When the Facts Change: Dissension in the RBNZ ranks
The Reserve Bank cut the Official Cash Rate this week, as expected, but one of the six members of the bank's rate setting committee voted to hold the OCR. That surprised markets and pushed up the wholesale interest rates that drive fixed mortgage rates. Bernard Hickey speaks with Kiwibank's Mary Jo Vergara about a very uncertain outlook for rates in the wake of Donald Trump's Liberation Day shock.
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RNZ News
3 hours ago
- RNZ News
Small business sales drop
Photo: 123RF Small business sales underperformed in the second quarter of the year, with weakness concentrated in the North Island. The latest Xero Small Business Insights indicates sales fell 0.1 percent in the three months ended June over the year earlier, which was consistent with the downturn seen over the the past 12 months. The latest sales data was tracking under the long term average of 6.3 percent growth, and well below the 3 percent growth seen in Australia over the second quarter. However, the month of June was the best since April 2024, with sales up 4.4 percent. The agricultural sector was another bright spot with a 11 percent increase in sales in the June quarter, making it the third quarter in a row for double digit growth. However, Xero country manager Bridget Snelling said the resilience of the agricultural sector was not enough to offset weakness elsewhere, with the construction sector hit particularly hard with a 6.4 percent drop in sales. She said the sector's sales had been falling since late 2023, with retail and manufacturing sales also down. "Despite consistent OCR (official cash rate) cuts by the Reserve Bank since August 2024, we're yet to see the expected boost to consumer and business activity. "While there are some bright spots like agriculture, the overall picture remains muted." Sign up for Ngā Pitopito Kōrero , a daily newsletter curated by our editors and delivered straight to your inbox every weekday.
RNZ News
3 hours ago
- RNZ News
Who's really to blame for our economic troubles?
Photo: RNZ New Zealand's economic downturn is proving hard to shake - but economists say when it comes to identifying the cause, it's not as simple as pointing the finger at government spending cutbacks or the Reserve Bank's interest rate hikes. Although conditions are expected to improve as the year progresses, the economy remains sluggish. The primary sector is providing one of the few bright spots. Last weekend, when issuing an annual update, Kiwibank chief economist Jarrod Kerr blamed the Reserve Bank's decision to thrust the economy into recession to tamp down problem inflation . Some readers contacted RNZ saying that was too simplistic and letting the government off the hook for the impact its spending cutbacks and public sector job cuts were having. "My wife's MPI office in Christchurch reduced headcount by about 10 percent," one wrote. "For each public service worker cut, two to three private sector jobs went with it. The cancellation or freezing of so many infrastructure projects saw my industry (engineering) lay off a quarter to a third of the workforce." So who's to blame? "The overstimulus of the economy from both the government and the Reserve Bank in 2020 and 2021 meant the economy was unsustainably overheated," said chief forecaster at Infometrics Gareth Kiernan. "The government and the Reserve Bank got us into the mess we were in, in the first place, and therefore had to get is out again." While normally monetary and fiscal policy would work to smooth the economic cycle, that was not the case this time, which made the upswing hotter and the downturn bleaker. "Normally, if the economy is going hot, they tend to pull things back. And if the economy is slowing down and we're heading to recession, you typically get more government spending and lower interest rates and that sort of thing. That's not what we've had over the last five years because they pumped things up too much and had to cool the jets on the other side. "Both the government and Reserve Bank needed to, they had no choice. "Government spending decisions have exacerbated the recession but they had no choice because they also exacerbated the boom before that." He said, in December 2022, government consumption spending was 13.5 percent higher than had been forecast before the pandemic hit. "It's still 7.5 percent larger than we were forecasting now… so they've pulled it back in line but it's still larger than it would otherwise have been expected. "Government investments - infrastructure, schools, hospitals, whatever else - by mid-2024, that's 18 percent larger than we were forecasting." Spending was still 13 percent higher, he said. "That puts some context around the fact that yeah, government has been tight but we still haven't undone or unwound all of the massive government-related Covid boom. "That's also reflective of the fact that fiscal numbers over for the next five years are only just getting back into surplus if you're lucky." Gareth Kiernan looked at GDP broken down into household and government spending, business investment and exports and imports. Photo: Kiernan looked at GDP broken down into household spending, government spending, business investment and exports and imports. He compared the current situation and the experience of the past two years to what normal growth might have been if it had kept going from the 2022 base at a 10-year average rate. "Government investment grew through 2023 and early 2024. It's done its fair share of contribution to how the economy has gone in a positive sense. "If I attribute all of the private sector investment and household spending and the slow growth there to interest rates and in Reserve Bank policy… then you put around about two-thirds of the underperformance of the economy over the last two years down to interest rates, 20 to 25 percent on to the government side of things when you take consumption and investment together and the other 10 percent or so is exports underperforming." Senior economist at ANZ Miles Workman said it was a question of how the Reserve Bank responded to the government's fiscal policies. "The faster the government gets the books back into the black, by restraining spending or increasing taxes, the more likely the RBNZ will need to lower the OCR, which would offset lower demand from fiscal policy settings by shoring up demand from households and businesses. "In other words, it's not as simple as saying government policy has caused X percent of the slowdown and the RBNZ has caused Y percent. The RBNZ's policy stance is a function of fiscal policy settings." Robert MacCulloch Photo: Supplied Economics professor at the University of Auckland Robert MacCulloch said there had been mishandling of the economy by governments on both sides in recent years. "The narrative the parties are using, that the other party is to blame for our problems… I'm past it now, that all the problems we've got are because of [Jacinda] Ardern and [Grant] Robertson and Labour messed it up, then Labour say the same about National. I think it's a con job on the people of the country. The country hasn't been doing great now for quite a long time under both major political parties." He said the wage subsidy had been a significant source of debt, but while it was introduced by the Labour government, National had put pressure on to extend it for bigger firms, which increased the cost. "Luxon's getting angry saying we inherited a shambles. I mean, what's he talking about? His party voted in favour of the all the fiscal and monetary policy. They were wildly enthusiastic about the wage subsidy scheme." He said the cuts the government were enacting were immaterial in the scheme of the fiscal pressures looming from the ageing population. "The cuts in bureaucracy they've done are just a couple of percent of those increased pressures on health and pensions. They're going to have to grapple with how you deal with those huge outflows with the ageing population… the Nats don't have a plan to rein in the cost of those major programmes." Photo: RNZ Eric Crampton Photo: Supplied The chief economist at the NZ Initiative, Eric Crampton, said the labour market was "certainly in worse shape" than it had been from mid-2021 to mid-2023. "But employment rates during that period were the result of substantial overheating from debt-fuelled spending and substantial monetary stimulus. They could not be sustained without severe inflationary consequence. It is wrong to blame anyone for labour markets not looking now like they did in 2022." He said monetary policy would always be expected to move last. "That doesn't mean monetary policy is slow. It means that whatever the bank does in monetary policy takes into account what everyone else has done and is expected to do. So if the fiscal authority announces a track - a Budget, Budget policy statement - monetary policy adjusts to take that into account. The Reserve Bank moves last - it makes its move after seeing what everyone else is doing. "Governments can be more and less helpful with all of that. But a bank following an inflation target ought to be taking account of what Parliament is doing. " He said the Reserve Bank had a tough job at present. "While the employment statistics are comparable to where they were around 2016-2017, government estimates still suggest that there is a remaining output gap - that the economy is running a bit below potential. However, there are inflationary pressures both in the non-traded sector and in tradeables. The bank's failure to keep inflation within bounds over the Covid period should have it sensitive to the risks of going above-target again. So I wouldn't want to blame them too much for current unemployment except to the extent that the bank's errors during the Covid period makes things a bit harder now. " He said keeping inflation within its target was the best thing the Reserve Bank could do to ensure long-term stable employment. "Given inflation risks, the bank would likely need to act to offset fiscal stimulus, if Parliament decided to provide further fiscal stimulus - we are still running a substantial deficit as well." Sign up for Ngā Pitopito Kōrero , a daily newsletter curated by our editors and delivered straight to your inbox every weekday.
Otago Daily Times
5 hours ago
- Otago Daily Times
Southern businesses buck trend
Otago's small businesses are finding a way to increase sales while North Island centres go backwards. Across the nation, sales weakness is uppermost in the north, with Northland down 3.5% in the June quarter compared with the corresponding period a year ago. A small business report by accounting software company Xero shows Wellington is back 3.1%, but Auckland declining 1.3%. In contrast, South Island centres are outgunning the national average, with Otago leading the charge, up 3.9% year-on-year for the quarter and Canterbury tracking 1.8% growth. This coincides with the agriculture sector making strong sales. The Xero Small Business Insights report revealed weak small business sales nationally in the June quarter, in line with an underwhelming result the past year. Overall, small business sales fell by 0.1% in the June quarter year-on-year, following a modest 1.1% rise in the March quarter and a 0.5% decline in the December quarter. The results are well back on the long-term national average of 6.3% year-on-year from 2017 to mid-2025 and behind Australia's 3% sales growth in the June quarter. Breathing some life nationally is a strong 4.4% sales rise over the month of June compared with the same month a year ago. Also bucking the overall national trend are agriculture sales, growing 10.9% year-on-year in the June quarter. This follows 11.1% growth in the March quarter and 14.9% in the December quarter, reversing 18 months of slow sales. Xero said industries more sensitive to discretionary spending and interest rates were facing tougher conditions with construction sales falling 6.4% in the June quarter — in a decline continuing since late 2023. Country manager Bridget Snelling said construction was concerning as it had a multiplier effect across the economy, from retail to manufacturing. Retail sales were unchanged in June compared with the same month a year ago, following four consecutive quarters of year-on-year declines. "While the pace of decline has eased in recent quarters, this moderation suggests only tentative signs of recovery," she said in a statement. Hospitality sales fell by 2.1% in the June quarter, marking the fifth straight quarter of backwards results for the sector. "These subdued sales figures highlight an ongoing challenge for Kiwi small businesses. Despite consistent OCR cuts by the Reserve Bank since August 2024, we're yet to see the expected boost to consumer and business activity. While there are some bright spots like agriculture, the overall picture remains muted." She said businesses were finding it difficult to plan because global economic uncertainty was adding to the pressure. This underlined the importance of staying on top of cash flow, getting paid promptly, and keeping a close eye on costs, she said.
