As the world gears up for another challenging year, it seemed fitting to restart our ‘Bring in the Expert’ webinar series with a highly informative session with independent economist Cameron Bagrie.
Cameron has been presenting to us on a regular basis, keeping our Financial Advice NZ members up to date with the key economic themes to watch out for.
The latest session has been a powerful reminder of the complexities of the current environment, and the impact this is having on New Zealand households. So, it was especially gratifying to have such a significant turnout for the webinar. It’s a testament to the genuine concern that the financial advice community has for their clients’ financial health.
If you haven’t watched it already, you can find a recording in the Membership Area of financialadvice.nz. In the meantime, here’s some good food for thought to start with.
Since the latest OCR increase in November, the prospect of an imminent recession in New Zealand has entered the public discourse with unprecedented force. While no-one knows for sure what to expect, there are signs that a recession may not just be unavoidable, but also necessary. And as Cameron pointed out, it may not be as bad news as it sounds.
We’re used to thinking of a recession as a time to ‘batten down the hatches’ amid job losses and reduced spending. The term ‘recession’ itself is intrinsically negative, as it involves going backwards. But according to many economists, ‘reset’ is probably a more appropriate term in this case.
If we put the current economic environment into context, we know that the global economy and ours have performed quite well up until recently. Namely, until the COVID pandemic triggered massive health, economic and societal disruption, with a chain reaction that’s still rippling on today.
The point that Cameron made, and I think it’s quite interesting, is that even if we satisfy the technical definition of a recession, it might just mean ‘less good’ as opposed to ‘absolutely bad’. So, what if we drop the recession narrative and embrace the reset one? We may realise that this environment actually presents an opportunity to fix some of the structural issues that led us here. The challenge is that we might need to re-learn the rules of the game.
Wherever you look, it seems the same questions are circling in everyone’s mind right now: Where do we go from here? What’s the way out of the inflation crisis? And does the normal 30-year playbook still apply?
Most economists agree that there is no easy way out of it: something must be broken in the process.
So far, central banks have been using interest rate hikes as a tool to constrain demand (spending) and rein in inflation. But even though there are signs that global inflation is indeed cooling, it’s not happening as fast as hoped. For example, despite the most rapid increase in interest rates New Zealand has ever seen, in the December quarter our inflation rate was unchanged at 7.2% (though slightly lower than the 7.5% forecast by the RBNZ).
It looks like the pandemic has triggered a major reverse of factors that, for the past 30 years, have helped tame inflation – like the unemployment rate. According to Stats NZ, in the December quarter the unemployment rate didn’t move much, having increased by only 0.1% to 3.4%. The tightness of our labour market is a big difference from past inflationary cycles. And while the return of migrants may help cool things down, it won’t happen overnight.
In the meantime, wage inflation keeps going. So, the risk is for labour shortages to continue to feed the price/wage spiral: wage increases cause price increases which in turn cause more wage increases. At some point, this spiral has to slow, and that’s the issue that the Reserve Bank is trying to break.
According to data from Ipsos Issues Monitor, housing is no longer the number-one concern for most Kiwis – inflation is. And it will be interesting to see what the RBNZ will do today (February 22), considering recent data and the latest minimum wage increase.
The general agreement is that it will take concerted, consistent action by the Government and the Reserve Bank to slow down the inflation train. And as Cameron pointed out, this also means finding a balance between the economic and social sides, in other words a way to address both rather than prioritising one or the other.
How that would work in practice is an open question, but I thought we need unifying messages like this to power our way through the cost-of-living crisis as a country.
Once again, if we leave behind the ‘recession’ narrative and embrace the ‘reset’ one, we might see that there are positives in this economy too. For example, banks’ data show that a lot of Kiwis are ahead with their mortgage payments. When mortgage rates dropped, they didn’t take the cashflow benefit but rather upped their principal payments to pay down their mortgage faster. And because they did so, many may not actually feel a huge impact on their budget, when their mortgages are up for refixing.
It’s small steps like these that create financial resilience – and it’s also where quality advice comes into play.
Financial advisers work hard every day to ensure that their clients are well-positioned for the financial challenges ahead. By sharing their knowledge and insight, they help Kiwis make the most of the tools and steps available. Most importantly, they show people where to look for opportunities, and how to be prepared for the challenges.
I believe these are tools and mindsets we all need, to weather the inflation storm and come out the other side even stronger.
Financial Advice NZ was founded with a single-minded purpose: to help New Zealanders, and New Zealand as a whole, be financially better off. Visit financialadvice.nz to learn more about our initiatives.
