Summary of key points:-
- Premature call for US inflation spike
- New Zealand at a crossroads in the post-Covid economic era
Premature call for US inflation spike
There were high expectations in the US ahead of last Friday’s CPI inflation figures for May that the annual inflation rate will record a peak for the 12 months to May, lower than the 12 months to May. in April, that is to say the confirmation of the inflation peak. The view of this column over the past few weeks has been that when financial and investment markets saw the US annual inflation rate falling, instead of rising, sentiment and direction would change for bond yields. lower, stable stock markets and a weaker US dollar. .
This call turned out to be slightly premature, as the increase in core inflation (excluding volatile and uncontrollable food and energy prices) for the month of April came in at +0.60% , slightly above the previous consensus forecast of +0.50%. The annual core inflation rate is at 6.00% (above the previous forecast of 5.90%). The guardians of inflation, the Federal Reserve, manage monetary policy on the measure of underlying inflation and not on headline numbers, because changes in interest rates have no impact on the global costs of oil/freight and weather conditions determining food prices. It was a near miss; However, markets expressed disappointment with the Dow Jones stock index falling 880 points, with 10-year bond yields jumping to 3.16% from 3.03% and the US dollar index rising to 104. .2 versus 102.50. As a result of the stronger USD and stock market sell-off, the NZD/USD exchange rate fell to 0.6360 from 0.6450.
Similar to the April inflation numbers in the US, the components that rose again in May were housing and air fares. Prices for new and used cars surprisingly rose after posting declines in recent months. Mortgage interest rates in the United States have risen sharply in recent months, rising from less than 3.00% to 5.50%. The chart below indicates that it seems inevitable that activity, prices and confidence in the US housing market will decline significantly over the next few months due to rising mortgage interest rates.
Combined with gasoline prices rising above US$5 a gallon, the slowing housing market will hit U.S. consumers hard and the resulting weaker demand in the economy will ease core inflationary pressures. . Some are calling on the Federal Reserve to accelerate interest rate hikes to 0.75% at its next meeting (6am Thursday June 15 NZ time), but that seems unlikely as the results underlying inflation are not significantly higher than the Fed’s forecasts.
The expected ‘V’ shaped rally in the NZD/USD rate to 0.6800 has been reversed with this latest US inflation reading. However, the peak of inflation (and therefore the peak of the USD) has only been delayed in time, not completely ruled out. It looks like we will have to wait for the June US inflation numbers on July 14th to see a confirmation of the peak. Currency and bond markets will start pricing in this likely outcome well before July 14th. Local USD exporters who only executed 50% of their longer term three- and four-year hedging intentions now have the option at 0.6360 to trade the balance.
New Zealand at a crossroads in the post-Covid economic era
By any measure of historical and international comparisons, the New Zealand economy is currently expected to be in a golden period with export prices at 40-year highs (terms of trade index) and unemployment at one record high of 3.2%. Higher export earnings and many jobs with rising wages suggest increased living standards and peace/happiness for all.
The ‘Rockstar’ economy continues now that Covid is out of the way, right?
Unfortunately, the rather sad reality of life in New Zealand today, despite export success and low unemployment, seems more like a syndrome of resignation, division and resentment. The hangover for the state-sponsored party economy in 2020 and 2021 (money printing and tax splurges) is hitting hard with little improvement in sight.
Any foreigner looking at New Zealand today, perhaps an overseas investor or a potential immigrant looking for new opportunities, is bound to observe the following less than positive images and direction:-
- Works: The reasons why the unemployment rate is so low is that young people are voting with their feet and leaving the country in droves for great opportunities in Australia and also because of inconsistent government policies restricting immigration. Delays/shortages of products and services in all aspects of life in New Zealand are currently entirely due to a chronic shortage of workers. A competent government would have an immigration action plan to solve the problem.
- Education: Any nation that only has 60% of its children in school regularly (and only aspires to increase that to 70% in the next two years!) is already on a slippery slope standard of living and social unrest. Again, the government has contributed to this problem by instilling public fears over the Covid pandemic and by abolishing the centralized school truancy management system.
- Lodging: New Zealanders’ preoccupation with buying and selling existing homes with each other, causing inevitable booms and busts, adds no growth or wealth to the economy. Coupled with food prices well above other countries, ridiculous property prices relative to income make New Zealand a very expensive and unattractive place to live. The answer to this problem lies in urban land zoning and economies of scale/competition in building homes.
- Law and order: Poor police forces are under pressure from an overburdened justice system, undetained criminals, criminals imported from Australia 501, gang violence seemingly condoned by politicians and methamphetamine addiction leading to poverty and suffering children. All of these issues are interrelated, but there is no leadership from anyone to solve the problems.
- Health: Government inaction and restructuring decisions have left primary, secondary and tertiary health services dangerously underfunded, staff under extreme pressure and in general disarray. Delayed screenings, interventions and operations due to Covid cause more grief than Covid itself.
- International exchange: We seem confused and without a plan in this critical area for the economy. We have a very successful free trade agreement with China and we have extended it to 10 other Pacific Rim economies with the CPTPP. However, the Prime Minister’s recent visit to the United States has apparently changed New Zealand’s non-aligned foreign policy stance post-ANZUS, which has rightly upset our biggest trading partner, China. If our exporters experience unexplained blockages at Chinese docks over the next few months, they will know who to blame!
- Climate change, carbon and agriculture: To bring international attention and applause to climate change policies, the current government seems determined to impose additional costs and BS regulatory compliance on our most important and productive industry, agriculture. Historically, agricultural science has been the backbone of New Zealand’s economy and our super-smart agri-scientists will find the solutions to methane emissions and sequestration through plant/animal farming and carbon sinks /methane. A smart government would invest heavily in this science, without overtaxing our hard-working farmers to grow food. Considerable resentment is growing again in rural New Zealand as farming as an industry is hammered by ideological socialist politicians in Wellington who don’t seem to understand that the agricultural export sector has saved the bacon from the economy over the past two years.
The direction that New Zealand takes in the coming years with its political leadership and related economic policies will determine whether we continue on the current path to a Venezuelan outcome or to a more prosperous path and a socially consistent example like Denmark.
With some policy changes to make our economy more competitive and attractive to foreign investors and immigrants, the balance of odds favors the Kiwi Dollar after the Danish Krone over the Venezuelan Bolivar!
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*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has been writing commentaries on the New Zealand dollar since 1981.