Offshore stability risks rising, says Kiwibank
A deteriorating global economy poses the greatest threat to New Zealand’s small, open economy, which is heavily influenced by overseas markets, Kiwibank says.
As the likelihood of a global recession looms large, commodity prices are falling and expected to continue dropping into 2023. Meanwhile, Kiwibank is predicting the RBNZ will hike the official cash rate to 5%, another 150 basis points on the current rate.
Kiwibank chief economist Jarrod Kerr (pictured above) said the bank was wary that too much tightening by central banks across the world might cause an “economic accident”, both here and offshore.
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“The greatest threats to Kiwi economic outlook come from offshore and unfortunately the risks are rising,” Kerr said. “For 2023, global growth is forecast to be just 2.7%, with many economies facing recession. The sharp slowdown in growth means the risks to financial stability are exceptionally high and the worst is yet to come.”
Kerr said the 2023 slowdown would be broad-based with the regions accounting for about one-third of the global economy poised to contract this year or next.
“The three largest economies (US, China and Europe) will continue to stall. Overall, this year’s shocks will reopen economic wounds that were only partially healed post-pandemic,” he said. “For many people, 2023 will feel like a recession.”
Kerr said the inflation beast was public enemy number one.
“During the pandemic, both governments (fiscal) and central banks (monetary) injected trillions of dollars’ worth of stimulus to offset the impact of lockdowns and COVID-19 disruptions. Demand for goods catapulted higher, as supply remained restrained by restrictions and underinvestment in parts,” he said.
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“Asset markets, especially housing and equities, were fuelled by the high-octane mix of record-low interest rates. Inflationary pressures began bubbling early in 2020 and burst the pipes in 2021. To the RBNZ’s credit, they were the first developed central bank to face into the rapid rise in inflation when they started tightening in October 2021.”
Kerr said monetary policy should stay the course to restore price stability and fiscal policy should aim to alleviate the cost-of-living pressures, while maintaining a sufficiently tight stance.
“For now, central banks continue to tighten monetary policy by lifting interest rates to tame the beast that is inflation,” he said. “Interest rates are being driven beyond ‘neutral’ and into restrictive territory in order to suppress inflationary pressures.
“Although the RBNZ was the first to kick off, the current leader of the pack is the US Federal Reserve Bank and Fed officials are unrelenting. The Fed just delivered its fourth consecutive outsized hike of 75bps to 4% with chair Jerome Powell noting data since its last meeting suggested the ultimate level of interest rates would be higher than expected.”
Kerr said all eyes were fixed on the RBNZ’s November decision.
“We are weighing up the options the RBNZ may face in February. We suspect that by the time the RBNZ comes back from their three-month summer holiday, global economic data may have softened enough to ease concerns around inflation,” he said. “The November meeting, in just two weeks, will be interesting in the way the central bank handles the deteriorating global outlook. But the February meeting will be of greater interest.”
