Academic journal article The Reserve Bank of New Zealand Bulletin

Business Cycle Review: 2008 to Present Day

Academic journal article The Reserve Bank of New Zealand Bulletin

Business Cycle Review: 2008 to Present Day

Article excerpt

Following the global financial crisis, spare capacity in the global economy has persisted much longer than in past expansions despite extremely accommodative monetary policy settings in advanced economies. New Zealand has not been immune to these developments--GDP growth here has also been more subdued than in typical expansions, in large part due to weakness and uncertainty abroad. Against this international and domestic backdrop, consumer price inflation in New Zealand has been low, and lower than the Reserve Bank of New Zealand and other forecasters initially anticipated--particularly since 2014.

This article summarises developments in the New Zealand economy since 2008 through the lens of monetary policy, and identifies five key phases. A subsequent article will present some of the key features of this cycle, and the insights for monetary policy that have emerged or been reinforced.

1 Introduction

The persistence of spare capacity in the global economy following the global financial crisis (GFC)--the worst economic crisis since the Great Depression--has surprised policymakers around the world. Despite extremely accommodative monetary policy settings, growth in major advanced economies has proved to be slower than in past expansions. Growth in New Zealand has also been much weaker than in past expansions (figure 1). (2,3)

Against the backdrop of surprisingly weak global growth, Consumer Price Index (CPI) inflation in New Zealand has been lower than the Reserve Bank of New Zealand (the Bank) and other forecasters had expected, particularly since 2014. The persistently elevated exchange rate, weak global inflation and falls in commodity prices have dampened tradables inflation. Non-tradables inflation has also been subdued (figure 2), despite stimulatory monetary policy in New Zealand. In part, the decline in non-tradables inflation since 2014 appears to reflect the dampening effect of persistently negative tradables inflation on inflation expectations (and therefore wage- and price-setting behaviour).

This narrative of the current business cycle has been structured from the perspective of monetary policy (figure 3). The lending rates that matter for firms' and households' mortgage and saving rates are driven by not just today's Official Cash Rate (OCR) but also by the expected future path of short-term interest rates. There are many times when the monetary policy outlook changed significantly despite there being no change in the OCR. The phases identified within this narrative are therefore defined by when the outlook for monetary policy--the forecast 90-day interest rate track published in the Monetary Policy Statement--has shifted direction (began being revised higher or lower). (4) While the current expansion is estimated to have begun in the second quarter of 2009, the GFC has been included in this review to provide some context to the economic developments that have since occurred.

Using this approach, the phases identified in this review are:

* The global financial crisis (2008-09).

* 'Green shoots' recovery (mid-2009 to mid-2010).

* Domestic caution and global uncertainty (mid-2010 to late-2012);

* The commodity boom and construction upswing (early 2013 to mid-2014).

* Persistently low inflation (mid-2014 to present day).

A subsequent article will utilise this review to outline the key features of the current business cycle, including ways in which the structure of the economy appears different from previous cycles. It will also present some 'lessons' for monetary policy that have emerged or been reemphasised during the current cycle.

2 The global financial crisis of 2008-09

The GFC triggered the worst economic downturn since the Great Depression. As the trust between large financial market players declined, bank funding grew more expensive and market volatility increased. Financial market uncertainty had contractionary effects on economic activity, and many advanced economies around the world entered recession (figure 4). …

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