Brian Fallow: Why worry about the economy? Let me count the reasons


Businesses chasing the consumer’s dollar are liable to find 2022 hard going. Several influences on people’s ability and willingness to spend come to mind which are downright negative or at least uncertain.

They are: inflation and the Reserve Bank’s response to it; the impact of the Omicron variant and any public health measures to flatten the curve; the waning of the wealth effect as house price inflation eases; the effect on net migration flows as the border reopens; the potential softening of export prices if China’s growth continues to slow; and the emissions reduction plan due to be released in May.

Apart from that it’s all good.

The inflation indicators in this week’s quarterly survey of business opinion (QSBO) from the New Zealand Institute of Economic Research were concerning.

A net 52 per cent of firms reported raising their selling prices and a net 65 per cent say they intend to. Both readings are more than twice their long-run averages.

Many workers will struggle to command pay rises to compensate for a higher cost of living, if a survey by the Council of Trade Unions is anything to go by. Their real incomes — and discretionary spending power — will fall.

But conversely, the more people who are able to take advantage of a tight labour market and command higher pay, the more the Reserve Bank will fret about the risk of a wage/price spiral taking hold and tighten policy more aggressively.

It raises interest rates, after all, to suck demand out of the economy to the point that firms are deterred from passing on higher costs for fear of losing sales.

That may not be the case yet, but as the substantial bulge of mortgages which come up for a rate reset this year flows through, the spending power of those households will be crimped.

Then there is the wealth effect. One of the ways the monetary easing introduced when Covid hit was supposed to work, and probably has, was by low interest rates pushing up asset prices, especially for houses and shares, and triggering their owners’ willingness to spend a few cents in the dollar of that increased wealth, even if they have to borrow to do so.

A couple of pre-Covid estimates from the Reserve Bank of the size of that effect — the marginal propensity to consume — are 2.2c and 3c in the dollar of additional wealth. And the statisticians tell us the net worth of New Zealand households increased by $460 billion or nearly 25 per cent in the year to last June.

But this week’s data from the Real Estate Institute provide tentative evidence that the period of runaway house price inflation may be, at last, coming to an end. If so, the associated waning of the wealth effect will leave quite a hole in private consumption.

What else? Oh yes. Omicron.

You would expect some effect on consumer behaviour when this highly transmissible variant sweeps through the country, as well as the disruptions from large numbers of people off work sick at the same time and whatever public health measures are imposed to flatten the curve and reduce pressure on hospitals.

Widespread infection will also only strengthen the case, already stark in the levels of skill shortage reported in the QSBO, to reopen the border.

But airports have departure gates as well. We should expect a resumption of the net outflow of New Zealanders once the threat of being stranded overseas is removed, especially foryoung people despairing of home ownership in their native land.

At this stage, the net effectthese two offsetting forces at the border have on aggregate demand, not just for housing but for consumer goods and services, can only be guessed at.

But we are unlikely to see a return to the situation prevailing for several years pre-Covid, when net migration accounted for two-thirds of population growth.

Meanwhile, a rather unheralded factor underpinningthe economy’s surprising resilience has been strong export prices, and the associated boost to farmers’ incomes. ANZ’s commodity price index rose 28 per cent in New Zealand dollar terms last year.

But there is no indestructible ratchet under those prices, and the slowing of China’s growth rate, to what is for it a mere 4 per cent over 2021, is an ominous sign on that score.

Finally, 2022 is supposed to be the year when we get serious, after decades of empty rhetoric and procrastination, about climate change.

The Government’s delayed emissions reduction plan is due to be released in May. If it does not impose costs on businesses and households, it will not be much of a plan.

Then there will be the outcome of He Waka Eke Noa, the consultation with farmer groups to devise a system for quantifying and pricing emissions at the farm level — emissions which account for about 48 per cent of the national total.

So far the signs and portents are not encouraging. A draft plan put out for discussion only envisages reductions of 1 per cent. That will not cut it.

If that head in the sand mentality prevails, the likely outcome, given the provisions of the Zero Carbon Act, will instead be that agriculture will be included in the emissions trading scheme at the processor level. That one-size-fits-all impost would be less efficient and unfair to those farmers who are taking action to reduce emissions.

Either way, the impact on farmers’ incomes and spending will be negative. It is called the primary sector for a reason. What happens there flows through via country towns ultimately to the main centres.

But illuminating the big picture on the great issue of our day and age this year will be reports from the Intergovernmental Panel on Climate Change on global impacts and policy options, and domestically a national adaptation plan. They are likely to make sobering reading.

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