NZ, says IMF

Everything seems complicated

While many might find the economy doing good at the moment, considering low unemployment, others worry about prices and the cost of living. Even though the equity market is not the ideal barometer of the economy, the decline in S&P/NZX 50 Index can be attributed to negative sentiments prevailing among market participants. In the UK, the cost of living crisis prompted political turmoil, with Liz Truss having to vacate the PM office in the wake of the mini-budget proposal that favoured tax cuts. In NZ, cost of living is one of the hottest political and electoral debates.

Only in the coming quarters could the NZ economy become a little simpler to decipher. In the event of a downturn, it is widely expected that low unemployment would not sustain for long. That the steep rise in interest rates would slowly start impacting economic activities is being anticipated by all. As borrowing becomes costlier, it would hit growth and demand, thereby finally bringing inflation down to RBNZ’s acceptable levels. But it is yet to happen, and for now, solving the NZ economy puzzle is just guesswork.

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