While Jacinda Ardern’s resignation is not likely to cause economic instability, new Prime Minister Chris Hipkins will have to contend with significant existing problems such as the cost of living crisis and declining business confidence, argues Dr Murat Ungor.
It was just another Thursday, but then something unexpected happened.
On the morning of January 19, we learned food prices had risen by 11.3 percent in December 2022, compared to December 2021. This marks the largest annual increase in food prices in 32 years, as reported by Stats NZ.
Breakdown of the prices shows that, compared with December 2021, grocery food prices increased by 11 percent, fruit and vegetable prices increased by 23 percent, restaurant meals and ready-to-eat food increased by 7.8 percent, meat, poultry, and fish prices increased by 11 percent, and non-alcoholic beverage prices increased by 7.3 percent.
In the afternoon, we first learned the 2023 General Election will take place on October 14.
Then, Jacinda Ardern announced she will step down as prime minister and leader of the Labour Party.
Chris Hipkins was confirmed Saturday morning as Labour’s sole nominee to replace Ardern as prime minister. But whichever contender had taken the top job, the economic challenges we face would have been the same.
Business confidence is already at a low level, and the appointment of Hipkins will not change this fact.
The ANZ Business Confidence Index in New Zealand experienced a significant decline in December 2022, dropping 13 points from the previous month to reach a new low. This was due to factors such as ongoing inflationary pressures, stringent monetary tightening, and the anticipation of an economic downturn in 2023.
Similarly, ANZ-Roy Morgan NZ Consumer Confidence decreased by 7 points in December 2022, reaching its lowest point since data collection began in 2004.
On January 17, 2023, the New Zealand Institute of Economic Research (NZIER) unveiled the findings of its most recent Quarterly Survey of Business Opinion (QSBO). The survey ran from November 28, 2022, to January 9, 2023.
The building sector had the most negative outlook among the industries surveyed, with a net 77 percent of companies forecasting a decline in economic conditions in the upcoming months.
Similarly, the retail sector also had a bleak outlook, with a net 76 percent of retailers anticipating a deterioration of economic conditions over the upcoming months.
What can be inferred from business and consumer surveys?
Uncertainty is a recurrent theme in global economic discourse, particularly among policy makers and central bankers, and business and consumer surveys may provide valuable insights for monetary policy decision-making.
The Federal Reserve Bank of Atlanta maintains a database of business and consumer surveys conducted by central banks worldwide. The Central Bank Business Survey Database enables users to navigate and sort through the various business and consumer surveys conducted by central banks globally.
Economic research has shown the importance of using survey data, especially when executing monetary policy in a rapidly changing and uncertain economic environment.
They assist in assessing other sources of information used by central banks, including forecasting of key economic indicators and official statistics.
Upcoming key economic indicator announcements
Stats NZ will unveil the Consumer Price Index (CPI) inflation figures for the December quarter on January 25.
In the September 2022 quarter, the CPI rose 7.2 percent annually. ANZ expects annual CPI inflation to remain unchanged at 7.2 percent in Q4 2022.
Raising interest rates is a commonly-employed strategy by central banks to curb inflation. Persistent inflation has brought the back-to-back increases in the Official Cash Rate (OCR), the main monetary policy tool used by the Monetary Policy Committee in New Zealand.
The Reserve Bank has steadily increased the OCR since 2021. It stood at 0.25 percent in August 2021, 3 percent in August 2022; and was raised to 4.25 percent in late November 2022 – the highest level since the end of 2008. It is expected to reach 5.5 percent in the first half of in 2023.
It is likely the Reserve Bank will raise the OCR by 75 basis points to 5 percent in its first monetary policy statement of the year on February 22 and an additional 50 hike in April 2023, bringing the OCR to 5.5 percent.
Food costs soar worldwide
The issue of rising food prices is not exclusive to New Zealand. Other countries such as the UK are also facing similar challenges. In the UK, food and non-alcoholic beverage prices rose by 16.9 percent in the 12 months to December 2022, up from 16.5 percent in November, and the annual rate of inflation for this category has risen for 17 consecutive months.
The World Bank’s January 2023 Global Economic Prospects report highlights upward risks to food prices, including the potential impact of rising natural gas prices on fertilizer prices, the closure of several fertilizer manufacturers in Europe, and the effects of a third consecutive year of La Niña weather pattern in 2022.
The cost-of-living crisis and the increase in food prices are closely intertwined, particularly for low-income individuals and families who often spend a significant portion of their budget on food.
During the post-Cabinet press conference on December 12, 2022, Jacinda Ardern stated that “the year 2023 will see the Government focus squarely on what it will take to get through the cost of living challenges” and the World Economic Forum’s Global Risks Report 2023 highlights the cost of living crisis as the most severe global risk in the next two years.
The cost of living will remain a central focus of economic discussions under a new prime minister’s leadership.