Gareth Morgan, Director of Gareth Morgan Investments
Last week may have been the best week NZ has had since the recession bit in 1987. The reasons? The Gulf war began at last, and NZ’s ex-oil inflation for the past year has turned out to be significantly lower than predictions, in particular the predictions of the Reserve Bank. These events may well herald the beginning of NZ’s economic recovery.
The RB has correctly acted to maintain control over the slide in nominal interest rates, and is keeping its powder dry with respect to responding to any oil price- induced burst in global inflation. It is reassuring to see that the RB is not, as has been the case in Australia for the last year, speeding headlong to major cuts in interest rates as a primary weapon in stimulating the domestic economy. Such a policy approach, while appealing to some of NZ’s more aged economics professors, belongs in the closet along with many of the inflation-inducing policy prescriptions that several NZ economists of that era still peddle.
The inflation result was undoubtedly a good one, and if it weren’t for the Gulf crisis there would at last be tangible evidence that NZ is comfortably headed to achieving price stability within the target of 1993. Indeed the process of easing interest rates that began before Christmas would no doubt be resumed on the back of that inflation result, and if it were followed up by another good quarter of around 0.5% excluding oil, then we would have virtually arrived at price stability. But of course, while the threat of oil-induced stag inflation remains the RB must continue to caution against allowing rates to fall faster than prospective inflation does.
Now that the war has begun, NZ is at least nearer to knowing whether or not the path will be clear for interest rates to find levels that will accommodate economic recovery. Not much solace, but better than the stalemate that had emerged with the pre-January 15 standoff. If the stratagem of the US and Allies turns out to be folly, and Iraq is able to wage a protracted campaign against the cheap oil supplies of Kuwait and Saudi Arabia, then the IMF scenario of oil at US$65 per barrel, will cast a pall over most economies, including our own and NZ’s recession will deepen. This outcome would not be avoided by precipitously easing monetary policy in an endeavour to stimulate the domestic economy, as seems to be the fulcrum of the advice tendered by some.
If however, the war can be reduced quickly to a local hot spot without its present global economic consequences, then NZ may well look back on last week as the week the economy started to be turned towards sustained economic recovery.