Hang on Tight: Our Economy Heading for a Plunge in 2019

Well, if you weren’t sure about it…you can be now.

The Reserve Bank of New Zealand has confirmed our suspicions…this economy’s in for a bumpy ride.

In a public statement on 27 March, the RBNZ stated that the Official Cash Rate (OCR) would stay at 1.75% for now. But they followed up with a warning:

Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.

That’s about as close to ‘batten down the hatches’ as you’ll ever hear from a central banker.

They’re notorious for highlighting the good while concealing the bad in their own brand of legalese — ‘Fedspeak’. So, you’ve got to translate a bit.

You can read the official statement here or you can keep on reading below for my translation.

The Official Cash Rate (OCR) remains at 1.75 percent. Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.’

We know that raising the rate would be disastrous for the economy…there are simply too many businesses running on cheap debt. And we don’t want to lower it…yet. Since we only have 1.75% to play with, we’ll want to wait until the very last moment to play the rate-cut option.

Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.’

We need to throw some good news in here…so how about unemployment? The economy might be on the brink of disaster, but at least we’ve got jobs, right? And when it comes to inflation, we’re missing the mark there, but we’re working on it.

The global economic outlook has continued to weaken, in particular amongst some of our key trading partners including Australia, Europe, and China. This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.

Most of the major economies around the world are already going downhill. Our central banker colleagues around the world are arming up for the mess that’s to come. At least we’ll get a stronger dollar…for a little while.

Domestic growth slowed in 2018, with softness in the housing market and weak business investment contributing.

But New Zealand is in trouble. The housing market’s already plateauing…and businesses are already reeling in their spending. It looks like anyone who’s paying attention is already prepping.

We expect ongoing low interest rates, and increased government spending and investment, to support economic growth over 2019. Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure, housing, and transfer payments also supports domestic demand.

We’re desperate…and willing to give you anything you want to make you happy. You want cheap borrowing? Done. You want the state to prop up the market with debt-funded projects? Done. You want higher employment, even though it’s allegedly ‘near its maximum sustainable level.’ Sure! Done.

Anything to instil a little confidence.

As capacity pressures build, consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.

If it all goes right, we’ll do our job of keeping inflation at 2%.

The balance of risks to this outlook has shifted to the downside.

But we’re scared. We know enough of basic economics to see that the near future’s looking real gloomy right now. And we’re especially anxious because we only have 1.75% to drop when it hits the fan.

Back when the Great Financial Crisis hit in 2007, the OCR was at 8.25%. We promptly dropped it to 2.5% within a year. That 5.75% downshift was the silver bullet that kept New Zealand from feeling much the Crisis.

Today, we can only drop it 1.75%. Then we’re out of chips.

‘The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending.’

Crash incoming. Mayday! Mayday!

‘On the upside, inflation could rise faster if firms pass on cost increases to prices to a greater extent.’

Spin time. When the market crashes, businesses are going to have a bad time. Sales are going to plummet, and costs are going to skyrocket. Businesses will likely pass those increased costs on to consumers by increasing the cost of their products. That means inflation will go up…which we’ll call an ‘upside’.

Quick note — if you’re confused why the RBNZ would call higher inflation an ‘upside’, it’s because of an economic theory that people prefer to spend more when their dollars are worth less.

In other words, if you knew that your green $20 was worth five cents less every day, you’d want to spend it as quickly as possible so that it doesn’t waste away to being worthless.

As you can guess, this sucks for savers. Their dollars are eroding away in their bank accounts…and there’s nothing they can do about it.

But as the theory goes, lots of spending means profits for businesses…which means they can build and produce more…which means economic growth. In theory, anyways.

We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.

We’ll keep stabbing the Kiwi economy in the chest with an adrenaline shot to keep it alive.

If you’ve ever seen the Jason Statham movie Crank, you’ll understand what the RBNZ is doing.

In the movie, Jason Statham’s character is injected with a special poison that would kill him if his heart rate drops. So Statham stays alive by seeking out adrenaline rush after adrenaline rush to keep his heart pumping. He picks fights with gangsters. He takes drugs. He brawls with the police. Anything to keep the adrenaline flowing.

Today, our economy is poisoned. Businesses are weak. Savings are fragile. Trade is under threat.

To keep it pumping, the RBNZ and the government are pulling all the stops trying to keep it above a certain level. Basement-bottom interest rates. Sky-high state spending. Anything to keep consumers consuming.

But as you may have guessed by now, the gig is up the moment the economy slows.

And it may have already begun…

Best,

Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


One response to “Hang on Tight: Our Economy Heading for a Plunge in 2019

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