Inflation challenges rise – worry about the macro but focus on the micro

Sometimes you need to step back, take a deep breath to separate the wood from the trees.The economic environment has changed massively. The changes are not just cyclical or temporary as the economy moves up and down. And changes cover both economic and social aspects. Businesses need to adapt to both near-term shifts, but deeper secular trends. There is some pain ahead, but also some getting back to basics which is long overdue. Below is a sample of changes I am seeing:


That was then                                                                        This is now

  • Globalised and connected world                                       – Fragmented world
  • Low inflation and low volatility                                           – Inflation and volatility
  • Trend lower in interest rates                                               – Rising interest rates
  • House prices doubling every decade                                – Falling asset prices
  • Central banks had everyone’s back                                   – Central banks talking tough
  • Distorted pricing of risk                                                       – Repricing of risk
  • All power to the employers                                                 – Rising power of the employees
  • Shareholder capitalism                                                       – Stakeholder capitalism
  • Shortermism                                                                         – ESG movement and the long game
  • Tame influence of government                                          – Rising influence of government
  • Rising wealth inequality                                                       – Inequality morphs into ugly fragmentation
  • Dominance of big four banks                                             – Emergence of non-bank competition
  • Fossil fuel dominance                                                          – Unlocking renewables

On top of that you can add the disruptive aspects of technology, shifting expectations across different generations (millennials versus generation X) and managing various aspects of climate change.

The immediate challenge is containing inflation. Headline inflation is still rising and expectations about future inflation are increasing too. The latest figures in the United States had inflation rising 9.1 percent on last year. Rising expectations about future inflation is a real problem for central bank credibility. Containing inflation is not growth or asset price friendly.

Consensus forecasts point to an economic slowdown but a far cry from a recession. Central banks are talking about soft landings. Politicians continue to preach about strong fundamentals. Maybe they are right, and I hope they are. But hope is not a word business should be relying on. Businesses need to be proactive not reactive, managing risks, rather than relying on political or central bank reassurances.

Leading indicators of economic activity have turned. Consumer confidence is in the United States according to a University of Michigan survey is the lowest on record, at a time the unemployment rate is 3.6%. Stagflation (inflation with no growth) is being mentioned more and more. Stagflation is associated with rising unemployment. We do not have that. Staff shortages are like Covid – ongoing. That is adding to wage pressure and negatively impacting productivity which adds to inflation.

Consumer confidence in New Zealand is at a recessionary level, as are firms’ own activity expectations from the ANZ Business Outlook Survey. Those measures might be overcooking things a bit though. They ask about the next year relative to the last year. The last year has been huge for many! Something slightly less strong might technically be negative but still a good level of activity. Residential building consents falling from 51,000 to 35,000 would just bring demand back into line with what the building industry can actually build! Financial markets have eased back on anticipated interest rate increases. Large rises are still anticipated but lower peaks. Bad economic news has been somewhat good for interest rates. A stitch in time (going hard early) could save nine.

Can we get the inflationary thief back in jail? Markets are oscillating. Many factors point to a more persistent inflation theme. Central banks are battling some factors they cannot control on many levels, namely supply, forcing them to hit demand harder. Forget about a precise economic playbook for the coming five years. How do you set a playbook when history has been so incredibly distorted by central banks rolling out the printing presses and taking interest rates to zero, or below zero in some nations? Brace for bumps as normality returns.

Some business basics still apply, and particularly for small businesses, the engine room of the New Zealand economy. The latest Annual Enterprise Survey reported 493,000 businesses with turnover of $50 million or less. They had a combined income of $255 billion, shareholders’ funds of $370 billion and total assets of $787 billion. Welcome to a reintroduction to Mr and Mrs C Ash. Businesses that make real money, not offer prospects of infinite gain.

People now need to take real risk to make real money. That doesn’t sound like a bad economic environment to me! It is an environment where we could see a major switch away from housing and investing in small businesses. It might sound heroic in the current COVID and government environment, but lacking an interest rate tailwind, housing will not be the investment it was and people need to invest in real productive assets.

Rising interest rates will expose the charlatans, which is overdue. Sometimes you need asset destruction to drive innovation. Good businesses will take over bad businesses.

Tough times generate the need for different political thinking. Change is needed. Would we be seeing the prospect of real change in the supermarket sector without inflation? Probably not. Tough times also reinforce the importance of long-standing relationships. Businesses cannot control the macroeconomic environment, but they can control the microeconomic ones in their own spheres. Worry about the macro but focus on the micro small levers.

*While Bagrie Economics uses all reasonable endeavours in producing reports to ensure the information is as accurate as practicable, Bagrie Economics shall not be liable for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. The content does not constitute advice. 

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