Learning to Adapt

Source: Nigel Tutt, Priority One Chief Executive

The prospect of an interest rate induced economic downturn in 2023 has become distinctly real over the past week, with the Reserve Bank of New Zealand governor Adrian Orr signalling the Bank’s intent to engineer a recession.

RBNZ’s primary goal is to keep inflation at a low level, and inflation is a problem for us at the moment, running at 7.2%…..way above the 1-3% range that we would talk about in normal times. Drastic action in the form of a very sharp increase to interest rates should see inflation reduce over time. It will do this by increasing borrowing costs for individuals and businesses, leading them to spend less and cooling prices.

High inflation is undoubtedly bad, but unfortunately, action taken to control inflation will also come with nasty side-effects. The Reserve Bank only has one real weapon in the form of the official cash rate, a blunt tool that targets the good and bad parts of the economy equally.  To get prices to stop moving up as quickly, things need to become much harder for businesses and households so that they spend less. To date, households have mainly been affected by higher prices, but will now be faced with much higher costs to service debt, and critically the prospect of unemployment as business growth prospects dim. A tougher job market is intentional as low unemployment means that people keep spending and the competition for wages is higher – not factors that are conducive to reducing inflation. Unfortunately, in past recessions, those that are less privileged in the job market get hit the hardest.

This is by no means a problem specific to New Zealand, most countries in the world have the exact same situation, with some worse as energy prices in Europe bite. Most are taking precisely the same action.

So how will this economic slow-down affect the economy in our region? My pick is that we’ll certainly feel it, but not quite as bad as other regions might. An obvious area where businesses will be uncomfortable is retail and hospitality, where consumers will be less likely to part with their money than we have seen in past years. Construction is the area where I would expect that we will see the most pain however, as residential house sales dry up and commercial projects are harder to make work. This is a sector that is one of our largest employers too, around 12% of our workforce. Hopefully some of those staff can be deployed to other sectors that need staff, such as infrastructure.

On the positive side, businesses in Tauranga and the Western Bay have proved strong over the past couple of years, many of our exporters have good market positions and unemployment is arguably too low anyway. I expect that these factors will see us through the next year in reasonable shape.