Editorial: Silver linings in forecast recession

Reserve Bank Governor Adrian Orr paints a grim view ahead for New Zealanders but wait, there's more to this. Photo / Mark Mitchell

Editorial

EDITORIAL

“Have a sensible spending Christmas,” said Reserve Bank Governor Adrian Orr, signing off on his last Monetary Policy Statement for 2022.

...And a recessionary New Year.

That last line wasn’t a quote but might as well have been. The RBNZ has forecast a significant recession in 2023.

It also lifted its expected peak for the official cash rate to 5.5 per cent, which could push some mortgage rates above 8 per cent.

Taken at face value, it all looks very grim for New Zealanders in 2023.

Thankfully, the evidence suggests that - while we shouldn’t ignore the forecasts - we should definitely take them with a grain of salt.

The RBNZ’s track record with forecasting in the past couple of years hasn’t been good.

As an example, this week it forecast unemployment will rise to 5.7 per cent by early 2024. But in November 2020, it was expecting unemployment to rise above 6 per cent. Instead, it plunged to record lows.

Signs seeking more workers have gone up outside businesses all over New Zealand during a period of low unemployment. Photo / Northern Advocate, File

When it comes to monetary policy, this RBNZ regime has a track record of doing too much rather than too little.

It delivered too much stimulus in Covid’s wake stimulus and now it is prepared to engineer a recession to beat inflation.

The RBNZ has said it follows “the path of least regrets”. It now seems to see a more pessimistic inflation outlook as the most prudent.

Inflation has proved worse than expected. It will continue to be worse than expected until (possibly quite suddenly) it isn’t.

It is important to remember that forecasts aren’t predictions. They are best estimates based on available information and historic precedent.

This pandemic was unprecedented and a lot of economists have had their forecasts wrong. Those economists, including those at the RBNZ, will just keep adjusting their outlook as new data emerges.

The numbers presented by the RBNZ on Wednesday are its current base case with an upside and a downside scenario built into the model.

In other words, there are two directions in which these forecasts can be wrong. Things could go better or they could go worse.

Thanks to the topsy-turvey nature of an inflationary economy, both scenarios have a silver lining.

If the economy slows faster than expected then interest rates won’t need to rise as high as forecast. Or we might avoid recession.

There is a third, less palatable, scenario: inflation stays high through a recession with rising unemployment.

This seems unlikely given the most difficult piece of the inflation puzzle is now the domestic labour market.

It would take another external shock, spiking oil and food prices, to derail the RBNZ’s current strategy. Strategy is very much what the RBNZ has laid out in its MPS this month.

With the inflation stakes so high, there was nothing left to be gained in being optimistic.

If the forecasts are wrong - as they were through the height of the pandemic - then reality will deliver a pleasant surprise on the upside.

It’s always better to underpromise and over-deliver.