Director’s thoughtpiece: Sex, Drugs and Inflation

It feels like inflation has become a bit rock’n’roll. In the way that rock’n’roll 50 years ago was ‘bad’, almost shocking, but now, just another music genre. Parents used to fear what Mick Jagger would do to their daughters. Now – not so much. Pop, drum and bass (please no more drum n bass on the family road trips!), rap, reggae…rock isn’t headline grabbing like it once was.

Inflation has given Adrian Orr the opportunity to shock people with some pretty dramatic OCR rate increases and make headline grabbing statements like ‘ yes I am trying to push the economy into recession’. So, is inflation truly bad ass rock’n’roll, or more of a yeah – interesting, but just one of several market driving factors?

We all agree inflation needs to come down
I know of no one debating inflation is a good thing. We all want it to be put back in its target range of 1% – 3%. Inflation hurts hard working families trying to save, it hurts the poor disproportionately, and of course it usually drives up interest rates.

We are well into the battle
We’ve been here before, and central banks have some blunt weapons to fight inflation – namely the OCR. They are into their work of rising interest rates…and sending stern messages to consumers that they need to rein their spending in.

Consumer Sentiment
Some may say that Adrian Orr likes soundbites more than his predecessors, that perhaps he has too much to say. Right or wrong, it ‘feels’ like the combination of rising interest rates and his comments are having an impact. I realise that ‘feel’ is not a word typically used to analyse the market. However, how people feel about the economy plays a big part. You can have all the money in the world, but if you feel really scared about what is happening in the economy, that can lead to withdrawal. I can speak from personal experience…we talk to a lot of investors and the number of times I have heard ‘I’ll just wait and see’ in the last 6 months is frustratingly high. Exactly what is it that you are waiting for?

The point being that many people have become very nervous. People sitting on cash does not lead to a thriving economy. It leads to recession. Orr is getting what he wants.

I am not sure that the sabre rattling results in those on lower incomes getting concerned about the economy and thus altering behaviour. I think these people are just trying to survive and make ends meet…especially at this time of the year. These people simply buy less because they can afford less.

Change is Afoot
The change has already started:

• • Shipping costs are falling. Google shipping costs and you’ll find plenty of articles on declining rates. A major driver is falling global demand for goods. Those price adjustments are yet to fully flow through to NZ, which has to do with port congestion in Auckland and Tauranga. Port of Auckland’s failed automation rollout has not helped, and now there are rumours of the union making re-recruitment of labour difficult.

• • There is evidence that demand for goods is falling. We have reports that whiteware sales have dropped 30% – 40%. This of course will be in part be driven by the drop in house building. Regardless, it is still a pullback in spending. We have heard stories of containers backing up that have not been unpacked because there is no room. This is probably a result of manufacturers building up greater stocks to deal with supply delays. So now that demand is falling, will we start to see big discounting in the new year to clear backlogs? If we do, that is not inflationary behaviour.

• • Labour shortages are starting to ease. The working holiday visa is back, and the working tourists are starting to arrive. That helps the hospitality industry and no doubt food harvesting. We also know that RSE (Recognised Seasonal Employer) numbers have been increased. This too will help growers get produce off vines and trees. Surely such businesses will now see labour costs level off with labour shortages starting to ease.

• • Redundancies. Q3 GDP results were surprisingly strong, but look under the bonnet and it appears much of the surge was due to post covid catch up spending. Time will tell if it was an outlier. Given the other drivers above, I’d suggest it is. Which is why I don’t think it’s an indicator the economy will surge ahead in 2023. However, the above factors don’t necessarily mean the economy will crash either. Will we see a crash, or a relatively soft landing? Either way, there will be some businesses that will hurt and will need to lighten the load with some redundancies, or that will simply fail. This means that the critical shortage of labour across the board may start to ease.

• • Government spending. I am sure there will be some election bribes thrown out, though at that this stage Luxon seems to be playing a defensive game and not trying to win points with promises. Is he simply letting Labour fail? After all, they say people don’t vote governments in, they simply vote out governments. Post election, if it is a National coalition, then we can likely expect a lot less spending. At this stage it looks like National will govern, though anything can happen.

So, if we step back, we can see that we all agree inflation should be tamed, that central banks are into their work, and that the beast is already starting to settle down. I am pretty sure that old rocker Orr knows that he has done the hard work and he is already at the beach. 2023 will bring plenty of drama, but that is simply the death throes of inflation. There will be people having to right size property portfolios because of breaching bank interest covenants, there will be building companies that fold, there will be hurt. But is it not simply the clean up after battle?

For some, inflation is leaving people wide eyed and frozen. From where I sit inflation is an old rocker that surprised with a late hit or two but is now headed back to retirement. Either way 2023 will be revealing.