Rodney Jones, director of Wigram Capital Advisors, isn’t very optimistic about the New Zealand economy these days.
Why doesn’t Jones have hope? New Zealand may no longer be a zero Covid country, but after a slow start we have high immunization coverage, unemployment is low and the property market is stronger than ever.
And don’t forget this: our largest city is on the verge of breaking out of a three-month lockdown.
There’s nothing like an influx of post-containment spending to really boost the economy, right?
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“I was very optimistic in 2020 because I thought elimination worked like a strategy,” Jones said.
“Today I’m more pessimistic because I think living with the virus is going to be difficult, and I think our main trading partner will not grow rapidly, and we will not have tourism.”
Too pessimistic, surely? If New Zealand takes a bad turn, the Reserve Bank is still backing us with interest rate policies that could cushion the blow, right? Not so much, according to Fisher Funds Fixed Interest Director David McLeish.
“What we are currently evaluating in New Zealand interest rate markets is the fastest and steepest cycle of all time.”
Jones says that in 2022 New Zealand may well experience what other countries have: a major public health crisis in winter and a community reluctant to return to the office or visit cafes and bars.
In short, an audience that isn’t reverting to their old spending habits but instead acts like they did during the lockdown, which means lots of online orders, less spending on services, and no quick return to the heyday of. the end of 2020.
A recent report from the International Monetary Fund seems to back it up. This signals that the pandemic-related shift in European spending patterns from goods to services continued even after the lifting of public health restrictions.
“What we’re finding is that we can’t go back to normal,” Jones says.
If this happens in New Zealand, it means tough times for the service sector and increased inflation due to international supply chains already struggling to meet growing demand for goods.
Jones thinks a lot of people are denying this, including the Reserve Bank. He took a stance on interest rates and inflation out of sync with our trading partners, signaling more steep rate hikes than much of the rest of the world is currently comfortable with.
While such a rate hike could kill rising inflation, it could also make it harder for the economy to recover by making the cost of capital higher.
Jones also doubts that inflation will lead to the type of persistent wage-price spiral seen in the 1970s.
Yes, prices are going up, but he argues that wages are not rising as quickly to keep up.
Jones says the cure for higher prices is sometimes higher prices, which means demand could decline when prices eventually get too high and inflation could ultimately prove to be “transient.” In this scenario, a rise in interest rates at the same time could only make matters worse.
“What we have to react to is a wage-price spiral, right now we just have higher prices.”
That’s why other central banks are largely waiting to see what happens, especially the Reserve Bank of Australia, Jones said.
Although it is also fair to say that there is no clear consensus on which of these central bank strategies is likely to work. All of these rate hikes are also subject to change, as the US Federal Reserve has already presented its own rate hike plans.
Assuming New Zealand continues to lead the pack on rising interest rates, Jarden Managing Director and Head of FICC Matt Blackwell says this brings the prospect of a higher New Zealand dollar in 2022, which could affect the competitiveness of our exports.
This will be a scenario that many companies haven’t seen in a while. Blackwell saw such moments early on in his career. He worked for the Apple and Pear Marketing Board when he hedged currencies three or four years in advance because high interest rates were pushing the New Zealand dollar up.
“At that time you had a very, very large interest rate differential in favor of New Zealand.
“New Zealand interest rates were considerably higher, so the point forward was important. So there was a real incentive to cover up ahead,
“The risk with hedging is that you’re stuck on that amount and that rate… if the outlook for commodity prices changes and supply or demand changes, you could go from an under-hedging position to an under-hedging position. – discovery and this has a real financial impact.
The currency hasn’t moved that much lately. After the global financial crisis, central bank policies began to synchronize as everyone cut interest rates or engage in quantitative easing, but they are now on the verge of becoming out of sync as central banks pursue different strategies.
The Reserve Bank of Australia is “dovish” (keen to keep interest rates as low as possible in the face of inflation), the US Federal Reserve and Bank of England less, other central banks like that of Sweden, have already signaled that they may seek to keep interest rates at zero for four years.
The Reserve Bank of New Zealand is one of the more “hawkish” (wishing to reduce inflation by raising interest rates), and Blackwell sees the potential for a divergence in the different interest rates between the New Zealand and other economies.
In the absence of currency controls, this could fuel the carry trade with people borrowing in a low interest currency like the Australian dollar and converting that borrowed currency into New Zealand dollars – thus increasing the value. of our currency and profit from it.
It all depends on whether the Reserve Bank follows through on its planned rate hikes and other economies maintain their own plans in the face of rising inflation.
Even if such a divergence occurs, Jones sees a myriad of factors thwarting the New Zealand currency from floating higher, the most important of which is China.
“Like us, they’ve had very high house prices, and a big part of their economy has been the housing market and building construction.
“Xi Jinping said houses are made for living, not for speculation, and they have a whole set of policies where they keep demand for housing away.
“So they’re in a housing crisis and in an economic crisis, but it’s the one they choose. “
Jones is referring to what Communist Party of China General Secretary Xi Jinping sees as a “window of opportunity” for China to eliminate key vulnerabilities in its financial system by accepting a slower growing Chinese economy.
These vulnerabilities include their high reliance on property and construction, which constitutes almost a third of the economy according to some measures. These imbalances created Evergrande, the country’s largest developer, which has racked up over $ 300 billion in debt, bills it might not be able to pay.
There are hints of new roadblocks to come, not only from China’s crackdown on some of its most profitable tech companies, but also from the United States. A recent report to Congress suggests that the United States may consider put in place major restrictions on capital flows between China and the United States.
China is New Zealand’s biggest trading partner, but now we will face a China that is no longer engaged in the rapid growth of the past.
All of this at a time when Covid-19 has also killed one of our great sources of currency: tourism. The government does not seem keen to welcome tourism back in the form we once had, and even if it was, it is not clear that people want to travel the same way as before.
Jones says it’s likely New Zealanders will start traveling overseas before inbound tourism returns.
The government has also signaled its desire to stop welcoming more tourists, and it remains to be seen whether its “pivot” to higher-value tourism really makes up for letting fewer tourists through. the doors.
“To get a stronger New Zealand dollar, you would need a strong China. And you need the return of tourism and international travel, ”Jones says.