Editorial: Never mind the politics, local economy remains at mercy of global forces

The US Federal Reserve, chaired by Jerome Powell, makes decisions that affect New Zealand's economy. Photo / Getty Images

Editorial

EDITORIAL

The latest proclamation from the Reserve Bank has been delivered, and the verdict is that the Official Cash Rate will remain on hold, probably for the rest of this year and possibly until the end of the next.

But as anyone who has refixed a mortgage in the past few months will know, the pause has not stopped bank rates ticking ever upwards.

The Rserve Bank hasn’t moved the cash rate since May, but in that time all the local banks have hiked their retail rates at least twice.

It’s a timely reminder that as much as we’d like to think we have some level of control over the local economy, in reality we are adrift on a vast and turbulent sea of international market forces.

To be more specific, the US economy is the place to look for clues as to what is really driving our interest rate outlook, and China is the place to look for clues on GDP growth.

The whole world is watching and waiting for the US Federal Reserve to call victory on inflation and time on this cycle of rate hikes.

But even with US consumer price inflation down at a relatively low 3.7 per cent, the Fed has refused to let down its guard.

Why the gloomy outlook? Perversely, it is because the US economy remains too good. The data have continued to suggest that the employment market remains stronger and workers are getting pay rises.

Good news has become bad news for those watching markets and interest rates, as investors watch for signs that we can put this long, tedious hiking cycle behind us.

That has various commentators debating the prospect of escaping the post-Covid inflationary cycle with a soft landing: getting inflation back in its box without sparking a recession.

It may be possible, but the Fed isn’t content to just hope. It needs to see its interest rate hikes doing more to flatten growth before it will loosen its stance.

Meanwhile a lack of strength in the Chinese economy threatens our GDP growth. A slower-than-expected post-Covid rebound has softened Chinese demand for global goods - not least New Zealand food exports.

The upshot of the clash between these two huge economic trends is that some days we wake to find global headlines highlighting worries that the global economy will stall, while on other days we wake to worries that it won’t.

The Reserve Bank - and anyone else trying to get a sense of where the local economy is headed - needs to try to calculate the net result of Chinese weakness and US strength before making forecasts.

One thing we do have certainty on is that the New Zealand election will have almost no major bearing on the big picture.

National has promised a tighter fiscal rein, but its final borrowing and spending numbers aren’t wildly different from those offered by Labour.

Neither of the major parties is offering a fiscal formula substantively radical enough to suggest it will have more influence than the international market pressures New Zealand faces.