Source: Radio New Zealand
New Zealand’s economy had barely grown in the past three years and inflation had risen. RNZ / Quin Tauetau
New Zealand is in a better position than Australia to weather the inflation effects of war in the Middle East, HSBC’s chief economist says.
Paul Bloxham is the economist who described New Zealand as a “rockstar economy” in 2024.
But he says the fact that we are far from that position now may actually make the looming disruption easier.
He said the Reserve Bank, updating the official cash rate on Wednesday, was better placed than the Reserve Bank of Australia was two weeks ago, or was likely to be at its next meeting.
New Zealand inflation was already close to its target band and the economy had spare capacity, making it less likely that the oil-driven spike in inflation would become embedded in inflation expectations.
After the pandemic, the Reserve Bank took a much tougher line on inflation than Australia’s central bank did.
“Lifting rates earlier and by more, driving the economy into a recession to get inflation to come down. In contrast, the RBA took a more softly softly approach, seeking to maintain full employment and accepting that inflation would fall more slowly.”
New Zealand’s economy had barely grown in the past three years and inflation had risen.
Australia’s economy had kept growing and unemployment has stayed low but core inflation had remained well above target.
“Given the nature of the shock that’s now arriving to the global economy, which is one which is going to push inflation higher, New Zealand’s in a bit of a better spot than Australia is because inflation’s already lower in New Zealand,” Bloxham said.
“It’s closer to the RBNZ target. I think the other thing is the economy itself has got excess capacity, which means that it’s less likely that the higher inflation is going to get through to higher inflation expectations if the labour market has got more spare capacity, which New Zealand has.
Then workers will have less bargaining power to be able to demand higher wages in the face of the higher inflation and businesses aren’t able to pass on their cost rises quite as easily into their prices and so those are at least two mechanisms that you can point to where having an economy that’s got lower inflation and more spare capacity puts the country in a bit better, a bit of a better spot given the nature of the shock that’s just arrived.”
He said the risk for Australia was that workers would demand higher wages and might be more successful.
“In an economy that’s in an upswing as Australia’s have been, businesses might be able to pass on more of their cost rises through to their final prices.”
He said it might be cold comfort for New Zealand households that having had three years of a weaker economy meant the shock was easier to deal with but it should still be some comfort.
“It’s been a tough time for New Zealand to try and to get inflation down but now the challenge is that in Australia …the economy has to have a downturn.
“The question is only really how big is that downturn going to be and whether and how that downturn comes about.
“The global economy is facing this huge negative supply shock and that’s as a consequence of what’s going on in the Middle East so it’s a question of how do you manage your way through it …New Zealand’s in a slightly better spot for managing it way through it, it turns out because a lot of the tougher times have already happened.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
