Taken from Tea with Tony November 2021
Kiwi’s just took a pay cut
With the cost of living rising 4.9% in the last year, independent economist Tony Alexander says that unless you’ve had a 6.9% pay increase, your improvement is below the New Zealand average, which usually sits at 2% above inflation and if you haven’t had a 4.9% pay increase you’ve actually gotten poorer.
However, while Tony says, “the cost of living has gone up substantially for those living in New Zealand”, there is a bit of an offset for those whose house prices have substantially risen.
Key inflationary drivers
While there are apparent inflation drivers such as global supply chain disruptions, an inability to meet huge factory demands in China and a significant rise in both manufacturing costs and raw materials (especially for the construction sector), Tony says high inflation cannot be pinpointed to one or two things.
“Even if you strip out the top 10 percent of things rising strongly and falling in price, you’ve still got a very high rate of inflation out there, so it’s largely across the board.”
And, Tony believes there is much more to come over the next couple of years.
Should the Reserve Bank have acted sooner?
According to Tony, the Reserve bank should have started increasing interest rates early this year due to strong economic growth from late 2020, indicating an official cash rate of 0.25% and low-interest rates were no longer required.
With an ‘unprecedented’ inflation increase of 2.2%, Tony says this is the most significant inflation rate increase since July 1987, where quarterly inflation hit 3.3%.
“Only five months back, they predicted that New Zealand’s inflation rate wouldn’t be 4.9%, 2.5% is what they said.
It’s almost double. Now, I’ve never seen an error of that magnitude from our central bank before,” states Tony.
Tony believes the economy has been overstimulated, and over-promoted house prices have seen a rise of about 39% from the low of May last year. The impact of which Tony predicts will see interest rates rising higher than anticipated over the next couple of years.
Inflation increases and risks
Tony envisages the next inflation number, due in the next three months, will be above 5%, and although inflation will begin to ease over 2022, Tony doesn’t believe this will fall as rapidly as expected.
And, while there will likely be an increase in wage rates – particularly with a current 4% unemployment rate and staffing shortages – in regular times, businesses would be unlikely to offset this with significant price increases due to the availability of cheaper alternative products cheaper online. However, with supply chain disruptions increasing and considerable shipping delays, local businesses have less competition which could see price rises in 2022.
Additionally, while Tony predicts ‘they’re going to put the hammer down on interest rates late in 2022 into 2023, the rises will likely be limited over the next few months.
Housing – “it’s going to flatten out”
With a sharp increase in the cost of living and anticipated doubling of interest rates – from a low of 2.19% for a one-year fixed-rate, Tony anticipates a negative net migration flow in 2022 with many New Zealander’s looking to shift to Australia. Consequently, this will contribute to a flattening of the housing market in mid-2022, which puts New Zealand in the endgame of house pricing increases.
However, if there are no major signs of a flattening by the June quarter, Tony believes the government is likely to ‘jump in’ before the Reserve Bank brings in sharp interest rate increases later in 2022.
Auckland impacts
With Covid-19 restrictions extending longer than predicted, Tony’s regular surveys indicate ‘absolute woe’ in the likes of tourism, accommodation, and hospitality sectors. However, outside of this, there is more demand than businesses can satisfy creating a ‘backlog of work to be done.’
And while there is a concern for the economy, as the lessons of the 2020 lockdown and current trends from New South Wales show, it’s likely that once Auckland opens up, we will see a spending surge with people looking to ‘spend with a vengeance.’
However, Tony cautions a spending surge could be short-lived as interest rates rise and the Reserve Bank intends to see a pullback of household spending.
