The New Zealand economy grew a staggering 6.4 per cent in the year to September 30. That’s a huge boom, or it would be if these were anything like normal times.
They aren’t normal though and we can all see the economic growth rate is too good to be true.
It is inflated by the recovery from last year’s long lockdown, and the reopening of borders to tourists. A base level of strong aggregate demand has also been maintained in the economy thanks to the enormous volume of fiscal and monetary policy stimulus we saw through the first 18 months of the pandemic.
That stimulus has done its job (and protected our jobs) through the pandemic.
But now we are a paying price in the form of high inflation which we now need to squash.
The Reserve Bank has been rapidly hiking interest rates and - as Finance Minister Grant Robertson was quick to point out yesterday - government spending as a percentage of consumption is already in decline.
Central Government spending was down 1.8 per cent in the September quarter and flat in the previous June quarter. As Treasury’s latest budget update showed trend will accelerate in the next year in tandem with rapidly tightening monetary policy.
Throw in a slowdown in global growth (which means falling export prices) and it all adds up to a much tougher year in 2023.
Both Treasury and the Reserve Bank now forecast we’ll be in a recession from the third quarter of next year. In theory, that’s just in time for the election but the historic nature of the data means we might not know for sure until December.
Opposition parties are entitled to make the most of an economic downturn in an election year.
But we should remember that the Covid pandemic was an economic cost - here and everywhere and around the world.
Nobody should expect to be enriched by what we’ve been through.
What we know right now is the economy has remained stronger and more resilient than economists had expected.
In fact, its remarkable performance has made a mockery of the most gloomy economic commentary in the past year.
Perhaps the worst is yet to come. So far we have avoided the dreaded stagflation (where recession and high inflation overlap).
It may still arrive. But, as a starting point, with unemployment at historic lows and growth at such elevated heights, we appear to be in relatively good shape.
There is a downside to that strength. There’s a risk of sailing into a storm with sails flying at full mast.
That’s why the Reserve Bank’s tone shifted so sharply in November. And why the Government is shifting its tone now.
The persistent economic strength revealed in yesterday’s data won’t make the Reserve Bank’s rebalancing job any easier.
Thankfully, the initial market consensus yesterday was that this does not materially change the outlook for rate hikes, although it does now make another 75 basis point hike in February look more certain.
Batten down the hatches.