It is clear New Zealand’s economy is starting to slow. That’s not especially surprising since the economy has been growing steadily since 2011, and given the international worries around US-China trade tensions, Brexit and general economic uncertainty.
NZ quarterly growth over the last decade. Source: tradingeconomics.com
As a response to these issues earlier this month the Reserve Bank cut the official cash rate from an already low 1.5% to 1%.
However, at the same time employment remains strong, with the latest figures showing unemployment dropping to 3.8%, the lowest figure in 11 years. So there is no need to panic yet, but with storm clouds on the horizon is time to prepare.
Previous experience shows these changes can be sudden. Around the time of the GFC unemployment rose from 3.3% in December 2007 to 6.5% in December 2009. Interestingly unemployment stayed stubbornly high for 3 years peaking at 6.7% in the September 2012 quarter, then trending steadily down.
The already deep cuts to monetary policy means the Reserve Bank has limited room to move. In the Global Financial Crisis, the OCR was cut from 8.25% in June 2008 to 2.5% in April 2009. This slashed household mortgage payments, allowing homeowners to increase spending and pay down debt.
NZ official cash rate over the last decade. Source: tradingeconomics.com
Given the interest rate is already so low, the impact of monetary policy will be minimal, even if the Reserve Bank tries innovative solutions like negative interest rates of quantitative easing.
As a result of this forecast slowdown, calls are growing from across the political and institutional spectrum for the government to stimulate the economy. Bernard Hickey of Newsroom has a good article on this here. The governor of the Reserve Bank Adrian Orr has also increasingly been talking about the need for some form of fiscal stimulus.
So far the government has kept quiet. Thankfully they have loosened their ‘Budget Resposibilty Rules’ for the next term of government, though they always had an out to allow for the government to respond to major downturns. In May Grant Robertson signalled that the debt target would be increased from 20% of GDP to 15-25% of GDP. This could allow the government to borrow an extra $15 billion.
Note in response to the 2008 GFC the National Government borrowed an extra $50 billion between 2008 and 2014, with net debt increasing from 5% of GDP to around 25% in 2013, though the Christchurch earthquakes obviously contributed towards this after 2011.
NZ Government Debt. Source: tradingeconomics.com
NZ Government Debt. to GDP ratio. Source: tradingeconomics.com
Therefore it would be prudent to at least start planning for a major fiscal stimulus program. The government has a range of options to do this including infrastructure investment, cash handouts and tax cuts. None of these can be done overnight. Major infrastructure especially requires preparation, as large projects can take many years to make it through the planning, design and tendering process. The government will also the projects contribute towards wider goals such as improving run down hospitals and schools, road safety, addressing climate change and designing new transport systems for our large cities.
My next series of posts will look further in detail at what the options their are for fiscal stimulus, and the preparation that the government needs to urgently start doing.