Muddle, Bubble, Toil, or Trouble?

The line above could almost be interpreted as the menu of economic outcomes available to the Reserve Bank, as it continues to ponder which alternative policy tool, if any, to deploy next. The show-stopper among these – a negative OCR – is looking a little less likely than it was a month ago. Not only has the economy continued to impress with its post-lockdown resilience, but certain sectors are positively humming. This highlights the uneven way COVID stimulus has filtered through the economy, and the care required in applying it. Beset by supply-side rigidities, stimulus has simply inflamed the excess demand obvious in the housing market (see ‘Chart of the Week’). Our latest Home Economics publication last week marked up our house price forecasts significantly. Equity markets, too, remain on a tear with the NZX50 up 46% since March. The risk is thus increasing we end up with “bubble”-like conditions in some sectors, even as others continue to “muddle”.

The weekend delivered an outright majority to the Labour Party. It’s the first time under the MMP electoral system that one party won enough seats (>60) to govern alone (acknowledging the results are not yet final). The result wasn’t a complete surprise given pre-election polling, and financial markets have taken the outcome in their stride. The emphatic result means we’re unlikely to see weeks of coalition wrangling as in past elections, something that can drag on business and financial market sentiment. Attention should move on quite quickly. We’ll provide a full run-down on our take in a note to be released later today. 

Attention this week will be on the US election, and in particular the rising chances of a Democratic “clean sweep” of the White House, Senate, and House. Locally, Friday’s CPI and tomorrow’s QSBO will be worth watching. We expect the former to reveal a lift in annual inflation to 1.7% yoy.

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Mark Smith

Senior Economist

Mark joined ASB in 2017, with over 20 years of public and private sector experience working as an economist in New Zealand and the UK.

His resume includes lengthy stints at ANZ and the Reserve Bank of New Zealand, and he has also worked at the Bank of England, HM Treasury and the New Zealand Transport Agency. Mark's areas of specialisation include interest rate strategy, macro-economic analysis and urban economics.

Born and bred in the Waikato, Mark studied at Waikato University where he graduated with a Master of Social Sciences, majoring in Economics.

Mark's key strengths are the ability to use his extensive experience, inquisitive nature, analytical ability, creativity and pragmatism to dig a little deeper and to deliver common sense solutions to tackle complex problems.

When not at work Mark likes to travel, keep fit and spend time with his friends and family.