The cost of living might soon be the least of our worries as recession starts to bite.
OPINION
It’s harrowing to watch the economic data deteriorate, corporate profits shrink and the job market turn against workers.
I suppose we should take heart that monetary policy is working. It’s doing what it is designed to. It’s sucking the life out of the economy.
It’s not a nice metaphor, but it’s all a bit like chemotherapy. This is a cure that makes the patient sick before it makes it better.
It is an ugly medicine with serious side-effects.
Using interest rates to constrict the money supply has just one virtue - it works. Adjusting the cost of borrowing goes straight into the bloodstream of the modern financial system.
Attempts by governments to regulate against inflation with price and wage controls just deal with the symptoms.
I’m not a supply-side economic zealot.
I see the use of both Keynesian-style intervention and hawkish Moneterism as a trade-off, a balancing act that our policymakers need to juggle in their efforts to ensure both stability and fairness in the economy.
There is a time and place for both approaches. And that broadly has been the New Zealand approach for 40 years.
The divergence between the two major parties is not really so wide when we get under the hood of their economic thinking.
The timing of this cycle hasn’t landed well for Labour. The party must surely have hoped we’d either be further along, with more conclusive evidence that inflation was beaten and the prospect of rate cuts coming into view.
Whether it would have made any difference is now a moot point, but maintaining policies designed to ease the cost of living pain (like the petrol breaks and extra family support payments) may have just delayed the inevitable.
The cost of living crisis still features heavily in election debate about the economy, but I fear that’s already backward looking.
The biggest issue for the next government will be jobs, not grocery prices. The employment market has turned on a dime.
Topline unemployment figures will flatter when they land in November. They’ll still be well below historical averages.
But the trend will be clear and worrying for many workers.
People aren’t losing jobs en masse yet. But companies have stopped hiring.
Job ads are down and the number of applications per job is up.
Now would be a bad time to lose your job. But six months from now might be even worse.
Whoever is in power when the next release of inflation data lands on October 17 (the Monday after the election), we are committed to this path of prescribed recessionary medicine.
I don’t use that chemotherapy analogy lightly. When we get into the bit where people start losing jobs then economic theory becomes very real and very personal.
It’s all very well writing reassuring words about bracing ourselves for the storm, holding our nerve and not panicking as we head into a recession.
Those sorts of words make sense when we are in an uncontrolled slump like the Global Financial Crisis caused.
But this is a deliberately engineered rebalancing act.
That makes the current state of affairs seem more cruel than usual.
A small but vulnerable, indebted segment of the population - specifically younger people who recently bought houses - will face a brutal overlap as crippling interest rates converge with the reality of redundancies.
If there is a bright spot, it is that the Reserve Bank controls this process. So in theory, if the economic downturn starts to bite too hard, rates can be cut sooner.
My hunch is they will start to fall sooner than 2025 - which is where the RBNZ currently has them timed in its forecasts.
That’s because I’m feeling very bearish about the Chinese economy and what the slowdown there means for New Zealand’s commodity prices.
It’s a huge variable over which we have no control and almost no little insight.
The Chinese economy is effectively (by Chinese standards) in recession.
If President Xi Jinping decides to keep toughing it out and letting market forces rebalance things (as he has to date this year) then the downturn could roll on for some time.
That would mean New Zealand also faces a deeper and more protracted recession.
If he decides to unleash a huge dose of economic stimulus - which he has in the past - then Chinese consumer sentiment should bounce and our economy will scrape through.
Who would know what he is thinking? The whole world is waiting with bated breath.
But it matters here more than most places.
Even the most hawkish economists (like those at ANZ who still believe the RBNZ will need to hike the OCR again) are starting to acknowledge the risk.
“We think RBNZ will eventually need to do more to get on top of inflation, but we are closely watching China’s slowdown, which could do the job for it,” they wrote in their weekly wrap on Friday.
It is incredible, and a bit depressing, to consider how little progress New Zealand has made since 1973 (when we were stung by the UK entering the European common market).
Back then we relied on meat and wool exports to Britain, now it’s milk powder to China. But here we are 50 years later still nervously waiting on the policy decisions of one crucial trading partner.