ASB: Stagflation On The Horizon

ASB note that “the Q2 NZIER Quarterly Survey of Business Opinion made for grim reading, with little to cheer optimists. Demand-side indicators were glum, pointing to outright falls in economic activity. Despite weakening demand, capacity metrics were tight, with worker shortages still the key constraint on expansion and with firms experiencing extreme difficulty in finding skilled and unskilled labour. Experienced and expected costs and prices lifted to stratospheric levels and point to the inflation impulse being high and increasingly embedded. All up, all of the ingredients for a hard landing are here, but a soft landing can still be achieved. Still, with high inflation running the risk of being increasingly entrenched, a frontloaded pace of OCR hikes and restrictive monetary settings by the RBNZ as well as tough talk on inflation is required. OCR cuts beyond then will depend on how quickly capacity pressures cool.”