Combine high inflation with low or negative real economic growth and you get stagflation, the spectre of which is said to be looming due to strong inflation rates and what credit insurer Coface described as “serious” economic headwinds ahead. So, what does this mean for New Zealand businesses, particularly exporters? Coface economist for Asia-Pacific Bernard Aw (pictured) examines here.
“New Zealand has limited exposure to Russia and Ukraine, with the two countries supplying less than 1% of New Zealand’s imports, and accounting for below 0.5% of the island economy’s exports,” noted Aw. “However, New Zealand is not spared, with the most direct and tangible impact of the war coming through higher raw material prices.”
According to the economist, the island country is facing “intensifying” inflationary pressures.
He told Insurance Business: “Consumer prices started accelerating throughout last year, and the consumer price index hit 6.9% in the first quarter of 2022, the highest in over 30 years, lifted by double-digit growth rates in costs of housing and transport, as well as strong increases in household utilities and food. Core inflation rates quickened as well, due to demand pressures acting on limited resources, worsened by supply constraints.”
Aw warned that “too strong” an inflation rate has the potential to dampen economic activity.
“The strong rise in consumer prices is expected to erode households’ purchasing power, and therefore constrain private consumption,” explained the economist. “Consumers remained pessimistic about the economy in April after confidence fell to a record low in March, according to the ANZ-Roy Morgan Consumer Confidence index.
“Consumption may be further restricted by high household debt, which has risen rapidly over the past few years, up 29% since 2018, according to Stats NZ. This suggests that consumer demand may be even more sensitive to the recent interest rate increases. The Reserve Bank of New Zealand has raised its official cash rate (OCR) five times since October last year, with the last two being the biggest increase (of 50 basis points each) in 22 years… which pushed the OCR to 2%, a level unseen since 2016.”
Naturally, increased cost pressures are not only limited to consumers, with corporate margins also compressed as a result, said Aw. He highlighted that reduced profitability could push businesses to delay investment plans and cut back on output.
“This has already hurt business confidence, which remained very low in April, with the agriculture and construction sectors among the most pessimistic on overall confidence,” added Aw, who cited increased financial and credit risks to businesses amid tightened monetary conditions. “Meanwhile, the retail sector was most gloomy on their outlook for profits and own activity, in line with weakening consumer confidence. All of this is illustrated with the fall in the gross domestic product in the March quarter.”
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Aw also pointed to growth risks to Kiwi exports, with external demand expected to weaken. According to the Coface executive, the consequences of the Russia-Ukraine conflict on global prices and supply chains have a considerable impact on economic growth, especially for Europe.
“This will affect NZ export performance, as Europe represents 30% of New Zealand total exports,” he told Insurance Business. “Being the largest export market and accounting for a third of New Zealand’s exports, China’s economic slowdown and headwinds amid its zero-COVID policies also affected Kiwi export growth.”
Aw went on to state: “Apart from tightening monetary conditions to rein in inflation, the government is also using fiscal policies to alleviate the pains of higher consumer prices. In March, the government announced measures to mitigate the impact of higher fuel prices, including a reduction of public transport fare, petrol excise duties, and road user charges.
“We expect the New Zealand economy to remain resilient in 2022, thanks to an easing of COVID-related policy and the opening of its borders to international vaccinated travellers… However, significant challenges remain, such as the pandemic’s evolution, inflation developments, a rising interest rate environment, and geopolitical tensions.”
Meanwhile higher credit delinquency was cited as among the risks that emanate from the combination of a weaker economic growth activity and high inflation. Also, periods of stagflations, said Aw, tend to overlap or lead to recessions.
“Coface is reporting renewed interest domestically following the recent high-profile failure of Armstrong Downes and also from banks as they look to securitise export transactions in light of global uncertainty,” declared Aw. “[Also], in light of renewed lending vigilance, exporters are using credit insurance to optimise trade finance facilities with their debtors insured and the policy assigned to the bank as security.”
Aw was referring to Armstrong Downes Commercial, which went into liquidation last month and owed more than 300 unsecured trade creditors millions of dollars.
