money – Lone Wolf Films

July 3, 2018

Bryce Edwards’ Political Roundup: What’s driving down business confidence?

Business interests aren’t very happy at the moment. We know this from numerous “business confidence” surveys, media interviews with CEOs, and increasingly restive business groups. Of course, as discussed in yesterday’s Political Roundup column, much of this might be put down to “business bias” against a Labour government – quite simply, businesses are struggling with the pledge the government made when it came to power, that “capitalism must regain its human face”.

There is more to it than this, though. At the moment, there seem to be three main concerns for business: 1) A belief that this coalition government arrangement is unstable and unpredictable, 2) The oil and gas exploration decision, and 3) Proposed employment law reforms. These are all explored below.

1) An unstable and unpredictable coalition government arrangement

On Friday, veteran political journalist John Armstrong penned a hard-hitting TVNZ column that implores the new government to reflect on how its relationship with business is developing. Armstrong warns that despite the potential for this dynamic to lead to the government’s early demise, “Labour instead gives every impression that it cannot be bothered” with the problem – see: Ardern’s baby leave gives her time to give serious thought to Labour’s ‘cannot be bothered’ attitude to business sector.

Armstrong worries that Cabinet ministers are in an arrogant phase, believing they are “infallible”, and that “Ardern’s troops have become battle-hardened” with a strong belief in the need to “remain staunch rather than being seen to be caving in to employers hell-bent on blocking reform.” They don’t seem to realise, that “the Government’s honeymoon is long over.”

Although Armstrong puts some of the government’s relationship “disconnect” with business down to ideology (“Under the leadership of first Andrew Little and then Ardern, Labour has also undergone a marked shift to the left”), his most important point is that business doesn’t think the government’s reform agenda is clear and consistent enough, and “Business hates inconsistency. It hates uncertainty”.

Rightwing commentator Matthew Hooton also published a column on Friday that explained that falling business confidence is “driven by huge policy uncertainty”, which is further undermined by “questions about Government’s decision-making processes” – see: Business uncertainty to get worse.

The problem isn’t so much the Labour Party, according to Hooton, but the struggling New Zealand First and Green parties, whose fight for survival will necessitate asserting themselves with some bolder policy initiatives as time goes on: “As the election emerges on the horizon, the pressure on NZ First and the Greens to make ever-more outlandish demands will only increase and Labour’s ability to say no will decline. Even the most peculiar policy proposal or sudden carve-out for your competitor will become possible. No one can really anticipate what will happen. But only the most brave or reckless businesspeople will see the next two years as a good time to take a risk.”

The latest editorial in the Listener also says business has little problem with “fiscally conservative” Grant Robertson, and is instead more worried about his colleagues who have made a habit of taking “potshots” at business: “Robertson’s mission is to convince business it does not face wild policy lurches or instability. Yet fellow ministers have repeatedly undermined Robertson’s message. So far this is more a matter of careless and self-aggrandising rhetoric and poor communications than of actual business-hindering policy. But an understandable sense of enmity has ensued” – see: NZ’s falling business confidence reflects the true price of ministers’ potshots.

The Listener singles out Employment Minister Iain Lees-Galloway and “ad hominem attacks on Air New Zealand and Fonterra” from Regional Economic Development Minister Shane Jones.

2) The oil and gas exploration decision

The surprise decision of the Government to essentially ban further oil and gas exploration apparently still has many in the private sector reeling. This isn’t simply because they disagree with the actual decision, but because the decision-making process has scared them. Concern has actually increased as more information has come to light. Last month official documents were released that indicate the decision was made quickly, without proper Cabinet involvement, no industry consultation, and minimal advice from government department officials.

Matthew Hooton has been the biggest critic of the process in the media, suggesting that businesses are rightfully fearful that their own sectors could be vulnerable to similar interventions by the government. He wrote about this in detail last month in his column, Crisis-filled month triggered Ardern’s oil & gas move.

To Hooton, the decision involved very poor process, and was not actually driven by environmental considerations, but essentially by pragmatic and strategic considerations: “Could there be a more cavalier and shameful way for a Government to behave when making decisions affecting 8481 jobs, billions of dollars of exports and which it had been advised would most likely increase greenhouse emissions and thus worsen climate change? The reason for the urgency is suggested by its context. After Labour’s mishandling of the sexual assault allegations at its summer camp, Winston Peters’ inexplicable stance on the Russian chemical weapons attack in the UK, Phil Twyford’s comical Pt Chevalier KiwiBuild announcement, and the scandal involving Clare Curran and RNZ, Ardern was desperate for something — anything — to reassure her core supporters.”

These points were also made strongly by Fran O’Sullivan, who argued the decision was rushed in order to aid the PM’s diplomatic trip to Europe: “Ardern put her debut as a global climate change warrior ahead of making credible plans to transition New Zealand away from a reliance on fossil fuels towards clean energy. There’s no other way to interpret the documents and emails that have been released this week” – see: Ardern’s Orwellian move to ban exploration.

Although pro-business commentators might be expected to criticise the process, some on the political left were also unimpressed. The No Right Turn blogger said: “Like many, I welcomed this decision – we need to decarbonise, and slowly shutting down the oil industry is a necessary step to that. But the process they followed to do it all seems a bit Mickey Mouse” – see: Government by press conference.

The blogger condemned the PM’s decision not to involve Cabinet and government departments in such a controversial decision, pointing to the Cabinet Manual’s rules about this. He concluded: “fundamentally, this is not how decisions are supposed to be made in our system of government. And it raises the question of exactly why the government chose to sidestep Cabinet in this manner. And if it was to avoid their obligations under the Public Records Act and Official Information Act, then that is looking very dubious indeed.”

Many journalists have since reported that business leaders have been concerned about this episode of governance. But Hamish Rutherford has reported that Finance Minister Grant Robertson claims that few businesspeople raise the oil and gas decision with him: “On Tuesday he played down the degree to which the abrupt decision to end offering offshore oil permits has dented investment confidence, saying it was hardly ever raised with him. If that really was the case, that seems likely to be a sign that business has not yet become comfortable being candid with the finance minister” – see: To inspire confidence, Grant Robertson must do more than repeat the message.

3) Employment law reforms currently proposed

In all likelihood, the main problem that the business sector has with the new leftwing government is the perennial “class struggle” issue of wanting to retain its advantages over employees. With the Labour-led government carrying out all sorts of industrial relations reform, business is simply unhappy to have profitability under threat.

The chief executive of Wellington Chamber of Commerce, John Milford is fairly upfront about this, saying in a recent newspaper column on business confidence surveys, that “The problem for the Government is that confidence is not going to improve as long as they insist on pushing ahead with their proposed changes to industrial legislation” – see: Minister, concerns from business aren’t junk.

Milford makes it clear that employers regard the reforms as a backwards step: “What’s proposed is old thinking that’s threatening to take us back to the industrial strife of the 1970s.” And he outlines what they don’t like: “the Employment Relations Amendment Bill as it’s drafted that will further reduce flexibility and harm the growth prospects of businesses. They are provisions that allow union reps to enter a workplace without permission, force businesses to settle collective agreements even if they don’t or can’t agree, and force them to join a multi-employer collective agreement (MECA).”

So, some degree of union power is being restored by this government, and understandably this isn’t welcomed by those who might be negatively impacted. This has also been discussed by John Roughan: “The Government is on a mission to raise incomes at the lower levels and rightly so. It proposes to do so not just with steeper annual increases in the statutory minimum wage but by strengthening trade unions. This is probably what is keeping business confidence low, and rightly so” – see: Striking state servants will be chilling business confidence.

This is also dealt with in Liam Dann’s column, Business heads for winter of discontent. Here’s the main point: “Feedback from groups like the Employers and Manufacturer Association (EMA) and Business NZ suggests that despite a broad acceptance that the new Government is not radical, there is genuine concern about the impact of new labour laws. This is less about rises to the minimum wage and more related to issues like the repeal of the 90-day trial period for businesses with more than 20 staff and changes to collective bargaining rules which will give unions more clout in some workplaces.”

Fran O’Sullivan reports that business groups have launched a campaign against the reforms: “employer groups confirmed they are launching an advertising campaign which will include billboards, newspaper and digital advertising. The ‘Please Fix the Bill’ campaign is funded by BusinessNZ’s member groups” – see: Business returns to fighting the same old fight.

Finally, not all businesses are complaining about the Government. Today, Graham Adams writes about one big business that is very happy, and he quotes their latest annual report: “As a business, we are pleased with the youthfulness and energy of New Zealand’s new government. Given the problems they face, we are impressed with the speed at which they are coming to grips, and we wish them well” – see: Mainfreight: A dissenting business voice on the government .

MIL OSI – Source: Evening Report Arts and Media

May 25, 2018

Tony Alexander’s Weekly Economic Overview – 24 May 2018

Economic Analysis by Tony Alexander.

Slowing Down?

This week we learnt that during the March quarter core retail spending (excluding fuel and vehicles) rose by 0.6% in seasonally adjusted volume terms. This is a slowdown from unusually strong growth of 1.8% in the December quarter but it is too early to conclude that a new easing trend is necessarily in place beyond the pullback from the 2015-16 surge. Much of the slowdown will simply be a payback from the strong December quarter and if we average growth for the six month period the outcome of 1.2% a quarter is consistent with the average for the past year and a half.

If we look at the best indicator of attitudes which consumers have toward how things are and where they are going we see that spending on store types selling mainly durable goods rose by 2.2% in the quarter. This was actually an acceleration from 1.5% growth during the December quarter. This again implies that treating the weak March quarter result as the start of an easing trend would not necessarily be correct. But as the graph above clearly shows, an earlier boom in spending growth has eased off slightly.

Looking ahead we see an environment which will provide continuing support for growth in consumer spending. Demand for employees is very high so we would expect people to feel a high level of job security. Interest rates look set to remain low for a continuing very long time. Population growth remains strong (see below), and house prices continue to rise in most parts of the country though at slowing paces. House construction remains strong and that is good for sales of home furnishings etc.

Yet there are reasons for retailers erring on the cautious side. Petrol prices have risen quite a bit recently and could go a tad higher. That saps spending available for other things.

Of probably greater relevance for retailers however is the ongoing rise in competition from online sources, and the increased willingness and ease with which consumers can search for alternatives online. On top of that social media’s omnipresence means that bad stories about a retailer or their product can spread very easily. And any stories of sales weakness may build expectations of failure or deep discounting to such a level that people sit still simply waiting for such discounting to occur.

Retailers also need to be aware of the increasing demand from consumers for environmentally friendly goods with a minimum of packaging. Plus staffing is becoming an increasingly problematic issue for many retailers. We more frequently see job vacancy signs in shop windows these days, and the rise in minimum wages will affect some.

For others the issue might be the long-overdue crackdown on staff exploitation by some bad operators. This may be hitting others who following an inspection might lose staff who’s work visas have been discovered to be out of date.

We also learnt this week that the population boost from net migration flows continues to ease off, largely because of a lift in the number of foreigners leaving the country. In April the net migration inflow amounted to 2,460 people which was down from 3,406 a year ago.

The annual net migration gain now stands at 67,040 from a peak of 72,404 nine months ago. The speed of turnaround is so far fairly slow at an annual pace of near 7,000 but a small acceleration in the decline could be underway.

Over the past three months the annualised net migration gain has fallen to 61,000 from 70,000 three months back. But we have to be careful about over-extrapolating monthly and even three monthly changes as things can move around quite a bit. This graph of monthly seasonally adjusted net inflows probably best shows the turnaround.

Fundamentally speaking, a key driver for high net migration inflows of strong labour demand in New Zealand remains and is expected to persist for some years.

This is highly relevant not just in terms of people coming in on work visas, but Aussies coming in at will and those of us already here choosing not to leave. The annual flow against Australia is interesting. It peaked at a record net loss of 40,000 people in 2012 but now stands at only a small loss of 162 in the past year. This is down from a gain of almost 2,000 in NZ’s favour late in 2016. The turnaround is minor but is likely to go further as jobs growth has been quite strong in Australia for the past year and a half with full-time employment in particular showing a turnaround from many weak years post-GFC.

Housing

I’ve been making number of presentations to people interested in the residential property market recently with more coming up. The questions people have are invariably centred around very specific things which have capacity to have some influence on the market. They ask about the changing brightline test, or the planned ban on foreign buying, or availability of bank finance. They are right at the coalface in the sector and their questions are quite specific. Rightly so.

But that is not where I live my job. As an economist my job in every forum is to take people briefly away from their immediate concerns and try and show them the big long-term picture. Sometimes I say to audiences that I will speak about the things over which they have no influence but which will influence their outcomes.

In the housing sector that means I am still writing and speaking about the same things I have been focussing on for a very long time. Consider this following collection of points.

• “New Zealand has a shortage of dwellings and not an over-supply like the US, Ireland, Spain etc. That means the extent to which house prices would fall this cycle was always going to be limited.

• Construction is at its weakest levels since 1965 near 14,000 per annum whereas 25,000 has been the average for the past decade.

• Population growth is accelerating courtesy of rising net immigration (fewer people leaving so the mix is different from what we thought last year).

• Interest rates are at very low levels – 40 year lows for floating mortgage rates.

• The ability of housing construction to respond this cycle will be limited by the collapse of the finance company sector and its generous loans of money to property developers, plus tighter lending criteria by banks.

• Investors have seen their equity investments and many others torn apart. The relative attractiveness therefore of housing from a psychological point of view has increased.” I wrote those comments in the August 20 2009 issue of the Weekly Overview. Here are some more detailed comments from the September 3 2009 issue.

• “Average new house sizes are far larger than before so each “unit” of house involves 1.x units of older houses. With nothing else changing (ceteris paribus) average construction prices will be 1.x times higher.

• There are more double income families now than in earlier years so price/income measures using average individual income measures are less relevant. One can easily adjust for this using household incomes however.

• Average construction costs per meter are now higher than they used to be due to things such as tighter regulation of materials and construction personnel, compliance costs, insulation requirements, inspections, quarry availability and travelling distance for materials…

• What we expect in a house is more than before – inside toilet(s), computer wiring, patios, …

• Section sizes are smaller but land availability is worse than in the past so prices are higher.

• Councils have not only moved to make section developers pay the full cost of services that will run to their area, but extras as well as a form of subsidy for existing ratepayers.

• Availability of credit to individual buyers is far greater than in the old days so the pool of people who can consider making a purchase is greater than before, and if people choose they can access credit at an earlier age than before.

• People’s awareness of the need to save for retirement has soared in the past 15 or so years so there is a constant nagging feeling that one needs to invest in something. Housing appears to be the default investment for Kiwis.

• One could be wrong, but it appears harder in some locations to develop new subdivisions and therefore expand city boundaries (Auckland) than in the past. “

You can find these two old publications here:

Page 7 in the former. https://www.mortgagerates.co.nz/files/WOAug20.pdf

Page 10 in the latter. https://www.mortgagerates.co.nz/files/WOSept3.pdf

And for your guide, here is the url containing our November 1 2012 listing of 19 reasons why Auckland house prices would keep rising. http://tonyalexander.co.nz/wpcontent/uploads/2013/02/WONovember-1.pdf

Have any of the factors discussed above changed enough to alter the new housing fundamental of higher prices? From the first set we can note higher consents at 31,500 but population growth well exceeding anything we envisioned back then as net immigration flows have boomed. From the second list we can note that credit availability has tightened up for house buyers through LVRs and changes in bank self-imposed rules. But development finance has also tightened up. On the last point above, development of new subdivisions still looks like a nightmare.

It is into the context of the long-term fundamentals like rapid population growth (see the net immigration graph trend line on page 3 above), hiking construction costs, desire/need to invest for long-term gain (that is the bit some people fail to grasp as they speak as if every investor were a speculator), and family changes that we need to place new developments.

Some investors will be discouraged by the coming anti-investor legislation. But that won’t change the above fundamentals. Once the mix of investors has adjusted the availability of housing stock will worsen as young couples move out of family homes to displace tenants, rents will be higher because of higher costs, and the market will move back up again. Timing for Auckland? Probably within the next 18 months. Relevance for the rest of the country? Underpinning of recent price rises with upside potential slightly further down the track, but lost in the wash for the next 18 months as the lagged booms following Auckland’s earlier surge naturally end.

Are You Seeing Something We Are Not? If so, email me at tony.alexander@bnz.co.nz with Housing Comment in the Subject line and let me know.

If I Were A Borrower What Would I Do?

Writing in this section has been a very boring exercise for some years and remains so even though we are seeing rises in US long-term interest rates. In theory such rises should place upward pressure on medium to long-term fixed interest rates in New Zealand. In practice we are yet to see that and it might take another 0.5% gain in the benchmark US ten year Treasury bond yield to cause a noticeable movement in average rates here.

Were I still borrowing at the moment my inclination would be to fix at about the two year period with some spreading of forecasting uncertainty by locking some debt in for one year and a tad also for three years with some also floating to allow for cost-free early repayments should such become possible.

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The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

MIL OSI – Source: Evening Report Arts and Media

May 18, 2018

Tony Alexander’s Weekly Economic Analysis Overview 17 May 2018

Economic Analysis by Tony Alexander.

In this week’s Overview we take a quick look at the Budget then examine data showing the types of jobs showing strongest growth in numbers in recent years.

We then correlate population growth projections with recent construction surges to see if any regions might have got a bit ahead of themselves. We finish off with thoughts regarding the temporary worries about investors pulling back from housing offset against the relentless growth in the housing shortage.

EDITOR’S NOTE: For the full analysis report including graphs and data, go to: www.TonyAlexander.co.nz

Not A Pre-Election or Reformist Budget

The new Finance Minister Grant Robertson released his first Budget today and it was fairly much as expected. The fiscal numbers look good with a string of reasonable surpluses causing the net debt to GDP ratio to slowly decline below the targeted 20% within four years. This leaves headroom for extra spending in future budgets as long as the economy stays strong.

The economic projections look reasonable and it would take a shock scenario to seriously threaten the fiscal outlook.

There is a noticeable dearth of solid key measures actually announced in the Budget. Instead there are numerous statements of how things will be different going forward, and hefty increases in funding for health, education, housing, and infrastructure. There will be a new research and development expenditure tax deduction but beyond that little of direct relevance to the business community. From a traditional restrictive economic and fiscal analysis point of view it was boring.

The Budget’s focus however is largely on allocating higher spending aimed at catching up the many groups of people who have been left behind by the firm performance of the economy in recent years. There is nothing jumping out suggesting that announcements in the Budget will provide any impediment to the good growth outlook which we have. The challenge for the new government will be meeting the aspirations of the various sectors and pressure groups seeking and/or receiving more funding, and ensuring the extra money is well spent.

This was not a pre-election Budget, but neither was it a budget of big change which reformist governments or those needing to inflict pain to get fiscal numbers under control typically implement straight after being elected. The government has inherited an economy in very good shape with fiscal numbers reflecting good management through and after the GFC and effects of the Christchurch earthquakes.

The new government has not come to power promising an agenda of radical economic change, much as one might think they did going by the still unusually low level of business confidence. If change is what the government intends making then the Prime Minister and other senior people have already repeatedly made it clear that this lies not so much in the field of economic management as in the social and environmental arenas. Issues like housing affordability and availability (where they will fail), the environment, access to good healthcare, the regions and infrastructure dominate.

For additional information on increased spending allocations and the small number of new measures such as expanded access to the Community Services Card simply look at commentaries already readily available before this Overview went to print.

Managers Galore

Between the March quarter of 2013 and the March quarter of this year total job numbers in New Zealand grew by 403,000 or 18.5%. The following table shows this growth for different job types. Most growth has been for people classified as Managers and Professionals.

We can look at this another way. Growth in job numbers for Managers was 19.9% more than the 18.5% for all NZ and accounted for 36.1% of all 403,000 jobs growth. Professionals grew according to their 2013 share of all jobs. All other job types under-performed to similar degrees. This tells us that the only job type growing radically different from market share is for Managers. People physically making or moving things around accounted for about 19% of all jobs growth.

The Managers category is extremely wide and in the words of the statisticians “Managers plan, organise, direct, control, coordinate and review the operations of government, commercial, agricultural, industrial, non-profit and other organisations, and departments. Indicative Skill Level: Most occupations in this major group have a level of skill commensurate with the qualifications and experience outlined below.

Bachelor degree or higher qualification. At least five years of relevant experience may substitute for the formal qualification (ANZSCO Skill Level 1); or NZ Register Diploma, or at least three years of relevant experience…”

This helps explain why the government is trying to encourage more people to go to the university – at the cost of not rapidly boosting spending in other areas like health and homelessness. Jobs increasingly require high skills and qualifications.

This does not mean university is however necessary for everyone because there are significant shortages of people in the trades sector. And the interesting thing about working in a trade is that it provides an opportunity after a few years for someone to go out on their own with the own business.

Housing

Last week I said we’d include Statistics NZ subnational population projections.

We can run an exercise comparing projected population growth rates (vertical axis) against growth in dwelling consents issued over the past three years. As a rule we would expect to see a scattering of dots starting in the bottom left hand corner of the graph following, rising to the top right hand side. We would expect regions with high projected population growth on the vertical axis to have high growth in consent issuance measured on the horizontal axis.

This is what we see by and large. Auckland has 56% projected population growth and consents have risen by 61% in the past three years. West Coast has a 7.3% projected population decline and consents have fallen 27.4%. Canterbury we can ignore because of the earthquake impact.

But Nelson shows as having 19.1% projected population growth but a 9.6% fall in consents. That suggests thoughts of a housing shortage delivering price support and perhaps reinforces our positive interpretation of Nelson listings and asking price data discussed here two weeks ago.

But look at the other end of the spectrum. Bay of Plenty has seen an 87% jump in consents but population growth from 2013-43 of 26% is projected. Northland and Manawatu-Wanganui also stick out. Northland has projected population growth of 19.4% but consents have soared 73.3%. Manawatu-Wanganui has population growth projected at 7.1% but consents have jumped 56%. Marlborough perhaps has overcooked itself as well.

This analysis cannot much guide us toward estimates of shortages or housing excess supplies. But it can deliver to us a suggestion as to which parts of the country over the past three years could have got ahead of underlying demand growth with their construction surge. And maybe the most relevant way that manifests itself is a recommendation to buyers looking at these areas to not be in a hurry. Just as there are developments falling over and no longer stacking up funding-wise and cost-wise in Auckland, some already completed developments in some regions may not attract the buyer demand which had been anticipated.

Every Week A Bigger Shortage

Back to Auckland, discussion continues regarding the impact of the new government’s planned ending of using losses to offset tax bills from other work (ring-fencing), legislation favouring tenants, banning foreign buyers and so on. There is a common view that these anti-investor changes will fundamentally change the economics of the housing market and improve affordability through containing prices over an extended period of time. Such a view however will almost certainly prove wrong in the face of the strong underlying dominant driving forces which we have long emphasised here and elsewhere.

Population growth is strong in Auckland. Every week on average an extra 800 people boost the population and need to find homes. But growth in dwelling supply has not kept up with growth in demand and whatever one’s estimate of the dwelling shortage was in 2012 or any year since, it is now bigger. The shortage will continue to get bigger in the next few years, especially because rising construction costs and council compliance red tape and delays are pushing some builders out of the sector, and because resources are in short supply.

Each week there is a bang, bang, bang noise from extra housing demand. But for now the noise is covered up by ears tuned only to worries and expectations about what investors will do. Eventually however we will see that the number of investors quitting their assets is much smaller than people seeking cheaper housing want. When that realisation kicks through people will hear the persistent weekly banging again from a growing queue of people looking for something to buy.

Eventually we will get a new price response. If the focus on some unhappy investors goes long enough, as I suspect it will, we will see the Reserve Bank ease LVR rules a little bit more. Such easing has become marginally more probable as a result of last week’s more dovish than expected Monetary Policy Statement and comments from the new Governor.

When will ears start hearing the banging from frustrated buyers and renters? There is no way of knowing but it could happen within 12 months. (It is interesting to sense the frustration already growing amongst government MPs and other agencies, the highlighting of the huge jump in the state house waiting list.) Trigger? Not a new interest rate cut, but perhaps revelation of KiwiBuild failure to boost construction as many hope. Perhaps collapse or closure of some builders unable to profitably manage an environment of deep regulation, bureaucracy, uncertain flows of materials and staff, and rising costs.

Related to this growing queue is news this week that officials are looking at shared equity schemes by which banks or government agencies will take part ownership of a property to help young buyers into home ownership. That represents a rise in demand. That means higher prices.

Where does this all end some years from now? Recognition that home ownership is an unrealistic expectation for many people until perhaps much longer in their working lives than currently desired. More legislation making long-term perhaps lifelong renting a more comfortable proposition for people. A government scheme covering landlords for damage done to rental properties by tenants or perhaps certain categories of tenants. More managed fund construction of and investment in housing perhaps with contracts to make units available to government agencies.

And prices will go higher. Later. Eco101.

For your guide, Treasury are forecasting that average NZ-wide house prices will rise by 2.8% in the year to June 2019 then 2% the following year, 3.4% in the year to June 2021, and 3.7% the year after that.

If I Were A Borrower What Would I Do?

Nothing new really apart from some strong retail spending data in the United States causing a decent jump in ten year US government bond yields above 3%. This might place some mild upward pressure on NZ bank fixed borrowing and therefore lending rates. If so this would be consistent with the view we have all been expressing for a long time regarding tightening US monetary policy slowly pushing NZ fixed interest rates higher.

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

MIL OSI – Source: Evening Report Arts and Media

April 20, 2018

Tony Alexander’s Weekly New Zealand Economic Overview 19 April 2018

Economic Analysis by Tony Alexander.

This week I take a simple look at reasons why our economy’s growth rate and jobs growth have both been so strong the past four years, in spite of the big fall in dairy prices over 2013-14.

Strong Growth For Four Years

In the absence of any truly useful economic data releases this week I thought it might be useful to take a look at the past four or so years. In calendar year 2017 our economy was 14.7% bigger than in 2013. That means growth has averaged near 3.7% per annum. That is a strong performance from three points of view.

First, it is well above average annual growth for the past 20 years of 2.8% per annum.

Second it is well above rates of growth over recent years in countries against which we have traditionally compared ourselves such as Australia, the UK, USA, Japan, the EU and so on.

Third, it is a much stronger performance than any of us were expecting to follow the 60% fall in international dairy prices between 2014 and 2015.

And it is not just in the GDP figures that we see a strong period of growth. Job numbers have grown near 15% or 350,000, the government’s accounts have moved from deficit to surplus (how long before our new Finance Minister blows them away however?), and the current account deficit has shrunk.

The decline in dairy sector income was very easily offset by a number of factors. One was a sharp recovery in the construction sector. The number of consents issued for the construction of new dwellings hit the lowest level since the 1960s (when the population was below 3 million) come 2011. That total of 13,500 is now dwarfed by consents in the year to February of just over 32,000.

The volume of non-residential construction in 2017 was ahead almost 30% from 2013 levels. Plus, infrastructure spending has picked up. Employment in construction at the end of 2017 was ahead 42% from the end of 2013. (Manufacturing was unchanged, a result consistent with it’s long-term flat to downward trend..)

Our economy has also received a strong boost from a surge in visitors coming to our shores. In the past five years visitor numbers have risen by 46%. In the previous five years ending in February 2013 they grew by only 4%.

This boom has created plenty of extra jobs and created significant capacity issues in the accommodation sector in particular. And now that Immigration NZ are cracking down on migrants in the hospitality and retailing sectors employers are really struggling to find staff. Be mindful of these staffing issues the next time your stay at a hotel is not quite up to expectations. And be sure to book ahead else you could find yourself being billeted with company staff in the location you are visiting and imagine the mess that could create in this day and age.

Our economic growth rate has also of course been pushed higher by a huge migration surge. Our population has grown about 8% over the past four years assisted by a net immigration inflow of about 263,000 since early-2014.

There has also been assistance to growth from the large fall in oil prices from 2014 levels, and the Reserve Bank cutting it’s official cash rate 1.75% over 2015-16 after raising it 1% over 2014 then watching as inflation came in near 2% lower than they were expecting. Opps.

That opps is important. Having twice raised interest rates post-GFC and had to quickly slash them the Reserve Bank will want to poke the whites of the eyes of threatening inflation before it will raise rates a third time.

So is this strong pace of economic growth continuing? Over the December quarter GDP (gross domestic product) rose by 0.6% after rising 0.6% in the September quarter. So in the second half of last year growth was running at about a 2.5% annual pace. Growth has slowed down. Why?

Weakness in agriculture and food processing by the looks of it which we can generally put down to the unpredictable impact of weather and such weakness is unlikely to persist. But we’ve also seen a surge in imports probably driven by strong growth in personal consumption and increased business investment. Imports count as a negative in the GDP accounts but to the extent that the goods coming in will go toward building the country’s economic base this will be good for future growth.

In fact as we look ahead we see scope for some good growth in business investment because a key constraint now on the ability of businesses to grow is a shortage of labour – as we discussed last week. With labour unavailable businesses need to boost capital spending to raise capacity and boost productivity.

But perhaps next week or the week after we will take a proper look at factors underpinning our expectation for continued good growth in the economy. Suffice to say, unless we get some major offshore disturbance, prospects for growth look strong.

If I Were A Borrower What Would I Do?

Competition between banks in the one and two year fixed terms remains intense. I would look to have a decent chunk of my mortgage at those terms and a tad fixed three years. Longer than that is too expensive for my taste and the fall in the annual inflation rate from 1.6% to 1.1%, and the core rate excluding energy and food to 0.9% from 1.1%, suggests our central bank remains a long, long way off raising the official cash rate.

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

MIL OSI – Source: Evening Report Arts and Media

December 8, 2017

Economic Analysis by Tony Alexander: Weekly Overview 7 December 2017

MIL OSI – Source: Evening Report Arts and Media

Headline: Economic Analysis by Tony Alexander: Weekly Overview 7 December 2017

Last 2017 Issue

This will be the last issue of the Weekly Overview for 2017. Merry Christmas everyone and enjoy the early summer fruit appearing as a result of the sudden switch in weather conditions around the country – from very wet to hot and dry. Lets finish the year with a run-through of some of the recent data starting with one set I suggest we all ignore for the moment – the ANZ Business Outlook Survey.

Released last week it showed a decline in business sentiment about where the economy will be in a year’s time to a net 39% pessimistic in early-November from 0% just ahead of the lateSeptember general election and 18% in August.

Employment intentions have dropped to a net 3% negative from 17% positive in August. Investment intentions have fallen to +4% from +23%.

Should we be forecasting recession on the basis that these readings and others are the worst by and large since the Global Financial Crisis? No. Business surveys have a downward bias in New Zealand when Labour are in power. Add in the uncertainties of having NZ First involved, the Greens in there for the first time ever, the inexperienced nature of the Cabinet and the gaffs made so far and a lot of uncertainty exists.

But the new government is not like the one which came to power in November 1999 intent on slamming employers and those with above average income. The drivers for our economy are strong, world forecasts have just been lifted, monetary policy is not being tightened, and consumer confidence is above average. This link will take you to our August 31 Weekly Overview where we discussed the chances of a repeat of the 2000 winter of discontent. http://tonyalexander.co.nz/wp-content/uploads/2017/08/WO-August-31-2017.pdf

So for the moment there is no real point in drawing conclusions from this business survey. It would be best to wait for it to settle down – remembering though that it will have a downward bias for the entirety of the time Labour are in power.

Speaking of good growth drivers, we have just seen the country’s terms of trade hit a record high. The terms of trade measure the size of a basket of imports one can buy with an unchanging basket of exports. The index has just gone above its June quarter 1973 high. Surely that is a sign that everything will be great. After all, things did go so swimmingly well from the second half of 1973 – not.

The slow grind upward continues in the house building sector with the nationwide number of consents issued in the year to October coming in at 30,866 from 30,892 in September and 30,225 a year ago.

Over this one year period Auckland consents have risen slightly to 10,437 from 9,947 which is fairly mediocre considering the well known and growing shortage. In Canterbury numbers have fallen 16% from 6,168 to 5,156. This means in the rest of the country numbers have risen 8% from 14,110 to 15,273. The Auckland growth has accelerated a tad recently, Canterbury’s decline has slowed, and the rest of the country has stopped growing – perhaps highlighting the key point we have been making for the past year or so.

The regions lag Auckland in prices and construction. The construction response however has been very fast. That means it will end rapidly as well, assisted by the realisation dawning on many people that Auckland’s young and old are not leaving the big smoke for the “lifestyle” people in the regions think surely everyone values over everything else.

The media are getting quite excited about data showing prices edging down slightly in Auckland. But watch for some of the regions bereft of decent population growth. It is from those places that more interesting negative headlines may emanate over the coming year.

Whereas dwelling consents in Auckland look like bobbing along for the coming year with an upward bias versus downward elsewhere, net migration numbers look like bobbing along with a downward drift. In the year to October the net migration gain came in at 70,700 from 71,000 in September and a peak of 72,400 in July. A year ago the number was 70,300.

The turnaround so far is very slow. History tells us we can sometimes pick the direction of drift for the numbers, but picking speed of decline or increase and where the peaks and troughs will be is a very hit and miss game. Back late in 2012 I was quite confident that the net outflow of -4,000 was turning around and would head toward maybe a 35,000 net gain. That was well off the peak of 72,000 recently but the analysis in terms of picking further price pressure in Auckland was correct.

This time I personally don’t think any of us really has a clue what the net gain will be in three year’s time. On the downside one might cite the improving labour market in Australia, foreign students in NZ completing studies, and government plans to slash gross migrant inflows by up to 30,000.

But on the upside the NZ labour market remains very short of people, and the government has notably not repeated its commitment to slashing migrant inflows – perhaps in the face of feedback that some industries would be very severely impacted.

Net migration inflows will likely continue for quite a few more years and remain supportive of growth in the economy, housing markets etc.

The monthly migration data release from Statistics NZ also tells us what is happening with visitor flows. In the year to October the number of people visiting New Zealand was ahead by almost 8% from a year earlier. One year ago this growth rate was 12%, two years ago 9%, three years ago 5%. Growth has been strong for quite some time now and at 3.7 million the number of people visiting our country is double what it was in 2001.

In the three months to October visitor numbers were 4.2% ahead of a year ago and annualised growth in seasonally adjusted numbers these past three months was actually a fall of 6%. So numbers have pulled back recently but feedback from the sector indicates that this is not expected to continue.

The key problem for the tourism sector as it looks at forecasts of the number of Chinese visiting for instance doubling in the next few years from 400,000 is that accommodation is in short supply and staff availability poor. The sector is undoubtedly working the phones with policy advisors and new government MPs pointing out the need for more, not fewer, working visas. Same for the farming sector. Same for aged care facility operators. Same for the construction sector, forestry tree planting, water deliverers etc.

At least in the banking business staff don’t appear to be in short supply – in fact the tone is more one of redundancies picking up driven partly by implementation of new technologies and declining numbers of people using branches, cheques, cash and personal discussions.

There are some negatives for our economy in play. The country is drying out like a bun in the back window and this will send a wave of caution through the agricultural sector. This includes farmers dependent upon irrigation facing restrictions on water access just like people in cities and towns are starting to face.

The Southern Oscillation Index has entered into a small La Nina pattern but truth be told there has been no big sustained movement in the SOI for the past year. Some discussion on the effects of La Nina and El Nino can be found here. https://www.niwa.co.nz/climate/information-andresources/elnino/elnino-impacts-on-newzealand

International oil prices have also risen recently and with help from a lower NZ dollar pushed petrol prices higher just in time for summer driving – something about which you might want to think twice given the still rapidly rising number of mindless tourists in the country hiring rental cars and campervans with no idea how to drive. Hitting the road these days is not the same experience as a couple of decades back and it could easily cost you your life. Bring on compulsory driverless cars for all visitors.

Kiwi households have increased their dissaving rate – to -2.8% in the year to March 2017 from – 1.3% a year before and a string of tiny positives from 2010 to 2014. This means in an environment where banks have to try as best as possible to fund domestic lending domestically, credit availability will remain marginally on the tight side of normal going forward. But lending growth has slowed over the past year, most notably for investment property. So some of the worse case scenarios for credit availability doing the rounds ahead of mid-2017 are no longer on the table.

If I Were A Borrower What Would I Do?

The key fundamental underlying interest rate forecasts and their appalling failure rate since 2009 (2007 if you count not picking the GFC) has been the absence of a surge in wages in response to fast jobs growth, and technology limiting the ability of retailers to raise their selling prices.

This comment applies not just to New Zealand but most other countries as well. The big question then is when will inflation rise enough to promote a general rise in the level of interest rates. The answer is that we do not have any post-GFC models or relationships which give any reliable insight into when this will happen.

That is probably a harsh message to hear for those seeking to structure their mortgage to minimise cost over the next few years and those trying to maximise their term deposit returns. But its a simple fact. No-one can stand up and say they have a good interest rate forecasting record these past ten years. We are all useless.

So what does one do in this circumstance? Spread your risk. Take a range of fixed terms as a borrower and as an investor perhaps do the same. If you are an investor and find that the structural decline in interest rates has left you with insufficient income in retirement then be very careful about taking on riskier assets in order to boost your yield. Such assets are available but how will you be left if they flop or fail to pay back your capital in the timeframe you envisaged?

If an interest rate guess is what you want then here is the popular one at the moment. The Reserve Bank project that they will not start raising the official cash rate until the end of 2019 but in the markets the view is that a rate rise will come probably in the second half of next year. Of course if the drought worsens and persist then the RB might start thinking about an interest rate cut!

If I were borrowing here at the end of 2017 I’d probably lock most of my mortgage in for two years with perhaps a little bit at one and three years.

Enjoy summer.

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The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

November 30, 2017

Economic Analysis by Tony Alexander – Thursday November 30th 2017

MIL OSI – Source: Evening Report Arts and Media

Headline: Economic Analysis by Tony Alexander – Thursday November 30th 2017

LVR rules have been eased slightly. But it is extremely unlikely that a new housing surge will occur – and if the Reserve Bank thought that such a surge would occur they would not have made the small changes.

No New Housing Surge

The Reserve Bank surprised most people yesterday with its move to ease up the loan to value ratio (LVR) credit controls introduced in October 2013 then strengthened in October 2015 and July last year. From January 1 banks will be able to have up to 15% of mortgages with deposits less than 20% of the house purchase price for owner occupiers. Currently that is 10%.

For investors the minimum deposit (with 5% of loans exempted) falls to 35% from 40%.

Will these changes cause a new surge in the housing market? Clearly the Reserve Bank does not think so else they would not do it, and we also think a fresh wave of demand hitting the market and pushing prices newly skyward is unlikely.

The fundamentals still support prices rising – but not at an accelerating pace. And the bulk of the repricing of the country’s housing stock to reflect changes in long-term fundamentals has probably already happened.

These long term fundamentals include things such as two incomes chasing a house instead of one per household up to the 1980s. Structurally lower interest rates courtesy of structurally lower inflation. This lowers the biggest cost of purchasing a house – the debt servicing burden. The reduction in this burden has been factored into the prices people are willing to bid.

There has been a structural lift in the depth and range of groups wanting to be investment property owners – foreigners, young people, savers, even Baby Boomers bemoaning low interest rates now offered for bank term deposits.

New houses are structurally very different from old ones with regard to levels of inspection and certification, energy efficiency, earthquake preparedness etc. Cities also have less land available near main centres of employment so land prices have structurally lifted. And so on.

Most notably however with regard to reasons why house prices won’t surge anew is the absence now of FOMO. When prices rise firmly people feel a visceral need to jump into the market to avoid missing out on future gains which might come. This is happening with Bitcoins.

Since the second half of last year FOMO has plummeted with regard to Auckland and it is on the way out in the regions.

What will happen if the housing market remains relatively subdued for the first half of next year? Probably in that case the Reserve Bank will experiment with another easing in LVRs, perhaps taking the minimum investor deposit from 35% to 30%.

The key point to note here is that the Reserve Bank is trying to learn how effective LVR changes are. They have learnt that a 40% requirement for investors is very effective. 30% previously for Auckland was not. But back then FOMO was strong. In the absence of FOMO 30% effective from perhaps the end of May next year might still not elicit a fresh investor surge – especially as banks have tightened lending criteria anyway in an environment where low interest rates are making it difficult to raise deposits domestically and raising extra funds offshore is frowned upon by the regulatory agencies and the likes of the IMF.

If I Were A Borrower What Would I Do?

Earlier on today I gave a talk to BNZ Retirees at their annual Christmas function. While there was interest in the political scene and some of the long-term trends, the main thing people wanted to know was when term deposit rates would be going back up. I did not have a good message.

Almost all forecasts of sustained rises in interest rates in all countries have been wrong since 2009, apart from the United States for the past year. This reflects the structural decline in inflation caused partly by the absence of an acceleration in wages growth in response to fast jobs growth as used to occur before the GFC. Maybe one day wages growth will accelerate. But seeing as all forecasts that it would have so far been wrong it seems best just to wait until it does happen – if it does – then assess the inflation and interest rate impacts.

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The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

November 24, 2017

Tony Alexander’s Economic Analysis – Weekly Overview 23 November 2017

MIL OSI – Source: Evening Report Arts and Media

Headline: Tony Alexander’s Economic Analysis – Weekly Overview 23 November 2017

Economic Analysis by Tony Alexander.

This week we take a look at the dual long-term challenges facing farming – protein alternatives and environmentalism.

Long-Term Farming Challenges

Lets stand back from the immediate fray this week and consider some of the long-term factors which businesses, investors, policy makers etc. should be thinking about.

Lets start with the traditional backbone of the NZ economy – farming. This is a sector which has always undergone change and adaptation to movements in market prices, rules and regulations, pests and diseases, market access requirements, the emergence of competitors and so on. People enter the field of farming knowing that they’re not going to be doing the same thing in five, ten or forty years time as they are doing now or were doing some years back.

In the past the biggest macro-challenge facing farmers was market access. They lost a lot of it when the UK joined the EEC back in 1973. They have been strongly supportive of government efforts (Labour and National) to sign trade agreements giving better access for primary products into markets which have been protected for domestic political and social reasons.

Going forward market access is not going to be the big problem facing our primary producers. Instead there are two big challenges – environmentalism and protein alternatives. By the latter we mean vat grown milk, factory grown meat, and plant based proteins replicating meat.

The environmental factor has always been there and apart from a few dirty operators farmers have long shown a concern for the environment and their impact on it. But the strong growth in dairying these past two decades has brought a negative environmental impact on water quality and greenhouse gas emissions which has never before been there.

Farming is still excluded from the Emissions Trading Scheme and will remain so courtesy of the demands of NZ First for this parliamentary term. But that cannot continue. With global climate change seemingly accelerating farming will have to be brought into the scheme and farmers should be prepared for the cost of buying emissions rights becoming higher than it currently is if the effects of climate change become more obvious and damaging and global determination to do something about it soars.

Farmers need to be planning now for more than just extra funding for various research institutes to try and find lower-emitting animals. And they will need to do more than finance advertising campaigns and open their gates to show us their land. Changes in the types of animals they rear, how they graze, what they eat, how many they stock etc. need to be scenarios which farmers run in their heads and perhaps computers now.

The dairy sector is going to experience the biggest need for change not just because it has grown near unfettered apart from a few locations. It’s negative effects are more obvious than for other farming activities. Few people blame dirty rivers on sheep – some on beef cattle, almost all on dairying.

The issue for farmers is that the pressure for them to stop polluting NZ water comes not just from average Kiwis but the growing tourism sector. By one measure receipts from foreign tourism now exceed receipts from dairy exports. This translates to jobs (more of them from tourism than dairying ever approaches) and political power. A shift in that power is underway.

Tourism operators sell NZ as clean and green. But that image is wrong and becoming increasingly so. Reversing the slowly growing concern about degradation of the tourism product will become manifest as pressure from the tourism sector on policy makers to accelerate changes in dairying.

The ultimate outcome of this is going to be fewer cows in New Zealand. Peak cow. This will result from a range of sources.

One will be reduced stocking rates from lesser application of nitrogenous fertilizers which leak into water systems. Grass will grow less rapidly. Another will be reduced feeding out of supplementary food. Helping drive these changes will be the spreading of regulations limiting farm nitrogen levels and leakage.

It is possible that in some parts of the country excess milk processing capacity will eventually exist. It is reasonable to expect that there will be a land price impact from soon to be falling forward projections of likely income off dairy land in the next decade. It is reasonable therefore to also expect reduced availability of debt. And it seems reasonable also to expect that eventually, just as banks in Australia have in some cases made the decision not to finance new coal mines, there will be recommendations made to ease off on funding of dairy farms which do not meet the highest emissions and water polluting standards. Coal pollutes, so do cows.

We are not there yet. But the direction of things is abundantly clear.

The other writing on the wall screams in very big letters – ALTERNATIVES.

Already plant-based chicken product is available in New Zealand. Over time it will become much cheaper and chefs will develop recipes which take advantage of whatever properties it has which differ from real dead animal flesh.

Making “meat” from plants is just one threat to the sheepmeat, beef, chicken and venison sectors, and it is not a linear threat. That is, we will one day reach a tipping point whereby eating real flesh will be socially frowned upon and allocation of chiller space in supermarkets will undergo a seismic shift from meat to the alternatives. Again, we are still well away from that happening.

The other threat to both meat and milk is factory produced alternatives. For meat it will be actual meat grown on some sort of mesh not involving an actual animal. No head, no digestive system etc. For milk it will be more than what is already happening with the likes of soy and almond “milk”. It will be real milk made without the involvement of a cow. No waterway pollution. Few emissions. No need for vast tracts of land.

Again, this is not something imminent. But it will come. And it seems overly dismissive to assume that we in NZ will comfortably adjust to the factory and plant-based alternatives by shifting up-market to target those people who are prepared to pay high prices for the “real” thing. We are clever, but we’re not special to the world.

Timeframe for these things? Starting now, starting small, slowly changing policies, but canny longterm investors moving into the alternatives. Maybe 20 years? Same timeframe as driverless cars? Who knows? Hopefully the change when it comes will not be as sudden and as economically negative as that for coal and the West Coast of the South Island. And consider wool. Merino is going gangbusters. But typical NZ coarse wool remains in low demand globally. Not all sheep farmers can shift “upmarket” to Merino.

What should farmers do to prepare for the effects on their operations and land prices long term of environmentalism and cheap alternatives? First, plan to get debt down long-term. Second, continue to do what you have always done which is to change at the margin. Small changes over time rather than big debt-funded makeovers. Tourism-related ventures. Agroforestry. Nuts. Crops. What inputs will the alternative protein companies need?

And the key point to note is this. Winston and politicians like him won’t always be there to protect you as he has done through to 2020. Your political power is strong but it is waning in the face of the increasingly obvious environmental negatives. Slowly change what you do, not the image presented by branding “gurus” on your behalf on TV.

Social and Economic Mobility

My original title for this little section of commentary was the usual Housing. But what it discusses is housing cost as an impediment to the functioning of a key element of the Kiwi lifestyle and of our values. The ability to break away and get ahead by moving on and moving out.

There is a shortage of houses in Auckland which is going to get worse. With bobbles along the way prices will oscillate upward with a new official upward leg to the price cycle in maybe four or five year’s time. Lets say associated with the Americas Cup and APEC meeting in 2021 for want of anything better to build this cyclical point around.

Rising prices eventually also bring rising rents. This is happening in Wellington with extra pressure expected from the new government doing what they normally do and hiring lots of advisors, cardigan-wearers and busy bodies using taxpayer money to tell you how to live your life. Then raising taxes to pay for it.

Rising rents in our big cities will also be driven by rising landlord costs and falling rental supply from policies making it less attractive for people to buy or hold a property for rental purposes. Extending the brightline test, housing warrants of fitness, ring-fencing cash losses, extra tenant protection and so on.

We Kiwis are highly mobile both internally and externally. Most of us believe and expect that if someone truly wants to get ahead they can easily do so by shifting from where they are and taking advantage of the education options on offer (improving under Labour) without the crunch of funding their own healthcare in most instances. (I mention this as I am currently reading Joe Bageant’s book “Deer Hunting With Jesus” discussing the gun-toting, Trump-voting poorly educated white underclass of some 40 million in the US bereft of health access yet fully buying into a self-reliance system (no socialist universal healthcare) and a belief that if even fresh immigrants can make good anyone struggling has only themselves to blame).

We don’t tend to accept that if someone is born in a particular location they are condemned to stay there forever. But internal mobility is being impeded by soaring big city housing costs. One outcome is likely to be subsidised housing for core people such as teachers, police, nurses etc. But another outcome is going to be some more young people moving to Australia for more affordable accommodation – maybe Brisbane and Perth.

This won’t be a flood, and it won’t see us soon back at the net Trans-Tasman loss of 40,000 seen in 2012. But it will help continue the turning of the net migration flow with Australia which started about a year ago when the net gain peaked just below 2,000. Now it is a small net annual loss of just under 100.

If I Were A Borrower What Would I Do?

Nothing new. I would seek a mix of 1 – 3 years noting that there is currently some discounting of two and three year rates going on. Going beyond three years I personally would find too expensive in the absence of any solid evidence that the global or local inflation track is set to move decisively upward and prompt some severe tightening of monetary policies by central banks. Sorry savers and retired investors. There really is no serious hope currently that you will be receiving 5% term deposit rates for short lock-ins in the next couple of years.

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

November 16, 2017

BNZ Weekly Economic Analysis by Tony Alexander – Thursday November 16th 2017

MIL OSI – Source: Evening Report Arts and Media

Headline: BNZ Weekly Economic Analysis by Tony Alexander – Thursday November 16th 2017

This week’s Overview merely traverses a few of the points discussed at functions around the country then notes that even if the Reserve Bank soon eases LVRs, this won’t spark a new upward leg in the house price cycle.

Download document pdf 240kb

On The Road I’ve had a busy week rising at all sorts of early hours in order to travel and deliver talks in Rotorua, Taupo, Auckland and Christchurch with more to come tomorrow. Often I don’t get time to have a decent casual chat with people at every function but can get a feel for what people are thinking about from the questions they ask during and at the end of a presentation.

In that regard these are the sort of things people are seeking views on.

What are the main risks? People generally buy into the scenario pitched by all of us economists that there is some good underpinning to growth in the NZ economy for the next few years. But they wonder what could go wrong. So do we. So do the likes of the IMF and OECD who post-GFC seem to devote more of their outlook summaries to noting things which could go wrong. For NZ the main risk is an offshore disturbance, most notably something involving the China Seas. Brexit? Not really relevant to our immediate economic outlook. European banks? Nope. Trump? No-one has the foggiest.

What does the next 30 years hold? This type of question is unusual but we economists love them because no matter what actually happens in 30 years we will be well off doing something else. I like to point out the generally upward trend in NZ’s terms of trade which is supportive of the NZD drifting up, the repricing of the housing stock which may be largely completed but which will not unwind. Also I like to discuss the trend change upward in New Zealand’s net migration flows, plus the growing proportion of the population living and to live in our major cities, particularly Auckland with the hangers-on of Hamilton and Tauranga plus some bits and bobs in between.

What can the government realistically do to get more people to live in the regions? No-one ever asks this in the cities, but it crops up in the smaller locations. There seems to be a view that somehow the government can strongly influence where people will live. They can’t – especially in NZ. We are a disloyal bunch who will leave the country at the drop of a hat if things are not going the way we like. Usually we go to Australia. The idea that we will up sticks in Auckland, Wellington or Christchurch and relocate to the regions is always embraced by folk in the regions but it is not a realistic expectation for more than a small number of people – who frankly may enjoy better lives than those of us who cannot break away from a focus on maximum wealth growth over extended years through owning big city property.

Or more accurately, our FOMO drives us to stay in the cities because everyone has or has heard stories of people who sold up, shifted out, but now bemoan their inability to ever shift back to the city because they missed out on big house price rises.

Only one person asked about the sharemarket but that is not unusual. We economists generally steer away from talking about it and of course have to be careful not to sound like we might be giving advice – which is a great excuse to say nothing at all. There does appear however to be some underlying concern about the future of the NZ market which has been spurred by the exit of Xero. But their move is consistent with the longterm trend for the NZ exchange – challenged listing numbers and more of a nursery function than true component of the global capital market.

One general theme which has crept into questions at presentations in recent months has been around issues of social equity, homelessness, the health system etc. It’s like people generally accept that the economy is okay, but what about the other stuff? This tone of people’s thinking and concerns at the edges helps explain the comfort with the new government, the hopes people have for it, and the feeling that had Labour not ended up on top this time they certainly would have done in 2020.

What is notable with regard to the questions is what is not asked. No-one seems truly interested in where the Kiwi dollar is going. Exporters seem comfortable with current levels.

Housing

The REINZ released their monthly housing numbers this week. Meh. As pointed out here many times in recent months, the NZ housing cycle has finished its exciting upward bit in Auckland and the rest of the country will join in over the coming year. Monthly data from a variety of sources will get people excited. But in the absence of either a drastic change in net migration flows, sharp sustained change in interest rates, radical shift in the relative strengths of the NZ and Australian labour markets, or sudden big change in Reserve Bank rules nothing truly interesting is likely to happen for some time.

Having said that, the Reserve Bank will be making an announcement some time soon regarding their current view on LVRs. There is an increasing chance that they will ease up on the rules because they have been surprised at how quickly the housing market has pulled back.

But before some people get excited and start thinking that if they cut the 40% investor deposit requirement to 30% that this will spark a new lift in house prices from an investor surge – think again.

First, the RB do not want a new surge. All they ever search for is the sweetspot where their rules (or OCR) have the effectiveness they want. The 40% made effective from the third week of July last year hit that sweetspot at the time but perhaps a bit too much so now. So if and when they reduce the proportion it will simply be to find the new spot where things become stable.

Second, banks have tightened up their lending rules this past year over and above what is required by the Reserve Bank. It is very unlikely in an environment of tightened credit availability that there will be an easing in those new rules to match any LVR easing and drive a new rash of lending to investors.

Third, FOMO on the upside has gone for this cycle. People do not feel that they must buy any old piece of ex-hospital radioactive land to profit from soaring property prices. And reinforcing that, foreign buyers are to be banned at long last. That can’t help but inject a note of caution into investors generally.

If I Were A Borrower What Would I Do?

There have been some small reductions in two and three year fixed rates offered by some lenders this past week. Our three year rate has been cut from 5.09% to 4.99%. Our two year rate is 4.69%. Am I prepared to shift what I personally would do if borrowing anew currently away from even splits between 1, 2 and 3 years and a tad floating to more three year fixed? Only a little bit.

There is still nothing truly jumping out which says to us that global or NZ inflation is lifting. Sure, wags growth in NZ is set to accelerate because of the planned increases in the minimum wage rate and extra tightening of the labour market to be caused by immigration restrictions, hiring of tree planters one day, and some young people of directionless nature x%#$ing a year away at varsity for free.

But can one truly believe that the pre-GFC relationship between jobs growth and wages is reestablishing itself? Every assumption that this has been happening since 2009 has been wrong in every country. I’ll believe it when I see it.

On top of that, even if wages growth lifts, businesses outside of sectors such as building materials, local and central government, power companies, petrol companies, and entertainment (including TV) will struggle to get price rises past us consumers. Any lift in the pace of wages growth will more likely generate a reassignment of labour within the economy (which is a polite way of saying some businesses close down) rather than a good old wage/price spiral.

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz.

January 26, 2017

FPI leader calls for withdrawal of banknotes with ‘communist symbol’

MIL OSI – Source: Evening Report Arts and Media

Headline: FPI leader calls for withdrawal of banknotes with ‘communist symbol’

Article by AsiaPacificReport.nz

Staying defiant — Islam Defenders Front (FPI) leader Habib Rizieq Shihab gives a press statement after his questioning at the Jakarta Police headquarters on Monday. Image: Reno Esnir/Jakarta Post/Antara

By Safrin La Batu in Jakarta

Islam Defenders Front (FPI) leader Rizieq Shihab has called on the Indonesian government to pull from circulation the newly-issued rupiah banknotes, which he claims have an image that resembles the now-defunct Indonesian Communist Party’s (PKI) hammer and sickle logo.

Rizieq attended on Monday the Jakarta police’s summons for questioning on his statement, during which he brought several new rupiah banknotes, from Rp 1000 (less than NZ$1) to Rp 100,000 (NZ$10) bills, and showed them to investigators to try to prove his claims.

Rizieq said the banknotes’ rectoverso image, which according to Bank Indonesia (BI) functions as an anti-counterfeit feature, resembled the PKI logo.

“We ask the government to explain to us why, from thousands of rectoverso images they could have used, they chose the one that looks like a hammer and sickle logo. This is dangerous,” Rizieq told reporters.

“We ask the government to retract all new banknotes, from the Rp 1,000 to Rp 100,000 bills, because they can all give the perception that there is a hammer and sickle logo on our banknotes,” said the firebrand preacher, who had to answer 23 questions from the police regarding his statement.

In an earlier statement, the bank brushed off Rizieq’s claim, saying that the rectoverso image on the bills was actually the central bank’s logo printed in such a way to protect the money from counterfeiting.

Mass organisation Jaringan Intelektual Muda Anti-Fitnah (Young Intellectuals Anti-Slander Network, or Jimaf) reported Rizieq to the police, in which they said the FPI leader’s statement constituted hate speech because his claim was baseless and could provoke public unrest.

Jakarta Police spokesman Senior Commander Raden Prabowo Argo Yuwono said Rizieq’s status was still that of a witness.