'Party's over' says ANZ chief economist Sharon Zollner

Wednesday, 16 March 2022

Anyone hoping for a speedy economic recovery this year could be out of luck, ANZ chief economist Sharon Zollner says.

Speaking at an economic briefing for the Chartered Financial Analysts' society Zollner gave a speech titled “Party’s Over”, which gave a grim economic forecast for the year ahead.

Zollner said ANZ analysts predicted inflation would peak at 7.4 per cent this year.

With the Russian invasion of Ukraine further entangling global supply chains, and the Omicron variant present in key trading partner China, tough times were ahead for the economy, she said.

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Sharon Zollner says prices are too high but that doesn’t mean they can’t rise.

“The upshot of all of this is we are seeing a highly inflationary negative supply shock, not a very deflationary negative net demand shock. Oops, because the central banks responded as if it was the latter,” Zollner said.

While she said the central banks should not be blamed for decisions made at a very uncertain time, they had inadvertently caused longstanding inflationary conditions.

“One could say it is not a great starting point.”

In New Zealand, an ANZ business survey found cost and inflation expectations were still rising and were showing no signs of topping out.

Reserve Bank Governor Adrian Orr delivers the Official Cash Rate. (File photo)

Of the businesses surveyed, 70 per cent were experiencing higher prices for goods, and 92 per cent were experiencing higher costs.

Zollner noted that this survey was undertaken before the Russian invasion of Ukraine and business conditions might have worsened since then.

The market conditions forced the Reserve Bank into a sticky situation, she said.

“It is a pretty unpleasant mix for central banks, with weakening activity, but still rising inflation pressures. One would say cut rates, and one would say hike them.”

The main problem was the inflationary pressures were coming from so many angles that there was no one easy solution, she said.

“It’s not just oil prices. The Reserve Bank can’t just say it is going to wash through, and ignore it.

ANZ analysts predict falling house prices will reach double digits before they start to bottom out.

“The starting point for the economy is so bad, it is such broad-based inflation. It is not just importers, it is wages, it is core inflation, it is inflation expectations.

“It’s the type of inflation that only goes away by opening up a negative outlook gap, by driving activity below the potential rate of output, which unfortunately has itself taken a hit from Covid-19, and energy prices.”

Zollner said the solution was not going to look pretty.

“We are talking about slowing the economy potentially quite a lot to get on top of inflation. It is pretty ugly, but the fact is inflation is the only thing that counts for the central banks whose credibility is on the line.”

ANZ was anticipating a robust response from the Reserve Bank with official cash rate hikes of 50 basis points in both April and May.

It also predicted house price declines would drop into double-digits before they started to bottom out.

An ANZ survey said households thought now was a worse time to buy a major household item than the 2007 GFC.

“Reality is starting to bite. We are going to see households really pull their heads in this year.”

But the Reserve Bank needed to get its hands dirty to turn the economy around, including hiking interest rates into an environment of falling house prices.

“They are already very late in tightening. It means on the one hand they will need to scramble to catch up, but on the other hand there are real questions with how far they will get before something goes amiss.”

Things that could “go amiss” and derail interest rate hikes could be a housing slowdown, a rising unemployment rate, change to inflationary expectations, or if global markets got even more unstable, she said.

Reserve Banks will not be investors’ friends this year, but they will do the “unpopular, tough stuff” that needed to be done, she said.

CORRECTION: An earlier version of this story stated that ANZ anticipated the Reserve Bank would raise the official cash rate by 25 basis points in April and May. In fact ANZ expects the rate to increase by 50 basis points in those months. (Amended at 10.41am March 17, 2022)