The diverging outlook for global central banks

We’re starting to see an increasing divergence in the outlook for growth, inflation and the likely next move from many of the world’s central banks.

Some are on track to cut policy interest rates as expected, such as the European Central Bank (ECB) and the Bank of England (BOE).

Others, like the US Federal Reserve and our own Reserve Bank of New Zealand (RBNZ), are grappling with stubbornly high inflation that has delayed any plans for policy easing.

Across the Tasman, some have even speculated we might need to see another interest rate hike before the year is out.

In the US, the world’s biggest economy and sharemarket, the headline inflation rate hit 9.1 per cent in June 2022 before falling steadily over the following year.

However, it’s been stuck in the low to mid threes for the past ten months and the Fed is struggling to deal with this last mile of price pressures.

On a brighter note, the American economy is still in good shape.

A 3.5 per cent inflation rate is undesirable, but it’s not the end of the world provided economic activity and the labour market are holding up, which they are.

It’s a different story across the Atlantic, where inflation has been coming down quicker than expected after hitting double digits in both the UK and Europe during 2022.

While some central banks look firmly on hold, financial markets are picking the ECB will cut its policy rate at its June meeting, in just three weeks’ time.

The BOE won’t be far behind, with its first cut expected in August.

This has come at a cost, with economic activity across Europe and the UK having been decidedly more subdued than we’ve seen stateside.

Here in New Zealand, we’ve had the worst of both worlds.

Our economy has been in a mild recession, with record population growth flattering some lacklustre GDP figures.

Things have gotten worse of late, as you can see from a string of profit warnings from listed companies.

Air New Zealand, Fletcher Building, Tourism Holdings, The Warehouse and even Spark (which operates in a more resilient segment) have all cut their earnings forecasts in recent weeks.

Falling customer demand has been the main culprit, along with high interest rates and other pressures on costs.

I’m hearing similar stories from smaller businesses up and down the country, across a range of sectors, and it seems the last couple of months have been particularly challenging.

We’ve also seen the housing market recovery lose steam, with sales volumes down and prices falling again so far in 2024.

At the same time, we’re battling persistent non-tradables (which means domestic) inflation that isn’t slowing nearly as much as hoped.

One bright spot (for the inflationary outlook, that is) is that the labour market continues to weaken.

In the March quarter, the unemployment rate rose to 4.3 per cent, above expectations and the highest in three years.

That’s still below the 25-year average of 4.9 per cent, but it’s much higher than the multi-decade low of 3.2 per cent from early 2022.

Average hourly earnings rose at an annual rate of 4.8 per cent, down sharply from 6.6 per cent in the previous quarter and well below RBNZ projections for a 5.9 per cent rise.

Rising unemployment, slowing wage growth and falling job security are taking their toll.

At least in part, this will be behind the recent drop-off in economic activity.

A tight labour market and plentiful wage increases have contributed to the high inflation of recent years, but this dynamic is changing.

It could be a sign inflation will slow in the months ahead, which will hopefully open the door to OCR cuts before the year is out.

This would take some pressure off households, while boosting confidence and activity for businesses too.

The RBNZ is due to release a new set of forecasts at Wednesday’s monetary policy decision, and it’ll be interesting to see how it sees all these pieces of the puzzle.

I hope it’s focused on what’s ahead of us, rather than in the rear view mirror, and that it’s been taking note of what all these businesses are saying.

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