Liam Dunn: Goodbye to Covid, it’s time to take our economic medicine

opinion:

New Zealand passed a major milestone last week as it lifted the last sweeping public restrictions aimed at curbing the spread of Covid-19.

Economically, we have also marked the end of the Covid era.
Hopefully, it will be the last GDP dataset directly affected by the virus.

Q2 GDP showed a big bounce (up 1.7%) from the Omicron wave, as returning tourists rushed to the rescue and headed into recession at the pass.

Good news then.

But recession or not, we cannot avoid the recession we face in the coming months.

Unfortunately, labor shortages and rising prices have not abated with the linear progression of Covid infection rates.

That is because an epic battle is still being waged between the forces of inflation and deflation.

And since these powers are actually all part of the same beast, it’s a complicated matter.

When one gains the upper hand, it immediately gives power to the other.

So when the US reports higher-than-expected inflation, the market falters. Because this means higher interest rates will be needed…which means the economic slowdown could be more severe. This means that higher interest rates may become unnecessary, causing the market to rebound…

And it’s like an ancient Greek fable, not smart enough to memorize and couldn’t be found with a quick Google search.

This means that linear recovery is practically impossible.

Taking two steps forward and one step back is the best we can hope to do until the global economy finally returns to equilibrium.

So you can be relieved to hear the bad news that the economy is slowing down, or worry that it will recover in much the same way.

It’s something that should keep both tribes of the political playground happy.There’s certainly no shortage of opinions and arguments.

That was evident in the key questions posed by last week’s GDP data.

Was it too strong? Is it just an indication that inflation risks are rising and the Reserve Bank needs to raise interest rates?

ASB and ANZ economists think so, raising their official cash rate forecast peaks to 4.25% and 4.75% respectively.

Others, however, suggested that there had been enough bad financial news to reassure them.

Household consumption fell by more than 3% in the quarter, which could cause the Reserve Bank to worry that rate hikes are about to begin.

In any case, the RBNZ already has a bright outlook for Q4 growth of 1.8%.

And finally, the financial markets had their way with the data.

But those of us who worry that domestic data are still too strong may be worried that the global outlook for the year ahead will be very bleak from a new World Bank report. I can’t.

“Even a modest hit to the global economy over the next year could plunge us into recession,” the report said.

A quick look at the world’s news pages is enough to highlight a few things that could result in that “moderate hit.”

Europe’s wars, extreme weather, and a strange China-backed zero Covid corner all stand out.

A slowdown in China’s economic growth poses a serious risk to New Zealand as it will hit export prices of commodities hard.

That said, as I said, this is probably good news for global inflation.

In the meantime, we will continue on the same path of inflation-fighting policies as the Americans.

In other words, no matter what happens in the world, higher interest rates will increase self-harm.

The complication is that regardless of how hawkish the RBNZ is, we are at the mercy of the Americans.

That’s because the US dollar dominates globally.

If the Federal Reserve raises interest rates, it will boost the US dollar. This is good for the US fight against inflation and makes imports cheaper.

But bad news for all other countries whose currencies are relatively depreciating.

The kiwi dollar fell below 60 cents last week despite an aggressive rate hike cycle.

Some currency analysts see a drop to around 57 cents in the near future.

This drives up import costs and goes against the fight against inflation.

So until inflation builds up in the US and the greenback eases, it will be hard work for the rest of the world.

Unfortunately, in addition to rampant inflation and recession, there is a third risk.

This economic recovery is a balancing act, and too much balancing can be a problem.

A World Bank report warns of “generalized stagflation.”

That is, if policymakers are too cautious, everything risks stalling as inflation remains too high for comfort and growth is too weak to drive new wealth creation.

There is a big political element to this. Because it goes against the cautious approach of the incumbent government that real economic pain is needed to beat inflation.

Voters hate financial pain. No government, whether they are left wing or right wing, wants to plunge their country into recession.

That’s why we have an independent central bank – to deliver unpalatable drugs.

So, hooray to skip the recession, hooray to put the Omicron wave behind us.

But unfortunately, when it comes to economy, remember that it’s only half the prescribed dose.