The great Kiwiflation
By Justin Pyvis – Delivered on 19 Oct 2021

Good morning! Exciting times yesterday as Queensland became the latest state to announce its border reopening plan, with 70, 80 and 90% fully vaccinated thresholds triggering various relaxations:

At 70% (~19 Nov) the hard border will come down, with anyone allowed in provided they're fully vaccinated, arrive by air, have a negative COVID test in the previous 72 hours and agree to undertake home quarantine for 14 days. International arrivals will still have to quarantine in a government facility.

At 80% (~17 Dec) entry by road will also be permitted and quarantine will be removed for all but fully vaccinated international arrivals, who can serve their 14 days at home. A negative test will still be needed for all travel but for the first time unvaccinated domestic travel will also be permitted, subject to 14 days of quarantine in a government facility.

Finally, at 90% all entry restrictions or quarantine for fully vaccinated arrivals (domestic and international) will be removed, with no testing required. However, all unvaccinated travellers will still have to apply for a border pass to enter and quarantine for 14 days in a government facility.

Deputy Premier Steven Miles also confirmed that once the 80% fully vaccinated mark is reached those who remain unvaxxed for non-medical reasons "won't be able to go to... some settings and venues that decide to be vaccinated only", with more details to be provided closer to the date.

Phew. By our reckoning that means it's just the last remaining hermit state of Western Australia that has yet to announce anything in terms of how and when it plans to reopen... if ever. 😉🤷‍♂️

Fully vaccinated population (aged 12+)


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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 gained 0.34% last night despite September recording the biggest drop (-1.3%) in US factory output since the start of the pandemic (although Hurricane Ida caused about 0.6 percentage points of the fall).

Big Tech performed well, as Tesla rose 3.2% while Twitter and Facebook added 3.3%. Apple also moved higher (+1.2%) following its online event where it revealed new AirPods, MacBook Pros and plenty more.

Locally, the ASX200 started the week off in the black by adding 0.26% despite the triple shock of soaring inflation in New Zealand, surging local bond yields and disappointing September quarter growth in China.


China slowing: China's economy grew by 4.9% in the September quarter, as "domestic and overseas risks and challenges have increased". According to the National Bureau of Statistics the ongoing power shortage had a "certain impact" on economic output, with September's industrial production expanding by just 3.1%.

Despite the disappointing numbers China's government should comfortably hit its 6% annual growth target for 2021, given the 18.3% and 7.9% growth rates achieved in the first two quarters (from low, pandemic-affected bases).

Under control: The governor of China's central bank, Yi Gang, said default risks for certain firms are due to "mismanagement" and the government is watching to make sure "they do not become systematic risks". The comments came after data showed new construction starts in September fell for a sixth straight month, the worst run since the downturn of 2015 (when iron ore prices fell below $US50 per tonne).

The great Kiwiflation

Prices are running hot, not for the delicious Chinese Gooseberry 🥝 but across the New Zealand economy, where the consumer price index (CPI) hit a 10-year high 4.9% in the September quarter. If quarters impacted by increases to GST rates are excluded, the 2.2% quarterly increase was the highest since June 1987, which was at the tail-end of the great inflation.

According to StatsNZ, "price rises were widespread, with 10 of the 11 main groups in the CPI basket (such as food and transport) increasing".

Stepping back: The Kiwi government spent an additional 19.3% of GDP as part of its fiscal response to COVID-19 – amongst advanced economies, that's second only to the United States (25.5%) – and its inflation rate is... wait for it... now second only to the United States (5.4%). About 80% of that spending was directly monetised by the Reserve Bank of New Zealand (RBNZ), which purchased government bonds worth 15.6% of GDP before the programme was halted on 23 July 2021.

All else equal, more dollars chasing the same number of goods will result in higher prices, or if prices don't rise for various reasons, reductions in quality and/or shortages.

For context, Australia's government spent 18.4% of GDP – the fifth most amongst advanced economies – and has the seventh highest inflation rate, although that could be because Australia hasn't released any inflation data since the June quarter. The Reserve Bank of Australia (RBA) has so far directly monetised over half of that through its own bond buying programme that will run until at least mid-February 2022.

Why this matters: High inflation is already here. Governments around the world responded to the pandemic with trillions in additional spending, much of which was created out of 'thin air'.

International supply chains have been (and continue to be) severely disrupted by the pandemic, meaning supply is unable to respond to the desire for every government in the world to go green, construct new infrastructure and support consumption at the same time – a tough task even in normal times. The shortages we're seeing in everything from autos to energy is because, for various reasons, prices have not fully adjusted to ration demand.

It should come as no surprise that prices are rising fastest in countries that spent the most on pandemic support measures. Average consumer price inflation in places that spent below 10% of GDP is 2.7%, versus 3.3% for those that spent above 10% (and that includes Japan!).

Looking forward: Some of the price pressures in New Zealand will likely show up in Australia's data when they're released (in the June quarter prices increased by 3.8%, more than the Kiwi's 3.3% over the same period). Surging consumer prices will heap pressure on the RBA to break from its pledge to maintain the cash rate at just 0.1% "until 2024", as the RBNZ did last month and will likely do again soon.

The Wrap Up
    🔓Tassie exited lockdown as planned at 6pm yesterday but mask wearing will continue to be mandated.
    🥝The lockdown in Auckland was extended for another fortnight to "suppress and minimise cases while we work towards high rates of vaccination".
    📔The €1 million Planeta literary prize — the world's highest paying — went to Carmen Mola, an pseudonymous author who had been presented as a female university professor. Turns out she's actually three male television scriptwriters in their 40s and 50s.
    🛂Only 62% of California's public sector employees are vaccinated against COVID-19, despite a state mandate. That's below the rate of 72% amongst all Californians.
    👷‍♀️According to the Chamber of Commerce and Industry, Western Australia "needs 55,000 more workers" to deal with a "skills shortage caused by interstate and international border closures".
    💉Anthony Fauci, the US director of the National Institute of Allergy and Infectious Diseases, said the Johnson & Johnson shot "should have been a two-dose vaccine to begin with".
    🛰️Oh those Russians. For the second time in less than three months, an errant Russian spacecraft thruster firing accidentally tilted the international space station.
    🥽Facebook is hiring 10,000 people in the EU to work on its "metaverse", a digital world where people can interact within a 3D environment. Microsoft, Roblox and Epic Games are also "investing heavily" in their own versions.
    🐊Only in Florida: a Miami private school "is requiring students who get vaccinated against COVID-19 to stay home for 30 days after each dose", having previously threatened to fire anyone who is vaccinated.
    🦠Former US Secretary of State Colin Powell died from COVID-19 "complications" last night. He was 84 and fully vaccinated.
    🦍A 7-foot tall 'Harambe' gorilla was placed directly across from the famous Wall Street bull in New York, which was surrounded by 10,000 bananas "to make a point about wealth disparity".
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