by Nick Clark, National Manager General Policy
Reserve Bank under the spotlight
A research note by the New Zealand Initiative has attributed the surge in inflation in many countries to ‘central bank mistakes’.
Co-authored by Graeme Wheeler, former Governor of the Reserve Bank, and the Initiative’s Bryce Wilkinson, the paper argues that central banks overall:
- were too confident about their monetary policy framework;
- were too confident about their models;
- were too confident they could control output and employment;
- lost their focus on price stability and took on too many mandates;
- faced conflicts in some cases with conflicting ‘dual mandate’ objectives; and
- were distracted by extraneous political objectives, such as climate change.
It’s highly unusual for former Reserve Bank governors to be critical of the operation of their successor’s performance, even indirectly (as in this case). But Graeme Wheeler joins a chorus of former senior Reserve Bank leaders, such as a former Chair of the Bank’s Board, Arthur Grimes, who have been speaking out.
With the Reserve Bank currently reviewing its Monetary Policy Remit, the research note should be a loud wake-up call for it and for politicians, including the Minister of Finance who is the architect of the Bank’s wider objectives for monetary policy.
Federated Farmers made similar comments in its own submission on the review.
Business gloom continues
ANZ’s monthly Business Outlook Survey for July saw business confidence continuing to hover at dismal levels.
A net 56.7% of businesses expect general economic conditions to worsen over the coming year, a 5.9 point improvement compared to June. Agriculture was the most pessimistic sector with a net 76.2% expecting it to worsen, an 18.2 point improvement – but still very negative.
Own activity is a better indicator of economic growth and it edged up 0.4 points to a net 8.7% expecting their activity to worsen. However, for agriculture this measure dropped 12.7 points to a net 9.5% expecting it to increase. The gap between agricultural respondents’ expectations for the economy and their own activity narrowed but it is still yawning.
Profit expectations improved 7.4 points to a net 34.1% expecting profitability to worsen. Agriculture remained the most pessimistic sector with a net 47.6% expecting lower profits, a 14.5 point improvement.
Cost pressures eased slightly but remained acute with a net 91.3% of firms expecting costs to increase over the coming year (down 2.2 points), with all 100% of agricultural respondents expecting higher costs. Pricing intentions remained high at a net 74.0% expecting to increase their prices (up 0.3 points). But as is always the case, pricing intentions were much lower for agricultural respondents (+47.6%) due to them mostly being ‘price takers’.
Forward expectations for inflation increased from 6.02% to 6.23%. Agriculture had the highest expected inflation of 7.08%, reflecting big price increases flowing through on many farm inputs.
Meanwhile, Federated Farmers’ latest six-monthly Farm Confidence Survey closed earlier this week. We received 1,217 responses and we’re now analysing the results. Thanks to everyone who participated.
The Importance of Arable
New Zealand’s arable sector is too often an unsung hero of our wider agricultural industries. However, a report by economic consultancy BERL for the Arable Food Industry Council casts light on its importance.
Arable production is made up of wheat, barley, and maize crops, including maize grown for silage, as well as seeds for sowing.
Arable farmers grow crops to supply industries that process the crops for use in other industries. This includes preparation of foods for human consumption as well as livestock feed. Other farmers are a significant market for arable production.
Total production from the arable sector in 2021 was 2.30 million tonnes, a 31% increase from 2018. Total grain and pulse production of 2.22 million tonnes was up 30%. Meanwhile seeds for sowing production grew by 40% to 81,470 tonnes.
In 2021 the arable sector directly produced crops worth $1.01 billion, $740 million from grains and pulses and $267 million from seeds. These sales went upstream of the arable sector and created total sales of all goods and services of $2.18 billion, of which $1.60 billion came from grains and pulses and $580 million from seeds.
Total sales were equivalent to a contribution of $932 million to Gross Domestic Product (GDP) – $684 million from grains and pulses and $247 million from seeds.
This has seen the arable sector increase its contribution to New Zealand’s total GDP from 0.30% in 2018 to 0.34% in 2021. The contribution to GDP is estimated to support 7,687 full time equivalent employees.
As a nation heavily reliant on primary industries, arable production is therefore very important to the New Zealand economy. It’s great to see arable’s contribution recognised in this report.
Jobs growth continues.
Employment increased in June according to Statistics NZ’s Monthly Employment Indicators.
Overall, across all industries there were 2.31 million filled jobs in June 2022, up a seasonally adjusted 0.6% (14,000 jobs) compared to May 2022. On an annual basis actual filled jobs were up 2.5% (56,000 jobs) compared to June 2021.
Primary industries’ 107,900 seasonally adjusted filled jobs were down 0.3% (300 jobs) for the month. The sector’s actual filled jobs were also down 0.3% (300 jobs) compared to June 2021.
The months of April, May, and June all saw increases in jobs following Omicron-induced declines in February and March. This could push June quarter unemployment down even further to below 3 percent. We’ll find out on 3 August when that data is released.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 28 July) show the effects of a very wet July. Soil conditions are wetter than usual across most of the country and especially so down the east coast of the South Island.
Overall, the NZ Dollar was stable this week, up 0.1% against the Trade Weighted Index. It was mixed against our main trading partner currencies. It was up against the US Dollar, Euro, and the Chinese Renminbi, and down against the Australian Dollar, UK Pound, and Japanese Yen.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was unchanged at 3.16% while the 10 year Government Bond yield was down 29 points to 3.50%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 17 August.
|This Week (28/7/22)||Last Week (21/7/22)||Last Month (28/6/22)||Last Year (28/7/21)|
|90 Day Bank Bill||3.16%||3.16%||2.82%||0.47%|
|10 Year Government Bond||3.50%||3.79%||3.97%||1.52%|
Source: Reserve Bank of NZ