‘We’ve run out of ammunition’

Economists warn of a new threat after tough times

When Covid landed in 2020, it came, it saw, but it did not conquer our economy; but the new threat is inflation enhanced by the battle against the pandemic, experts say.

Propped up by the Government, the New Zealand economy proved more resilient amid coronavirus than economists expected. There were no unemployment queues, no housing market slump, and although specific areas suffered, the overall picture was not one of gloom.

But throwing taxpayer money at the problem is unsustainable and will not make it go away, it will simply create a new problem, the economic warnings run.

‘‘We have run out of ammunition fighting off successfully the first mass attack of the enemy,’’ former Trade Minister Tim Groser says.

New Zealand was insulated better than some countries, thanks to the strength of its primary producers, he argues.

As such, the economic spine proved strong and flexible, as industries here and overseas struggled through the worst global pandemic since the Spanish flu a century ago. ‘‘In the past two years, it is far better to have been a large food exporter like New Zealand than a motor vehicle exporter,’’ Groser says.

In those two years global food prices (on the IMF commodity index) increased 40 per cent in nominal terms, to New Zealand’s great advantage.

‘‘In Europe, their automotive industry has just endured six months of declining new car registrations because of the impact on global auto supply chains. But at the highest level of generality, the global economy has got through this health crisis relatively unscathed, and we should all be thankful for that.

‘‘The main risk economically is not likely to arise from the biological dynamics of the mutating virus, but the risk of a premature and excessively rapid withdrawal of that fiscal and monetary stimulus.’’

Continuing to stimulate the economy will come at a cost, Groser says. ‘‘We and other advanced economies will pay that price over many years either through a secular shift upwards in the long-term inflation rate (the worst of the two options) or the implications of a long and difficult period of fiscal consolidation that must now take place precisely to avoid setting long term expectations of a higher inflation rate.’’

Economist Cameron Bagrie too, warns the free lunch of Government employment and other subsidies, will come at a cost.

New Zealand will need to learn to live with Covid and that will involve tough trade-offs between health, the economy and mobility, he says.

‘‘Covid is a supply shock that makes us poorer, not richer. Sugar candy economics via heaps of government spending and aggressive central bank (policies) just provided a temporary reprieve with both positive and negative consequences. Inflation is the reality check and ‘pop’ variable that will be a big focal point over the coming years. Inflation

‘‘For the past 20 years, investors and other risk-takers have got used to thinking of central banks as their friends... This time, it’s highly conditional love. It’s all about inflation now.’’ Sharon Zollner, inset above ANZ chief economist

is a thief that steals savings and reduces spending power. Getting inflation back into check is not going to be asset price or growth friendly.’’

Growth in the global and New Zealand economies will be slower than we have been used to, with labour supply and productivity curtailed, Bagrie says.

Government policy will need to pivot from spending and using fiscal policy, to a stronger emphasis on microeconomic policy, he says.

‘‘These are the little levers you can pull to improve the anaerobic capacity of the economy to grow year after year.

‘‘Why do we have 40,000 more people on a benefit now than preCovid but an unemployment rate of 3.4 per cent? Covid, and the policy response to it, has magnified pre-Covid themes such as wealth inequality, housing affordability, globalisation, health system readiness and the underappreciated value of some people such as nurses.’’

Although food parcel delivery rates are high and tourism, hospitality and international education are battling, 90 per cent of the economy is still firing and the past two years have not been as torrid for the overall economy as most expected, says Kiwibank chief economist Jarrod Kerr.

‘‘At the start of the pandemic we were worried about queues of unemployed and we were going to get a housing market correction, and a whole lot of nasty stuff was about to happen. That, it didn’t – and you can pop that down to the government’s policy, the wage subsidies and the other measures that the government did.

‘‘Kiwi businesses are much more resilient and adaptable than we gave them credit for. We always underestimate the adaptability of Kiwi businesses and, once again, we found ourselves and our economy far more resilient than any of us had anticipated.

‘‘We got through various lockdowns well. With each lockdown the severity of the impact is lessening. The first lockdown was bad, the second lockdown was not quite as bad.

‘‘Our terms of trade are at historic highs… in terms of what we are receiving compared to what we are paying, our purchasing power has never been better.’’

But now the big question marks for Kerr are how we move from a pandemic to an endemic, how we live with Covid when Omicron makes it into the wider community, and how and when we open up to the world.

Cracks are showing and inflation is coming, Kerr says.

‘‘There are still a lot of negatives out there, so cautiously optimistic but [I’m] certainly not going to be surprised if the New Zealand economy does as well, it’s a well oiled machine – adaptable.

‘‘There’s a lot of risks out there but we are in a really strong starting position, we’ve got record low unemployment, government finances are in great shape. They are making more revenue via tax than they thought, they’re spending less than they can, so a good situation

there.’’

ANZ chief economist Sharon Zollner was even more wary, to the point of gloomy, in a change of heart this week forecasting lifts in the Official Cash Rate over the next 15 months.

While inflationary global supply-side disruptions remain, ‘‘it’s domestic inflation pressures, and in particular the ongoing tightness in labour supply, that explain most of our change in view’’, Zollner says.

She expected upward surprises for the Reserve Bank in both the labour market and the consumers price index (CPI), the measure of inflation for households.

‘‘Our updated view is not based on a belief that growth will be going gangbusters. The housing market appears to be coming to a very sudden stop; households are facing significant cost-ofliving stresses and have subdued confidence; a shortage of workers and materials is hampering production; and Omicron is knocking on our door. But the reality of a prolonged negative supply side shock is that even modest growth can stretch resources and cause inflation. The trade-offs are unpleasant and there’s no way around that.

‘‘For the past 20 years, investors and other risk-takers have got used to thinking of central banks as their friends who have their back; that weak growth or wobbly markets mean lower interest rates. This time, it’s highly conditional love. ‘‘It’s all about inflation now.’’ Groser, chief trade negotiator over many years, says overseas factors will have the biggest impact on Kiwis’ economic wellbeing: it’s all about pandemic science, not economic analysis.

‘‘The orthodox view that the mutations are now on a highly contagious but clearly less dangerous path, may prove wrong,’’ he says.

‘‘If that orthodox view is wrong the economic impact could be far more severe than the first wave of the pandemic, precisely because the fiscal and monetary armoury of the major economies is all but exhausted from the first wave of the pandemic.

‘‘Our economic fate is therefore largely in the hands of the world’s major public health institutions, the public and private science research establishments and ...innovative pharmaceutical companies’’.