“The Global Battle Against Inflation Is Almost Won”

• The IMF released its latest World Economic Outlook which celebrated the end of the global fight against inflation. Even better is the resilience of the global economy throughout the disinflation process.
• Downside risks are rising and now dominate the global economic outlook. Between geopolitical risks and a deeper slowdown in China, there is plenty reason for policymakers to remain vigilant.
• RBNZ Governor Adrian Orr was on the newswires last week. The key takeaway was two words: “more incremental”. Our COTW breaks down what this means.

Here’s our take on current events

“The global battle against inflation is almost won”, according to the IMF’s latest World Economic Outlook. Global headline inflation is forecast to fall to 3.5% by the end of 2025, from an average of 5.8% in 2024 and the 9.4% peak in 2022. It’s great news. Even better is the resilience of the global economy throughout the disinflation process. We’ve managed to avoid a global recession altogether. But now the IMF warns of rising downside risks.

"While the global decline in inflation is a major milestone, downside risks are rising and now dominate the outlook: an escalation in regional conflicts, monetary policy remaining tight for too long, a possible resurgence of financial market volatility with adverse effects on sovereign debt markets, a deeper growth slowdown in China, and the continued ratcheting up of protectionist policies." (IMF World Economic Outlook, October 2024).

The IMF made no change to its global growth forecasts. The global economy is still expected to grow 3.2% this year and next, which the IMF describes as “stable yet underwhelming”. Beneath the headline, the US was the only advanced economy to see an upgrade to its growth outlook due to robust consumer spending. In the IMF’s eyes, the so-called ‘soft-landing’ sought by the US Federal Reserve, has largely been achieved. Growth projections for emerging market powerhouses like India and Brazil were also upgraded. However, growth for the second largest economy, China, was dialled back. The collapse of the Chinese property market and subdued consumer confidence sees China’s economic growth slowing from 5.2% last year to 4.8% this year and 4.5% in 2025. That’s not good news for us. A severe slowdown in China hits us directly through our trade with Asia and volatility in financial markets. But our exposure to a Chinese slowdown is compounded by our links with Australia. Australia is our second largest trading partner. And any Chinese-led slowdown in Australia is likely to spill over to New Zealand. Australia exports materials used for construction in China. And China is Australia’s largest trading partner.

So, what about Aotearoa? The IMF’s outlook is largely unchanged with economic growth climbing back to ~2% in 2025. But the starting point is softer. The IMF now projects 2024 to record flat growth, down from a forecast of 1%. In per capita terms, we know that economic growth has been worse than the GFC. And on the global scale, the IMF puts us down among the worst in the world. It’s a result of aggressive monetary policy tightening which has driven our economy into recession. But now that the RBNZ has closed the chapter on rate hikes, the outlook is improving. Inflation is back within the band and rate cuts are coming through thick and fast. But hold your horses, RBNZ Governor Adrian Orr signalled more “incremental” moves on the way down in a speech last week (see COTW). Nonetheless, 2025 should be the year we climb out of recession.

Chart of the Week: Cost of living crisis is coming to an end.

In a speech last week, RBNZ Governor Adrian Orr said: “On the way down we can be more incremental, and we have been… We’re being more incremental because we’re in calmer waters but also because of that lingering inflation persistence on the domestic side.”

So what does being “more incremental” mean?

Well, the RBNZ were very aggressive in their tightening of monetary policy, following the surge in inflation as we broke out of Covid. The RBNZ was the first major central bank to start hiking in late 2021. They started off with a few 25bp hikes, and then they delivered seven 50bps moves with one 75bp hike for good measure. The cash rate was catapulted from just 0.25%, to 5.5%. It was the hardest and fastest tightening cycle we’ve seen. A cash rate of 0.25% was too low in hindsight, but they were talking about a negative cash rate at the time (which we fiercely opposed). And 5.5% was arguably too high. We’ve been in a recession for two years, and we’re losing

businesses and jobs.

So incremental, to us, means less than that on the way down. And no one is suggesting we need to go all the way back to 0.25%. So, a move to neutral (around 2.75%) would be more incremental, and involve fewer 50s. But more 50s nonetheless.

Indeed, we think the RBNZ will deliver another 50bp move in November (to 4.25%), and they can easily justify another 50bp cut in February (to 3.75%).

Cutting from 5.5% to 3.75% makes policy much less restrictive. But it will still be restrictive, and “will remain [restrictive] over the coming quarters as we get more and more confident that pricing behaviour has renormalized,” (Governor Adrian Orr). The RBNZ needs to get the cash rate below 4% ASAP. And then they can cut in 25bp increments in a search for a neutral setting.

Our take on the Governor’s comments also suggest some guidance for market traders. It does seem that Orr was pushing back a little on the call by some in markets for a 75bp cut in November. We’re in the dovish camp, and think 50 is enough, especially if followed up with a third 50 in February.

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