New Westpac chief economist on inflation woes: ‘These problems best dealt with fast and early rather than late and slow’

After 11 years in Washington DC, working as a monetary policy analyst for the International Monetary Fund (IMF), Westpac’s new chief economist Kelly Eckhold brings a fresh international perspective to the local debate.

Eckhold, who was born and raised in Oamaru, has also spent more than a decade of his career at the Reserve Bank of New Zealand - in two stints - with some time at the Bank of England in the late 1990s.

His broad assessment of the inflationary challenges facing the New Zealand economy is that we don’t look too bad compared to our international peers.

New Zealand is facing very similar challenges post-Covid, he says.

“One thing I would say is that New Zealand is further through the cycle than perhaps some other jurisdictions,” he says.

New Zealand and the US were the countries that had the most monetary policy tightening, he said.

“It’s fair to say that the New Zealand Reserve Bank, plus the [US] Fed, have probably been at the forefront in terms of really trying to grapple with this high level of inflation that everybody is facing,” he says.

Things were tougher in Europe where they had a more direct shock from the Ukraine war and they were nervous that the economies didn’t have the ”underlying momentum” to cope with rapid hikes.

“They really worry about overdoing it, a lot.”

Of course, there are similar concerns here as New Zealand faces the prospect of a recession later this year.

Eckhold sees a recession as likely but feels there are bigger risks around failing to rebalance the economy quickly.

“At Westpac, we’ve [forecast] a GDP fall in aggregate of around about 1 per cent which is a fairly standard-sized recession, not as bad as the one that hit us in the GFC,” he says.

“Nevertheless, you tend to see when this happens, the unemployment rate goes up by say 2 per cent or something like that. That’s a material change in business conditions relative to what we’ve been seeing for the last few years.”

It was not necessarily a catastrophe but there was going to be a reduction in spending, he says.

“We already see that to some extent with retail trade where, you know, nominal spending is held up, but real spending is going backwards.

“That’s an early sign that households are really starting to pull back a little bit and these interest rates matter to them.”

But in the external sector, there were still positives, for example, tourism was rebounding with some strength.

“You know, there’s a lot of people out there in the world who have wanted to come to New Zealand for a while and who couldn’t. Even I couldn’t for a few years.”

During this period of rebalancing New Zealand will be vulnerable to external shocks - things like the international banking crisis that threatened to blow up early this year, he says.

“I think we are quite exposed to any significantly negative event that comes out of offshore in the big foreign economies.

“There was a bit of a wobble back in March when some banks got into trouble,” he says.

“It turned out the authorities there smoothed that over relatively quickly. But if we did find a broader set of negative outcomes, then, you know, when we’re sitting here with a high current account deficit and slowing growth, that’s not necessarily great news.”

Eckhold says he doesn’t see New Zealand government debt as a particular worry.

“I mean, I’ve spent 11 years dealing with a lot of customers around the world who would give their eye teeth to have government debt to GDP [ratio] in the forties, which is sort of where we are.

“Most of my customers had it anywhere between 80 and 100 and 130 per cent of GDP.”

But New Zealand’s current account deficit, which has climbed to 8.9 per cent of GDP, is a concern, he says.

“It’s very much a symptom of the underlying problem, which is that there’s been excessive demand for a while now, which has meant that import growth has been very strong,” he says.

“There’s that kind of overheating in the domestic economy, which is what the Reserve Bank is trying to kind of bring under control so that things can become more sustainable both in terms of inflation but ultimately the current account as well.

“That’s why, you know, Adrian [Orr] or his team have tried to be quite proactive because these problems are best dealt with fast and early rather than late and slow.”

Reserve Bank Governor Adrian Orr. Photo / Jed Bradley

New Zealand is vulnerable to the sort of volatility that we saw during the Asian crisis in the late nineties and also in the GFC as well, he says.

We will also need to stay conscious of the geopolitical risk around China and US tension, Eckhold warns.

“From my time in Washington, I got a greater appreciation of some of the kind of big geopolitical issues that are going on around the world and the rising tension between the West and China in particular.

“We’ve got a very high reliance on China and it would be challenging for us that if something kind of serious did erupt, you know, in the five-year, 10-year type horizon, that might really call into question the ability of countries like us to continue to trade as much with China as we kind of do.

“If you think about what happened to Germany in Europe with the Ukraine war last year, there were whole industries that just had to stop doing things within about a month.

“I mean, I kind of wonder about whether we should be thinking about the degree of diversification we have to China in the event that some of these worst-case scenarios erupt.”