The journey to a post-Covid world is largely out of our hands at present and is likely not going to be smooth.
Opinion: In his State of the Union address in January 1962, President Kennedy told Congress: “We sometimes chafe at the burden of our obligations, the complexity of our decisions, the agony of our choices. But there is no comfort or security for us in evasion, no solution in abdication, no relief in irresponsibility.”
He went on to add his famous words: “It is the fate of this generation – of you in Congress and of me as President – to live with a struggle we did not start, in a world we did not make. But the pressures of life are not always distributed by choice.” It was, he said, time to seize “the burden and the glory”.
Although Kennedy was speaking at a different time about a different set of international circumstances, his words are particularly apposite to the circumstances the world is now facing as the slow retreat from the coronavirus and its variants gets underway. Right now, aside from the ongoing public health issues associated with the pandemic, rising global inflation and the war in Ukraine loom as the major immediate international challenges to recovery. Both are to some extent interrelated.
Global inflation is rising because after two years of pandemic restrictions, pent-up consumer demand is now being unleashed across the world’s economies. But labour restrictions because of immigration and stricter border controls, and now the “great resignation”, have left many companies worldwide struggling.
To attract the workers needed to meet the consumer demand now underway, they have needed to raise wages, the cost of which is being passed on to consumers as higher prices. Near full employment across economies, as New Zealand exemplifies, is, perversely, adding to the problem. Because jobs are more plentiful, there are not the workers available in the industry sectors where consumer demand is presently strongest.
Shortages of goods, higher prices, and a rising cost of living are the consequences. Delays in obtaining imported raw materials and componentry are becoming longer, affecting the efficiency and reliability of domestic production. The wind down in international shipping and air freight services during the pandemic has led to higher transport costs and more uncertain supply timelines. For a small, isolated country at the end of the supply chains the problem is aggravated. It is little wonder that consumers, here as elsewhere, are starting to pay the price.
Add the economic impact of the war in Ukraine – however long it lasts – and the picture becomes gloomier. The imposition of sanctions on Russia is clearly seriously harming the Russian economy but it is also having a blow-back effect on economies such as ours. Restrictions on Russian fuel exports are already having an impact on New Zealanders, as rapidly rising retail prices at the pump are showing. In 2019, about 14% of New Zealand’s crude oil was directly imported from Russia. Although that figure has fallen sharply over the past couple of years, because of the winding down of the Marsden Point Oil Refinery it is not clear how much Russian crude is instead now finding its way to New Zealand as product refined in other countries such as South Korea or Singapore, from where more than 80% of our refined oil comes. Much clearer is the reality that because of our small size and geographic isolation, we are more dependent than most on regular and assured supply lines.
The upshot is that New Zealand, like many other countries, faces adjusting to the unforeseen pain of inflation and higher interest rates as well. Inflation has risen sharply in recent months. It is forecast to hit 7 percent in New Zealand by the middle of the year, a figure most New Zealanders will not have experienced before in their lifetimes and may have only read about in history books.
The impact of significant inflation is pernicious, especially on those on low or fixed incomes. Rising prices and costs erode disposable income and living standards. Wages have to increase to match rising prices, creating a vicious wage-price spiral which only makes things worse for such people.
Income support measures to protect against inflation are always applied after the event and are never quite enough. Government spending gets diverted to protecting those on low and fixed incomes, often at the expense of investing in improving health and social services. At the same time inflation eats into the value of national savings, hitting people’s dreams and nest-eggs for the future equally hard. It is a no-win treadmill that becomes very difficult to get off. Prolonged high inflation leads to economic stagnation and lower living standards.
To counter rising inflation, the immediate instinct has always been to resort to government interventions – increased benefits, price controls, or direct subsidies, for example – to maintain living standards. But, however well-intentioned they may be, they are essentially short-term measures that get overwhelmed as inflation marches on. Already it is hard to see how the temporary cut in petrol and diesel excise tax or the 50% subsidy on public transport costs can be removed when their expiry dates come around. More likely, there will be strong public pressure to expand and extend them.
The Reserve Bank Act 1989 directed the governor of the Reserve Bank to use monetary policy to keep inflation within a defined range. That single focus has proved remarkably successful in keeping our inflation rate at very low levels since the 1990s. However, because of concern that the bank’s focus had become too narrow and rigid, and was stifling growth and employment in the economy, the bank’s mandate was broadened in 2018 to require the governor to also take the impact on employment into account when determining the inflation control strategy.
At the time, this was a relatively uncontroversial move and was seen as largely sensible. After all, inflation was well and truly under control with little apparent likelihood of recurring, so widening the governor’s brief was seen as an appropriate rebalancing that would boost employment while still keeping inflation low. But with inflation rearing its head internationally once more, alongside rising domestic government spending and borrowing, it may well be time to revisit this objective, if the current inflation surge is to be curbed and the longer-term living standards of New Zealanders protected.
Similarly, the so-called immigration reset is likely to require reconsideration. This was originally postulated in the government’s first term, before there was the whiff of a pandemic, when the economy was buoyant and there was unused domestic capacity. It made sense then to be thinking of ways to encourage more New Zealanders to take on jobs being done by migrant labour to reduce unemployment. However, the reset always looked more knee-jerk than that, more a response to xenophobia and the racism inherent in New Zealand First than anything else. In any event, the arrival of Covid-19 and the closure of the border put paid to all immigration far more quickly and dramatically, rendering the reset irrelevant.
However, labour shortages are becoming apparent in key areas that domestic workers are unavailable or unwilling to fill. Low unemployment levels add to the problem because there is no pool of domestic workers prepared to fill these gaps. That leaves domestic industries struggling to meet orders, pushing up prices to the consumer, and fuelling inflation.
Therefore, the government may well need to consider some immigration policy readjustments to address that imbalance to ensure the manufacturing and hospitality industry sectors have the staff to meet rising local demand. That may not be what the government originally intended, but times have changed over the past two years.
The government can be forgiven a measure of frustration if it is feeling that at the time of our greatest modern vulnerability, we now appear to have the least control over the events shaping our economic environment. To some extent, that has always been the New Zealand challenge – a small, isolated trading nation at the far end of the world’s trade routes, one that is occasionally a price maker, but so much more often a price taker, while all the while trying to maintain a decent standard of living for its people.
As we begin the journey to a post-Covid world, the last thing we need is the double whammy of rising global inflation and the shortages and disruption caused by Russia’s invasion of Ukraine. The government may ruefully reflect on Kennedy’s words all those years ago – “the pressures of life are not always distributed by choice”.
At the same time, as with other governments before it, it knows there is “no solution in abdication”. Its duty and responsibility leave it no option but to confront these pressures, deal with them as best it can, and await the voters’ ultimate judgment on how it does so.
