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Is the Reserve Bank leading us into a recession?

July 25th, 2014 -

Several sets of news came out this month which appear to fly in the face of, and contradict our blind belief in New Zealand’s “rock star economy”.

  •  The ANZ Business Outlook survey shows business confidence declining as economic growth slows.
  • New Zealand core retail spending on debit and credit cards fell in June for the first time in four months.
  •  The New Zealand Government books showed a bigger operating deficit than forecast as recently as May as company tax and GST fell short of predictions.
  • In Auckland, the so called powerhouse of New Zealand’s economy, the March quarter jobless rate was 7.3 per cent, the same as a year earlier and well above the national rate of 5.7 per cent.
  • And now, with his fourth increase in the OCR since March, the Governor of the Reserve Bank is backing away from his previous bullish remarks about both growth and wage inflation.

Shock horror – how can this all be true when we are supposedly the envy of the world?

The messages from the Reserve Bank appear mixed and confused. Today the Governor said he expected growth at an ‘annual average’ pace of 3.7 per cent in calendar 2014. This differed from last month’s monetary policy statement when it was 4%. Only a few weeks ago, the Reserve Bank’s assistant Governor and chief economist said we’re flying and he had revised up their estimate of the country’s growth next year.

So what is the real story? Who does the RBNZ been talk to before arriving at these different scenarios? Do they venture out of their glass tower to talk to real people in the street?

It wouldn’t matter so much if this chopping and changing wasn’t leading to continued interest rate hikes in the form of the expanding OCR. This is important because it will translate into every floating rate mortgage immediately and lead to further increases in fixed rates. It also means that investors all over the world want a piece of our interest action and are purchasing our currency like it’s going out fashion. Hence the exchange rate is at post-float record highs.

This too wouldn’t be so bad either as it makes petrol, overseas holidays and other imports cheaper – but as the retail figures show, people are pulling back their spending.

So, is the RBNZ leading us into a recession? No of course not – a recession is classed as two consecutive quarters of negative economic growth – but they are surely leading us into a no-man’s land where wages are flat (if you actually have a job), living costs are increasing and people are being priced out of home ownership.

All this comes about because of the oft repeated curse of the legislative fixation put on the Governor to look only at inflation.

Just to rub salt in the wound, here’s the assistant Governor again, “With the economy growing at a faster rate than potential output, inflationary pressures are expected to increase. In this environment, it is important that inflation expectations remain contained and that interest rates return to a more neutral level.”

Just what a “more neutral level” is, is debatable. One person’s neutral is another’s out of kilter! Wouldn’t it be much better to have a “weighted” management tool where the Governor’s performance rating was determined by not only the inflation figure, but also by unemployment, the exchange rate, commodities prices and/or other determinants that make up an economy?

As many other more learned commentators have said before, why just have one sole determiner of monetary success/failure when there are so many other factors that go into a successful economy and a vibrant society? It surely is time we had a sensible conversation on what makes a successful Reserve Bank Governor and what makes a myopic bureaucrat.

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