The next six weeks could make or break the global economy – The Economy of Everything
With fuel prices soaring and global inflation threatening to ruin New Zealand’s economic recovery, all eyes are on when the Reserve Bank will hike the Official Cash Rate again.
So why was the Reserve Bank of New Zealand (RBNZ) Monetary Policy Committee talking about the possibility of a rate cut at its meeting last week?
“The world economy could tip abruptly into a downturn causing weaker inflation over the medium term,” the committee said.
“[If] the global economy turns sharply down, materially weakening demand and the inflation outlook, this could alter the desired stance, including leading to monetary easing.”
It’s prudent to keep all options on the table, but these comments raised eyebrows last week.
When questioned at the press conference, Governor Anna Breman wasn’t keen to specify what could cause that downturn.
But on the Economy of Everything podcast this week, Liam Dann and Tamsyn Parket were happy to run through the big events that will be worrying the RBNZ.
“If you look at what could really turn this world around in the next six weeks, it would be a Wall Street crash,” Dann said.
There was worrying volatility on United States markets, particularly the tech-heavy Nasdaq Index, he said.
The stock market float of shares in artificial intelligence (AI) company Anthropic looked increasingly as if it would be a referendum on whether the tech boom was sustainable or a bubble about to burst, he said.
Anthropic is seeking to raise up to US$100 billion ($178.65b) in capital, positioning it to potentially break the previous initial public offering (IPO) record set by SpaceX (US$86.2b) in June.
That would give it a total valuation of around US$1.75 trillion to US$2t.
It is scheduled to list in the next two weeks.
But as inflation persists and bond yields rise, there was growing concern about the debt levels of AI companies, Parker said.
“A lot of these AI companies are borrowing huge amounts of money to fund data centre builds. And the cost of debt has been rising.”
Inflation was linked to oil prices, which were highly dependent on the geopolitical situation in Iran, Dann said.
There were serious concerns that the US would reignite the war with Iran after the US midterm elections this week.
Iran has responded to US threats with its own, warning that it will take the war wider into Arab territories and seek to further disrupt oil markets.
“So that’s the concern,” Dann said.
Meanwhile, the US midterms have delivered a resounding blow to Trump and the Republicans.
The potential for standoff and conflict between the President and Congress added more uncertainty at a sensitive time for the global economy.
“No wonder the Reserve Bank is trying to hedge its bets, right? Maybe it is a good idea to pause right now and just sort of take a breath, wait and see how things go over the next six weeks.”
Then there was the potential uncertainty for the domestic economy as New Zealand headed into a tight election race this Saturday.
This week Dann and Parker also look at what impact the days or weeks of post-election uncertainty could have on New Zealand’s recovery.
Listen to the full episode for the complete conversation.
The Economy of Everything is available on the iHeart app or wherever you get your podcasts.
The series is hosted by Liam Dann, business editor-at-large, and Tamsyn Parker, business editor, for the NZ Herald. Thanks to CMC Markets.