Economic Weekly: Focus turns to inflation

The NZ economy has performed well throughout the COVID-19 pandemic, particularly compared to most of its international peers.  But the economic bounce back has not been evenly shared across NZ, as highlighted by Nat Keall in our most recent Regional Scoreboard, released today.  The North-South divide has widened further over Q1 2021, as the South Island appears to have taken the brunt of the impact of international border closures. Tourism hubs like Queenstown continue to face significant challenges, with employment numbers down 5.2% from the beginning of last year. In fact, in Q1 this year Otago was below the national average on every other metric we measure, posting a huge 27% fall in construction.  Rural regions generally outperformed the major urban centres on the Scoreboard, with the resilience of the country’s primary sector helping support the broader New Zealand economy through the pandemic.

With NZ’s economic recovery well established, and the global economic recovery now firing, focus is now shifting to the rapid lift in costs and inflationary pressure.  The recovery in demand in NZ over the past 6 months has come at a time when resource constraints are becoming more acute.  In NZ, we are predicting annual CPI inflation to lift sharply from the second quarter of 2021, to reach 3.2% by the end of this year.  This week’s NZIER Quarterly Survey of Business Opinion (6th July) will provide an indication of how much of the rise in cost pressures is being passed onto consumers, with further confirmation to come in the following week’s Q2 CPI release (16th July).

Central banks have become more wary of leaving monetary settings too stimulatory in an environment of improving demand and a quickly building on inflationary pressures.  The RBNZ adopted an explicit tightening bias in May, with a number of US Federal Reserve officials recently noting that the time to normalise interest rates may be sooner than previously indicated.  This week the focus shifts to the Reserve Bank of Australia.   At Tuesday’s board meeting the RBA will provide an update on its yield curve control and the bond buying program.  Despite the current COVID-19 outbreak in Sydney, our colleagues at CBA expect the RBA to start tapering the pace of bond purchases from September, either via scaling back the amounts being purchased or spreading out the purchases over a longer period of time. The RBA may also use the opportunity to move to a more flexible programme.  CBA recently updated its Australian interest rate view, and now expect the RBA to start lifting the 0.1% cash rate in November 2022.  Nevertheless, we still expect the RBNZ to be towards the front of the rate hike queue, starting with a 25bp hike in the OCR in May next year or possibly sooner if the economy continues to perform well  jane.turner@asb.co.nz

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Jane Turner

Senior Economist

Originally hailing from sunny Nelson, Jane moved to Auckland to join the ASB team in 2008.  As Senior Economist, Jane's main focus is co-ordinating the team’s macro-economic forecasts.  In this key role, Jane was thrilled by the team’s twice consecutive win of the Consensus Economics Forecast Accuracy award.   

During her decade-long career in economic forecasting, Jane has gained a thorough knowledge of the New Zealand economy.  Her current focus is on New Zealand GDP growth, including both manufacturing and the construction sectors.  She has spent time forecasting most sectors of the economy, including inflation, trade, housing, labour and financial markets.

Prior to joining ASB, Jane honed her macro-economic forecasting skills at the Reserve Bank of New Zealand.  Jane is a qualified scarfie, attending Otago University and graduating with a Bachelor of Commerce in Economics with 1st class honours.  In 2014, she took a career break from ASB to travel the world and learn to snowboard.

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.

Mike Jones

Senior Economist

Mike joined ASB in 2019 armed with almost 15 years of experience in applied macroeconomic and financial markets analysis.

Mike's career has been all about distilling the risks and opportunities of economic and financial market trends for business. Basically asking the "what does it all mean" question. Mike's enthusiasm and skill for drawing out practical, commercial insights from the murky world of economics has been honed over a relatively broad base of experience.

After spending the early part of his career on the tools at the Reserve Banks of both NZ and Australia, Mike had a lengthy stint at BNZ where he was NZ’s top-ranked currency strategist. His regular and topical macro research also saw him pick up several FX forecast accuracy gongs from Bloomberg.

Drawn in by the prospect of putting strategy into practice, Mike moved from Wellington to Auckland in 2013 to join Fonterra as GM Treasury Risk Management. In this role, Mike lead Fonterra’s macroeconomic research output, and was responsible for the strategy and execution of Fonterra’s foreign exchange, debt, and interest rate hedging programmes.