Wow, I didn’t expect New Zealand to get back on track so quickly.
It seems like only a few days ago that we were staring into the precipice of fiscal oblivion and stagflation. Now we’re talking about a soft landing. Also, the weather has improved and both the All Blacks and Black Caps are in fine form.
I’m being facetious of course. The precipice is still there. We’re still just an oil shock or a dry summer away from recession. And don’t get me started on the potential for the cricket and rugby results to turn on us.
But it’s true that the economic data of the past few weeks has started to come in ahead of expectations.
That’s prompted a number of local economists to shift their forecasts into more positive territory.
We’re starting to see the term “soft landing” crop up a lot more in economic commentary - both here and in the US.
“Trends in current inflation and growth expectations are both relatively good, all things considered. There is a sense that the rebalancing of the New Zealand economy after the pandemic could have been a lot more harrowing than what we are currently experiencing,” wrote Infometrics chief forecaster Gareth Kiernan in a report released on Friday.
It should also be fairly obvious that none of this bears any relation to last week’s election. We haven’t actually got a new government yet, let alone a set of policies that might shift the economy.
Since mid-September, we’ve seen that the current account deficit is narrowing, that GDP growth is positive, that immigrants still want to come here and that inflation is falling faster than expected. Even dairy prices have started bouncing back.
News this week that the annual inflation rate landed at 5.6 per cent for the year to September had all the local economists ruling out another rate hike in November and several ruling out further hikes altogether.
“We are winning the war on inflation!” declared Kiwibank chief economist Jarrod Kerr.
After all the gloomy economic hyperbole we’ve endured from some quarters in the past year it is worth noting that most market economists always remained fairly sanguine about the scale of economic challenge facing New Zealand.
Give or take the occasional panic about China’s economic growth and dairy prices, I’ve also remained optimistic about the prospect of a soft landing right through this inflationary cycle.
The term soft-landing isn’t a technical one. It’s a popular one that economists and commentators use in relation to central bank effort to slow an inflationary economy.
If we can get through a cycle of rate hikes without tipping the economy into recession, that’s generally considered a soft landing.
Most times, rate-hiking cycles do cause recessions.
Given the scale of the pandemic disruptions and the rapid reversal of monetary policy - delivering the steepest hiking curve in history - sticking this landing was always a long shot.
On that basis, I’ve been applying a more generous interpretation of “soft”. To me, it was always about jobs - getting inflation back down to target range without causing high levels of unemployment. Beyond that, whether we are technically in a recession doesn’t really mean very much.
Forecasters like Kiernan at Infometrics now think we might skip recession altogether, which would be a remarkable achievement from a macro-policy point of view.
I don’t know if I’m that optimistic yet.
While the data has never suggested we are facing a downturn of the scale we went through in the early 1990s or in the GFC years, I still think the toughest bit of the economic cycle is ahead of us. It is darkest before the dawn, as the saying goes.
We’ll feel the squeeze of peak interest rate pain through the next six to 12 months and the cost of living pain will linger.
A falling inflation rate is great news, but prices are just rising a bit less quickly. We’re going to see companies cut costs and unemployment rise.
Even if it remains well below historic levels, the shift at the margins of the job market will be unsettling. We’re also still in a vulnerable spot if global events rock the economy again.
But, broadly, things are following the script. It’s starting to look like Prime Minister Christopher Luxon and his new government will arrive on the fair winds of a cyclical recovery.
As Herald aviation editor Grant Bradley noted when Luxon took over as National leader in 2021, he also got lucky with the timing of his landing and departure at Air New Zealand.
Luxon “took up the top job at the airline at the start of 2013, just as air travel was about to boom. He left it in September 2019, just three months before the start of the worst global health crisis in a century that financially devastated the airline,” Bradley wrote.
“In what was known as the “Golden Age of Travel”, [Air NZ] benefited from the post-global financial crisis recovery, relatively cheap fuel for parts of that time and a huge appetite from a growing middle class to go places.”
As Bradley noted, Luxon “had tailwinds behind him, but he made his own luck, making the airline nimble, moving towards a more uniform fleet, forging and ending critical alliances and quitting routes that didn’t make sense”.
So good luck to him, hopefully those tailwinds pick up and we get our soft landing. That will provide Luxon with an opportunity to do more than fight economic fires and deliver the kind of economic transformation he talked about on the campaign trail. That’s something the country still very much needs - however hard or soft we land in the coming months.