What will it take for NZ to become a 'rockstar’ economy again?

Economist Paul Bloxham says the biggest risk to the economy is persistent inflation. File photo.
Photo: 123RF

New Zealand needs to become a „rockstar” economy again, but getting there will take some work.

That’s according to HSBC chief economist for Australia and NZ Paul Bloxham, who made headlines a decade ago when he said New Zealand would be „the rockstar economy of 2014”.

But he says times are tough now and the film is very different.

„I described it as a rockstar 10 years ago when a lot of things were going in a positive direction,” he said.

HSBC Chief Economist for Australia and NZ Paul Bloxham

HSBC Chief Economist for Australia and NZ Paul Bloxham
Photo: LinkedIn

„You were a big exporter of dairy and meat products and had a huge influx of tourists that fueled growth.”

Now, rockstar status is something the country should aspire to, he said. Households, in particular, have borne the brunt of balancing the economy again post-Covid.

All the focus to fight inflation went on reducing demand, but policy makers should work on improving the supply side of the economy to overcome the country’s inflation problem, he said.

„We need to focus on finding things that New Zealand has done well to grow the economy,” he said.

„There needs to be a clear focus on what the engines of growth are and how best to use them to grow the economy. Deregulation must play a role, making labor markets as flexible as possible must play a role.”

He said New Zealand’s unemployment was rising, the economy was heading for recession and four of the last five GDP updates showed a decline.

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As New Zealand emerged from lockdown, Bloxham said the situation was created because demand increased, but the supply side of the economy was not ready to provide enough goods and services to meet that demand.

„What you had was a big increase in inflation, policymakers responded, central banks responded by raising interest rates.

„The RBI has raised its policy rate by 525 basis points…it was one of the first central banks to raise interest rates. The objective was to raise interest rates, slow the economy and bring inflation back to target. They have delivered a slowdown.”

High interest rates hurt families, he said. Its impact could be seen in consumption figures, which were weak and declining in the past year.

That said, it doesn’t have to be that way.

„One of the best ways to reduce inflation is to see a big improvement on the supply side at the same time – there’s a weakening of demand but also an improvement in supply. Some countries have had that. The US has had a very big pickup. It’s helped reduce inflation in productivity.”

He said New Zealand’s supply response was „poor” compared to the rest of the world.

„Inflation is coming down very, very slowly.. Inflation is not yet back to what RBI needs.”

He said the biggest risk to the economy is that inflation continues to persist and does not stick to high levels. That means long-term weak demand may be needed.

„It’s a very difficult place to be. The Reserve Bank has raised interest rates to reduce inflation, which has pushed the economy into recession, but you’ve still got inflation sticky and inflated.”

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He said the RBI does not expect to cut the cash rate until the end of this year.

„We think tariff relief could come before Christmas.”

He said improving the productivity and flexibility of the supply side of the economy will be a big question to address in the upcoming budget.

„Are the policy settings going to help improve the supply side of the economy? Will there be steps taken by the government aimed at raising productivity? That’s where the focus is… The RBI has raised a lot. Big effect in slowing down consumerism but it still hasn’t brought inflation down quickly.”

New Zealand’s closed borders were the most disruptive to supply, he said.

„The first happened [when borders reopened] A net outflow and that made the labor market even tighter… it boosted the supply side of the economy. Even as overall economic demand and recession weaken.”

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