Economic Weekly: Playing off the front foot

It sounds bizarre. After all, we’re still in a global pandemic with the borders shut and our formerly top export earning sector on the ropes. But the NZ economy is increasingly at risk of overheating.

The supply side of the economy is clearly restrained by the closed border and disruptions to global supply chains and inventory levels. At the same time, the strength of demand continues to outstrip even the most optimistic of forecasters. The associated lift in cost and inflation pressures is increasingly proving too worrisome for central banks to keep waving away as entirely temporary.

Illustrative of this solidarity in demand, we got more evidence last week that housing market heat is being released only gradually. It was enough for us to act on the risk we flagged last month and nudge up our house price expectations for calendar 2021 (2022 expectations were lowered). But the show-stopper was of course first quarter GDP figures. The 1.6% quarterly surge in activity blew everyone’s forecasts out of the water, as kiwis continue to front-foot pandemic uncertainty and build and spend like crazy. No one was more surprised than the RBNZ who, admittedly, didn’t have the benefit of the most recent GDP indicators. Overall economic output was revealed to be 2.7% stronger than the RBNZ forecast less than a month ago. That’s a surprise equivalent to a year’s worth of growth! All the while, labour market data and anecdote points to a market that is getting tighter by the day.

We’ve previously written about the markets vs. central bank interest rate ‘battle royale’. We’ve tended to side more with financial markets’ view that central banks would ultimately need to bring forward their stimulus withdrawal plans. This now appears to be (slowly) playing out. The highly influential US Federal Reserve was the latest to shuffle forward its plans last week. It tentatively pegged two rate hikes for 2023, where it previously had none. Hardly imminent sure, but it was the sniff markets were waiting for and wholesale rates around the world pushed higher still. 

In NZ, our forecast for a May 2022 lift in the RBNZ’s Official Cash Rate has become the consensus in the wake of last Thursday’s GDP/FOMC double act. But, in light of the above, we’re now weighing the risk that the RBNZ opts to get off the mark even earlier than May. The fact the US Fed is shuffling forward and the NZ dollar remains remarkably restrained may leave the Bank more comfortable in doing so.

Whatever the exact meeting date, the message for borrowers is that record low rates are on borrowed time. Two of our recent publications explore the issue in more detail. We flagged the risk of higher wholesale rates in our latest Corporate Hedging Toolbox and outlined some hedging considerations for corporates. Meanwhile, our latest Home Loan Report examines the moving parts for mortgage borrowers and nudges up our mortgage rate forecasts.

Finally, the local economics news slows right down this week. But of course the sporting excitement reaches fever pitch, with our beloved BlackCaps chasing cricket’s biggest prize in England. Here’s hoping the weather holds off and the team can stay on the front foot.

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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.