Analysis: We knew Covid’s impact on the economy wouldn’t go away any time soon; now the Reserve Bank has revealed that lockdowns in China are a new and significant contributor to rising prices in NZ.
We’re talking a lot about China right now, and it’s not just about the geopolitical tensions. The bank’s new analysis of tradable (global) versus non-tradable (domestic) inflation drivers show global and domestic factors provide a roughly equal contribution to our 6.9 percent consumer price inflation – after a long period when stable import prices helped to keep NZ inflation low.
That’s not to buy into the Government spin that our prices are simply following the rest of the world, up up up. There are domestic contributors like household stimulus payments, broken local supply chains, and critical industries including construction that failed to prepare for the contingency of supply and labour shortages.
The above Reserve Bank chart shows domestic and overseas goods and services both driving up prices, but it’s the global shocks that are newest.
Governor Adrian Orr says the Ukraine invasion is weighing very heavily on business confidence and investment intentions, but there’s a renewed shock from Chinese Covid-19 restrictions, exacerbating supply chain disruptions and adding to the cost and complexity of doing trade. “China is so important to us and that is a nation that’s going through significant Covid challenges at present,” he adds. “It is a risk for us around that China concentration of trade.”
Annual CPI inflation increased to 6.9 percent in the March 2022 quarter – well above the bank’s target band of 1 to 3 percent.
But the bank is boldly predicting that the worst of the price rises will be (to reference a very different war) all over by midwinter Christmas. It predicts inflation to peak next month, then begin dropping.
According to the monetary policy statement, inflation is being influenced by global and domestic factors, as reflected in the roughly equal contribution of tradable and non-tradable goods and services to overall consumer price inflation. “This follows an extended period when low tradables inflation helped to keep overall inflation low in New Zealand.”
Oil prices have played a particularly large role in the recent increase in tradables inflation, due to the Russian invasion of Ukraine. But food prices in New Zealand have also been increasing recently, in line with rising food prices around the world – and Ukraine, Russia and China are among the world’s biggest cereal exporters.
Last year, New Zealand bought $65m of meat and seafood from China, $51m of fruit and veges, $30m of sugar and confectionary, $29m of cereals, $12m of beverages, $11m of chocolate and $49m of other edible preparations.
But while food may be the most visible import, the amount we buys pales in comparison with the $4.3b in machinery and electronics, or the $708m in cars, trucks, trains and ships.
Orr says Covid-19 restrictions in significant regions of China are exacerbating supply-chain disruptions and adding cost and complexity to trade.
His monetary policy committee goes into greater detail. “China’s regional health-related economic restrictions are having a direct impact on global growth, supply chain efficiency, and New Zealand’s trade outlook. New Zealand’s trade performance is strongly linked to China’s economy.”
The monetary policy statement says China is continuing to pursue its strict policy to eliminate the spread of Covid-19. “In the past few months, major cities in China have been in lockdown,” it notes. “These are disrupting the production and transportation of goods, creating widespread pressures on the prices of materials and manufactured goods. The combined impact of supply disruptions from China and the war in Ukraine has intensified inflationary pressures for a broad set of food, consumer goods and energy supplies.”
It says China has also been affected by global inflationary pressures, but its economic circumstances have kept demand pressures relatively low recently. “Many economic indicators suggest the pace of China’s recovery is slowing, in part due to ongoing lockdowns in its major cities to control the spread of Omicron. These lockdowns provide a drag on both production and consumption, and have materially slowed the pace of inflation in the country.”
The inability of Chinese people to travel is also hurting New Zealand’s battered tourism industry, the statement says.
All this means import prices will remain higher, for longer, than the Reserve Bank previously expected. “The Ukraine war and renewed lockdowns in China have added to existing supply constraints, pushing up prices. As a result, we expect export prices to fall further than import prices over the projection horizon, resulting in a fall in the terms of trade from high levels.”