How the election result will affect your pocket

I’ve just had a reminder from Pattrick Smellie that it’s a breach of the Electoral Act to run political coverage/commentary on polling day, Saturday Oct 14, so I have brought forward next week’s column so as not to run foul of the law.  Always a good strategy…

Well it’s been one heck of a year so far:  Inflation came back in 2022 and doesn’t really look like easing in any material way, in spite of some slowing in the rate of price increases (i.e. not going back to previous levels but increasing further) it’s still at 30 or 40 year highs.  The massive government spending (with not a lot to show for it…) has continued under recently-anointed (by the party) Prime Minister Hipkins with his Government actually projecting in the PREFU a few weeks ago more borrowings / deficits and resulting debt levels for the next four years.  As John McEnroe said “You cannot be serious?”  Taxes are rising to pay for this government spending – the tax take has increased $50 billion over the past five years and is forecast to continue increasing.  Energy costs are up, do we still blame supply shortage ex-Russia?  Maybe but we cannot overlook the green-energy transformation taking hold in many Western countries.  I think the pressure’s easing but businesses still cannot get necessary supplies as production difficulties continue mainly because of labour shortages, in spite of an extraordinary / pent-up surge in immigration over the past few months.  Interest rates have spiked over the past two years as Central Banks everywhere seek to cut even shrink consumer spending.  As I said, a heck of a year or so…So unsurprisingly, share markets have been worried.  From their highs around two years ago now, we have seen declines of up to 30% in some markets notwithstanding some rebound over the past year.  Retracement now though..??  And adding to this here in NZ we sadly have some social and societal unrest making matters if not our collective moods all the more worse.

So, what’s the outlook for next year and what is on the horizon to hopefully make all this go away and for things to get better.  I am sad and sorry to say, not much.

Inflation won’t abate for a while, there’s too much cost pressure across the board and barring an employment collapse and substantial cuts to transfer payment, it’s “built-in”.  After fueling inflation by flooding the economy with cheap and printed money, Reserve Bank Governor Adrian Orr now says “we are sorry that New Zealanders have been buffeted by these significant economic shocks”.  He says things like we must “cool our jets” when it comes to spending over the next year or so in order to dampen runaway inflation.  We’re now looking at maybe another increase in the official cash rate to rise to 5.75% which will possibly see mortgage rates over 9%.  So, it looks as if interest rates will stay high for a while.  This spells very bad news for mortgage holders over the next couple of years if not longer particularly with food, fuel and utilities bills and indeed most other costs all going through the roof.  Painful indeed.

Labour supply will stay tight until skilled immigration really frees-up meaning it will remain difficult for business to staff-up properly for a while yet.  Our Government spending must ease, it will with a National/ACT coalition i.e. if there’s a change in Government next week – but maybe not at all if the incumbents are returned.

Meaningful tax relief is gone in the foreseeable future even with the Nats tax tweaking policy.  So it looks like tough economic times for a while yet regardless of next week’s outcome…

But, the good news is share markets “know” all of this and in aggregate tend to be pretty good at factoring all such news and views into share prices.  That’s why it’s been such a tough year or so for markets, digesting and pricing all of this bad news. The other bit of good news is that markets do tend to rise over time – averaging some 12% per annum, over the past forty years.  This compound return is in spite of the share market crash in October 1987 (more next week), the Asia Crisis in the mid-1990s, the tech wreck around 2000, the GFC in 2008 and the Covid-crash a couple of years ago.

I can’t help myself finishing with a political jab as we head into the last week before what will probably be looked back upon as one of New Zealand’s most pivotal elections ever.  Apart from “Mr Gorbachev, tear down this wall” I think one of the late great President Ronald Regan’s greatest quotes was “The nine most terrifying words in the English Language are I’m from the Government and I’m here to help”. But I will borrow and amend another of his classic’s which he quoted during the 1982 Presidential campaign against incumbent democrat Jimmy Carter.  At the time the US economy was in the doldrums and public malaise was high, Regan simply stated that, a recession is when a neighbor loses his job, a depression is when you lose yours and recovery starts when Jimmy Carter loses his.  Please note, Prime Minister Hipkins and former Prime Minister Jacinda Ardern.