Given Minister of Finance Grant Robertson's pre-Budget statements, there sadly appears to be no appetite for increasing government spending any further, says economist Dr Dennis Wesselbaum. Photo :Getty Images

The first signs of inflationary pressure are showing: Metals are 10 percent more expensive; wheat prices are up 40 percent, corn prices have doubled, and container freight rates have surged. Grant Robertson is leading NZ into high inflation and low growth.

OPINION: Last year it was the Covid Budget. This year we will see the Stagflation Budget.

The Covid Budget needed little explanation: the world was dealing with a pandemic, and our Government needed to support the economy given its aggressive and successful elimination strategy using lockdowns.

But as many foreign economies are now growing strongly, New Zealand’s could be drifting into stagflation – a period of high inflation coinciding with low economic growth.

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More than one year into the Covid-19 pandemic and after three million deaths, some countries are stepping up vaccination efforts to protect their citizens and to kickstart their economies.

In the US, 38 percent of the population are fully vaccinated, in the UK 37 percent are, and in most European countries the rate is around 10 percent. Australia has administered close to 3 million doses.

A combination of factors such as vaccinations, social distancing, face coverings, better treatments, and improvements in health system capacity has allowed various countries to reduce restrictions and to open borders. For example, the UK has just announced a traffic light system for international travel and the European Union has a similar list for non-EU countries.

In New Zealand, we are far behind these developments. Hardly anybody in New Zealand has been vaccinated. The government’s plan to administer more than 7 million doses within about 26 weeks is optimistic, to say the least, and the travel bubble with Australia is fragile.

In this environment, how does the near-term economic future of New Zealand look like?

Labour, with a zero tolerance for Covid-19 cases and a failed vaccination strategy has locked itself and the country in a place where they cannot open the border before herd immunity is achieved. This has major implications for the recovery of the economy, where service industries contribute around two-thirds of GDP.

What we see around the world is a fast recovery fuelled by exiting lockdowns, large fiscal spending programs, and low interest rates. The US grew by 6.4 percent and China grew by 18.3 percent in the first quarter of 2021. European countries will likely follow suit in a couple of months and the International Monetary Fund projects a 6 percent global GDP growth in 2021.

By contrast, the New Zealand economy shrank by 1 percent in the December quarter.

We also see the first signs of inflationary pressure. Commodity prices are increasing fast. Metals and precious metals such as copper, palladium, nickel, or aluminium are more than 10 percent more expensive than last year.

In the agricultural sector, wheat prices are up by more than 40 percent and corn prices are up by more than 100 percent year-on-year.

Container freight rates have surged: for example, shipping from Asia to North America is 63 percent more expensive compared to last year. The recession has even caused a shortage in the supply of computer chips.

The data paints a clear picture: a weaker than anticipated recession and strong economic growth in many countries increases global demand for resources and, hence, prices. This will lead import prices to increase which should put upward pressure on domestic prices. Typically, this would imply that the Reserve Bank should increase interest rates.

However, this is not possible. First, our economy is not yet able to grow fast enough to allow increasing interest rates. Second, due to the burden imposed by Labour on the Reserve Bank to include house prices in their decision making, increasing interest rates has become less likely. This would result in increased mortgage payments of – often highly leveraged – house owners, something that needs to be avoided to support the stability of banks.

Moreover, given pre-Budget statements, there sadly appears to be no appetite for increasing government spending any further. Instead, Labour is again beating a dead horse – wellbeing – instead of focusing on GDP and employment.

Other policies recently announced will add to the negative outlook. The “Fair Pay Agreements”, for example, will be a disaster as they – besides being illegal and unpractical – will lead to lower productivity and could increase wages and prices even further.

The interaction between Labour’s successful elimination strategy, a failed vaccination strategy, and atrocious economic policy making, can only lead to one conclusion: the outlook is bleak.

Other countries will grow faster compared to us and, combined with economic policy mistakes, this means that we are likely heading to a low growth-high inflation environment, so-called “stagflation”, over the near future.

Dr Dennis Wesselbaum is a Senior Lecturer in the Department of Economics at the University of Otago.

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