We haven’t learnt all that much new over the past two weeks since my last column which greatly impacts the outlook for NZ interest rates. As is the case for most other economies at the moment, our central bank is signalling that rate cuts lie ahead, but as yet remains unprepared to initiate them.
Is inflation under control yet?
The common problem is that although inflation rates have come down, they remain above the 2% level which central banks generally target, and there is not yet confidence that inflation will actually settle at 2%. There are fears that once reached, that 2% rate may be followed by a bounce back up in inflation to over 3%. So, what is happening is that very close attention is being paid to indicators of where inflation is headed.
The problem there for New Zealand is that those sorts of indicators do not unequivocally signal that the inflation outlook is safe.
As previously noted for instance, while the net proportion of businesses planning price rises has averaged 25% in the ANZ’s long running Business Outlook Survey, the latest reading is a net 48%. As yet too many businesses still plan to pass on cost increases into their selling prices.
That sounds perfectly sensible. But the aim of tight monetary policy is to make businesses become fearful of the decline in sales which will result should they pass on cost rises and force them to consider either cutting margins or boosting productivity.
There is as yet little evidence that productivity growth is receiving any special new focus from the business sector
In fact the value of capital goods imports over the past three months is running about 17% down from a year earlier.
That said, boosting productivity through investment isn't the only way to handle higher costs. Another method is for businesses to stop producing low margin products and to focus their attention on products and services where they earn their best margins. The third way of course is to trim costs by laying off staff.
The government is forcing the public sector to do that after six years of unfettered growth under Labour. But these cutbacks are for reasons of driving efficiency and getting the books in better shape – not avoiding raising selling prices which for most government services do not exist.
In the private sector we are now seeing more evidence of staff layoffs and I can see from my various monthly surveys that people are becoming more concerned about their employment situation. Whereas in late-January 14% of real estate agents said that buyers were concerned about their employment, in late-February that jumped to 23% which is the highest level since 2020.
Also, from my monthly Spending Plans Survey the net proportion of consumers expecting their wages to rise went from a net 0.7% expecting declines in February to 2.9% this month.
It's taking a long time for the tightening of monetary policy from late-2021 to have much impact in the labour market
That is because of the extreme shortages of skilled and unskilled staff some 18 or so months back when the unemployment rate was down near 3.2%. The rate is now back to where it was at the start of the pandemic at 4%.
But this rate was not consistent back then with extreme job insecurity, so it is unsurprising that we are not yet at the point where people are highly scared of their employment prospects. But we are getting there in some sectors including parts of hospitality, retailing, and residential construction.
Speaking with a recruitment expert however it is clear that in many sectors there remains a shortage of highly skilled people
The migration boom underway has delivered a plethora of low-skilled people and that is where wages restraint is likely to now be felt to a large degree. But hoarding of skilled people may well continue.
High uncertainty remains about how rapidly inflation will fall and that is why borrowers should consider a range of terms in the six months to two year time period for fixing their interest rate exposure.
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