Talking Economics: Clouds on the horizon 

By Peter Nicholl

The year 2022 started with good weather. But a storm arrived early. The economy in 2022 could be similar. It looks calm now, but storms are on the way.

The only certainty for 2022 is that the economy is facing many uncertainties.

I can’t predict what is going to happen – but I don’t think anyone else can either. One thing I can predict is the type of storms that could hit the New Zealand economy. Hopefully they will be like the recent cyclone and veer off and have only a minor impact.

While the New Zealand economy performed better in 2021 than most expected, some underlying trends of 2021 could spell trouble in 2022 – and beyond. The first of these trends is inflation. At the end of 2021, inflation in many countries, including New Zealand and the United States, was at levels not seen for nearly 40 years.

Throughout 2021 as the inflation level rose, many Central Banks said don’t worry, the rises are transitory and inflation will fall back without us having to do much. The Chairman of the US Federal Reserve said in late 2021 that he was putting the word transitory out to pension. It is an admission that the Federal Reserve has been wrong, and inflation is going to be with us for a while.  That means that one clear prediction for 2022 is that interest rates will rise.

A second trend evident throughout 2021 was rising asset prices, especially for houses. A lot of measures were taken in 2021 that should have led to the house price bubble easing or stopping. While this hasn’t happened yet, the impact of these policies should be seen in 2022 and house prices will stop rising and even fall in some places. But the main policy problem caused by the house price bubble is the impact it has had on income inequalities in New Zealand. This will bedevil New Zealand long beyond 2022. I will come back to this issue in a subsequent column.

A third trend evident at the end of 2021 was that unemployment fell to only 4 per cent and labour and skill shortages were appearing in many sectors. In this environment, wages should rise throughout 2022. The uncertain element is what will happen to immigration. But does New Zealand need to or want to return to the low-income model of growth based on importing labour? I don’t think so.

Policy-making is made more difficult for the Government by the fact that these policy dilemmas are inter-related. For example, rising wages would help address the income inequality issue. But they will put further pressure on inflation. There are few easy policy solutions for the New Zealand Government or for the Reserve Bank. The only set of policies that would help solve all the issues simultaneously are those that increase New Zealand’s low levels of productivity. One step in this direction would be an urgent cost-benefit review of all the regulatory requirements that have been placed on businesses and financial institutions over the last 10 years. For all of them, the costs are clear to see. For many of them, the benefits are much harder to identify.  This is also an issue I will come back to in a subsequent column.

On top of these home-based issues, the international political and economic environment enters 2022 in some turmoil. While New Zealand won’t be directly caught up in most of these international problems, we will not be immune to the economic impacts if any of them become serious. It should be an interesting year.

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