Economic Weekly: Upside risks building

Economists are well versed in espousing downside risks. To be sure, these remain plentiful. We’re in a global pandemic after all. But it’s also important to acknowledge the positives. And it’s actually these upside risks that are looking more pertinent as the economic data has rolled in over the past few weeks.

The global backdrop, while patchy, is looking better by the day. COVID hotspots remain, with the tragedy in India particularly troubling. But global growth as a whole is now expected to expand a strong 6.3% this year. China and Asia are out in front. But the impressive turnaround in the fortunes of the US and UK is certainly bearing out the ‘who vaccinates wins’ thematic. Three quarters of the population in those countries have now had at least one vaccine dose, enabling a more rapid economic reopening. Forecasters in the UK, for example, now expect GDP growth to exceed 5% both this year and next.

The steadying in the global economy is bolstering demand for commodities generally, including our own export commodities. In fact, there’s something of an export price boom underway – it’s just that the housing boom tends to attract all the column inches. Global prices are holding around the highest level in seven years. And thanks to a restrained currency, prices in NZ dollar terms are not far from the highest level ever. We think prices will hold up or even push a little higher this year. The income windfall for NZ’s agriculturally-exposed regions is providing the foundation upon which NZ’s economic recovery is being built.

Against this backdrop, confidence in the economic upturn is growing. Last week’s ANZ business confidence survey saw investment and employment intentions continue to ratchet higher. The former are now at 4-year highs, and suggestive of GDP growth miles ahead of our forecasts (chart ‘o’ the week).

Stretched capacity, shortages of labour, and spiralling costs are flies in the ointment we’ve discussed before. Business surveys are pointing to these things worsening. Cost and pricing intentions are at the highest levels on record. We’re still of the view the impacts on inflation will mostly be temporary, but we’re keeping an eye on it. By contrast, the turn higher in wage inflation we expect this year will proffer more of a sustained, albeit modest, inflationary impulse. Last week’s labour market figures provided support for this view. Unemployment printed below market/RBNZ expectations at 4.7%. It will continue to track lower from here, in our view. Should this pan out, the RBNZ could be brushing up against its Maximum Sustainable Employment objective in a few quarters time. The upshot from all this from an interest rate perspective is that we’re a little more confident in our view that the RBNZ will be able to start reducing stimulus next year. We continue to expect an August 2022 OCR hike, something we note the market is now close to fully pricing. There’s also room for RBNZ bond purchases to be tapered further.