Here's our summary of key economic events overnight that affect New Zealand with news forecasts for global economic expansion are being downgraded on the consequences of the Russian invasion, the Chinese slowdown, and the worrying rise in food prices globally.
But first, China reported that its economy expanded at an annual rate of +4.8% in the March 2022 quarter, better than analysts estimates of +4.4% and the +4.0% rate in the prior quarter.
But this result defied electricity production that actually shrank marginally in March (-0.2%). It also defied retail sales that also shrank in March (-3.5%). And housing sector activity was unusually weak in the period. Further, household incomes were reported up +4.2% and less than the rise in household expenditures which were reported up +6.1% over the year-ago equivalent quarters. Their jobless rate rose sharply to 5.8% in March from 5.5% in February and now back near its pandemic highs.
Chinese industrial production did rise +5.0% above the same quarter a year ago but that was despite their capacity utilisation rate being its lowest since the pandemic hit in 2020. Overall, it is a tough ask to reconcile their 'good' reported Q1 GDP outcome with a general slide in most factors that go into it.
Things are unlikely to have improved in April. And because of the tough actual trading conditions, China has pulled the trigger on more generous credit expansion settings. As expected it has cut its reserve ratio, this time by -25 bps. After this cut, the weighted average deposit reserve ratio of financial institutions becomes just 8.1% - that is, on average their financial institutions now only need 8.1% of reserves backing up their all their new lending activity. China's prime loan rates are expected to fall soon too, and their term deposit rates could fall too. But in the grand scheme of things, it has been a modest set of moves so far.
Far more impressive is its rush to get big new infrastructure projects approved and underway. They have already approved 32 projects worth NZ$120 bln for new transportation, energy, and high-tech activity. In all of 2021 they approved 90 projects worth NZ$180 bln, so the pace is startlingly faster in 2022. And the private sector is getting regulatory encouragement too. "Multiple tools" is now the catch-cry for how they are dealing with the slowdown.
They need it right now, because the pandemic lockdown in Shanghai is close to causing a widespread business stall there. (Also see this and this.)
In Japan, updated its population statistics to show it has recorded its largest fall ever. There were 125.5 mln people in the country, down -644,000. Tokyo's population shrank for the first time in more than 25 years, and every prefecture recorded a decline, except Okinawa.
In India, wholesale price inflation was recorded as +14.6% in the year to March, higher than expected. Within that, food inflation was up +8.7%. These are troubling rises for a country like India, but not a total surprise given the global situation.
The price of rice rose to a two year high, and the price of corn rose to an all-time high overnight. The price of soybean and wheat remain unusually high too. The grip of high food prices isn't going to work out well unless they normalise soon.
In Europe, there appears to be a building consensus in Europe that they can cut dependence on Russian energy supplies much quicker than they imagined even a month ago. But that will come with higher costs.
The IMF and World Bank are meeting and about to update both their economic forecasts, and its financial stability analysis. They are widely expected to downgrade expectations of economic expansion later today from +4.1% to +3.2% for 2022, effectively signaling that the world is entering a stagflation phase.
The UST 10yr yield starts the week on the shoulders of the +14 bps Friday gain and up another +3 bps today to 2.86%. That is its highest since December 2018. The UST 2-10 rate curve is steeper at +39 bps. Their 1-5 curve is still at +103 bps. Their 30 day-10yr curve is a little flatter at +250 bps. Just about all the other minor curves are quite 'positive' again. The Australian ten year bond is now at 3.03% and unchanged. The China Govt ten year bond is up +3 bps at 2.86%. And the New Zealand Govt ten year still at 3.43%.
On Wall Street, the S&P500 has started its week up +0.3%. Overnight, European markets were all closed for Easter Monday. Yesterday Tokyo ended its Monday session down a sharpish -1.1%. Hong Kong was closed. Shanghai ended down -0.5%. Obviously both the ASX and NZX were closed.
The price of gold starts today at US$1978/oz and up +US$4 since this time yesterday.
And oil prices are +US$2.50 higher at just over US$108.50/bbl in the US while the international Brent price is now just over US$113.50/bbl.
The Kiwi dollar will open today a little softer at 67.3 USc. But against the Australian dollar we are unchanged at 91.5 AUc. Against the euro we are marginally softer at 62.4 euro cents. That all means our TWI-5 starts today at 73.5 and a little lower.
The bitcoin price is up +0.8% from this time yesterday at US$40,416. Volatility over the past 24 hours has been moderate at just over +/- 2.4%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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89 Comments
It's beginning to dawn on some, that China's seemingly illogical insistence on locking down entire centres of production may in fact be their way of waging economic war on their Western consumers. Just as Europe deftly maneuvered itself into dependence on Russian FF, the offshoring of manufacturing in the West to China , has left much of the West in the same unenviable position. Which is now being exploited.....
Meanwhile Jacinda is running around Asia, looking for new buyers for our milk, cheese and tourist attractions. Why diversify?
She is spreading the word in Japan and Singapore that New Zealand is open for business, when ironically so many of our local businesses are shutting down due to staff shortages and high running costs.
With rates still at emergency levels inflation will continue to skyrocket and NZD will tank even further making inflation even higher. Rates just need to go up RBNZ needs to stop trying to protect people who purchased a house in a super overvalued market in last 3-4 years.At the moment average wage earners have no chance of buying a house.The market needs a correction of around 50% too 60% just to be affordable in Auckland all the people who got caught up with FOMO and thought rates were going to stay at emergency level for ever will learn a huge lesson but hopefully they made plenty on way up to ridiculous levels.
That's right. For wages to match up to the ridiculously high cost of everything here, we will have to increase the value extracted from our exports. Based on MBIE's own findings, this can only realistically be done in 2 ways - 1) move up the value chain in dairy, 2) grow and retain tech service exporters in NZ.
Both seem far-fetched without sweeping changes to our current socioeconomic policy settings that could take years to plan and implement.
This is a dream not based in reality, though. McKinsey found that countries with the most effective non-medical interventions in response to COVID had the best economic outcomes.
It's not reasonable to believe that had there not been lockdowns businesses would've been all fine and dandy. "Lockdowns" vs "business as usual" is an unrealistic false dichotomy.
If that's right waymad, then I think it could possibly back fire as the general population in China might just turn against the regime. Also, as in Europe with Russia, the rest of the west look at producing elsewhere or at home. Either way China loses. I guess they could hold hands with Russia for awhile and cause as much havoc as possible. Hopefully they come to their senses.
Another Cultural Revolution, in the most surveilled society on earth? Fuggedaboudit.
The financial consequences are obvious:
- rebuilding onshore manufacturing,
- getting back to just-in-case inventories from JIT with small to zero inventory,
- shipping delays which mean funding cargo insurance for longer if FOB, or simply paying more if CIF,
- Pure COGS inflation especially in core commodities
All mean having to carry larger balance sheets, with lending, equity, working capital, cashflow and ratios impacts.
The silver price starting to look interesting. While relatively sober and cheap compared to other commodities or index, it's now up approx 48% since the DGM times of March 2020. And in practical, real-world supply and demand business case thinking, having exposure makes complete sense, particularly if we're moving towards a green new deal. On the downside, if commods like sliver are going to be necessary for the green economy, then we're going to have to prepare for inflation in the cost of other things.
I mean if we had engineered a soft-landing then we could have done almost anything. We could have offered KS credits so that they're not financially crippled come retirement time. We could have funded HNZ to buy out FHBs to bolster our housing stock. We could have had a targeted FLP specifically aimed at current FHBs to finance their loans are lower-than-market rates, instead of just giving it to banks for less. We could have offered them entry into Kiwibuild houses as if they were not yet owners.
But we didn't. There was no plan to help ease house prices, so there's no structural support for FHBs who foolishly believed the PM and Finance Minister that house prices should be expected to increase in value, but just slower than they had done. It's taken external factors to prompt the drop in values that Labour campaigned on, backflipped on and as a result, did not have a plan for. Just add it to the list of policy failures at this point, I guess.
But we didn't. There was no plan to help ease house prices, so there's no structural support when FHBs who foolishly believed the PM and Finance Minister that house prices should be expected to increase in value, but just slower than they had done.
That's also a reflection of the competency of Cindy and Robbo. They believed they could get away with it. In terms of leadership, amateur hour.
Almost all of these would have let you walk house prices back to affordable (And I mean, really affordable) levels without totally financially ruining FHBs who had bought in the last two years. It wouldn't have been win-win, more like a draw where everyone shares a little of the pain. But there was no plan because making housing actually affordable was never in the script - so here we are, with an external shock, rising inflation, mortgage rates and no plan for how we get out of it.
GV - I don’t think it’s correct to say nothing has been done by the government to help ease house prices. For example, to increase supply of homes, the government changed the planning rules to support more intensification, then, with National, agreed further changes to further allow intensification in our larger cities. To reign in speculative demand, it introduced the foreign buyer ban, increased the bright line test to ten years, removed mortgage principal deductions, except for new builds and increased LVR to 40%.
To be fair, it was the recent hikes in interest rates that has probably put the final nail in the coffin of this demand driven post-lockdown frenzied boom, which ignited after after our reserve bank engaged in QE and dropped the OCR to the lowest levels ever. But RBs in the west did similar, fuelling their housing markets as well.
The cries to bail-out recent first home bagholders are growing louder.
Look over the ditch. Loans up to 800K with 2-5% down and the govt providing rest of the deposit. All this in efforts to keep the bubble alive. This is all the ruling elite can do.
https://www.skynews.com.au/australia-news/politics/watch-live-scott-mor…
Waste of time while this condition persists:
Banks have migrated away from lending to productive business enterprises because capital risk weights can be as high as 150%. Thus around 60% of NZ bank lending is dedicated to residential property mortgages owed by one third of already wealthy households.
We've already got a scheme like that with just 5% deposit required https://kaingaora.govt.nz/home-ownership/first-home-loan/check-you-are-…
And the problem is it's not like National would stand up for free market price discovery here. They're as a person (and their mates) too deeply invested in property to want to allow it to go down.
National and Labour seemed to have coalesced into a gelatinous glob that props up property because people expect - feel entitled to? - their most valuable assets to go up in value.
Easily done - Govt buys the land under house, mortgagee pays down chunk of their mortgage, and Govt leases land back to them cheaply. Govt takes land onto its balance sheet as an asset so Govt net worth is unchanged. A condition could be Govt getting first refusal on house purchase (at fair market value) at the next sale - allowing for redevelopment of the land or property for affordable / social housing etc.
In Europe, there appears to be a building consensus in Europe that they can cut dependence on Russian energy supplies much quicker than they imagined even a month ago. But that will come with higher costs.
Indeed and export disadvantaged.
Higher cost to whom? Ukrainians or Germans? The Germans didn't mind putting Greece to the sword over loan repayments but drag the chain when it comes to funding a shooting war.
The anti frackers hve blood on their hands. Had planty of opportunity to tap their vast resource - on a par with the US - but chose to go woke and shackle themselves to Putin.
profile,
Forget fracking; if Germany hadn't been so eager to shut down its nuclear plants, it would be in a much better place now.
They believed that they could embrace the Bear through ever closer trade links and only now are the scales begin to fall from their eyes. You are right about Greece and indeed you could include pretty much all of Southern Europe. In a rational world, the German Mark would have been much higher, but the Euro has been wonderful for their exporters. I struggle to have much sympathy for them.
Germany has been caught with their pants down over Russia, hoping that they would play ball & perhaps even join the club one day. This is the same story about America getting into bed with China hoping that the capitalist gains would turn them into a liberal society. They were both wrong as they both overlooked how dictators don't like to give up their power. The fault here is on the western front thinking. Both western societies theories regarding their trading partners were wrong in hindsight, & only ever hopeful from the beginning, let's be honest. It is our thinking which is coming up short again & again. This takes me back to our lousy education system once again. Sigh!
Japan is a harbinger to things to come ... across the world , populations are aging ... populations are beginning to decline ... and the starkest example of that in the next half century will be China ... their dreams of a worldwide empire will lie in tatters as they can't find enough people to run their factories , let alone look after their huge numbers of elderly folk ...
Going to be a bit contrarian here. In the case of Japan, GDP per capita is actually reasonable over the past 10 years, partly because of demogs. I know it's not that simple, but they at least have all the infrastructure they could ever need and still seem to actually produce stuff.
PNG - I would argue, corruption, exploitation by foreign interests on an industrial scale, the availability of modern negative lifestyle indulgences, and tribal mentality have played a far greater role in the low standard of living in PNG than simply rapid population growth.
If rapid population growth goes hand in hand with a purpose for people to pursue, it could be managed and possibly leveraged.
What purpose in life are these people being educated with to pursue? Identifying this or these will help. One size will not fit all.
Regeneration of land is cheaper than building un-needed concrete structures and steel that will all decay and be trashed in 100-150 years or less. Quality Soil and perpetual regenerative management is needed for as long as a population exists..tens or hundreds of thousands of years.
So there are environmentally sympathetic and necessary methods of feeding more people ,and educating people to want less of the planet,lead simpler integrated lives.
Just started this week.
A 35-year-old Chinese man has become the first person to be granted a resident status that effectively allows foreign blue-collar workers to stay in Japan indefinitely, the infrastructure ministry and a supporting organization said Thursday.
https://japantoday.com/category/national/chinese-man-gets-japan's-1st-s…
Far more impressive is its rush to get big new infrastructure projects approved and underway.
This is absolutely the wrong thing to do though, most of those projects will never make any economic return. They create employment and a temporary GDP boost but China is in a very tough spot regarding debt due to demographics.
Most of the countries are marching towards an inward looking economy, they should keep the domestic consumption high to survive so that imported inflation does not bite much. NZ should ease its laws on domestic tradesmen so that more people can enter and cost of production and labour can reduce. If China agrees to go heavy on Taiwan (which it might after Ukraine situation subsides a little which also means that communist countries are planning a power equation in world geopolitical situation) then see Oil seeing all time high. NZ cannot keep a lid on oil prices for long. When the PM decides to tax oil again (which it will) then inflation could see a jump of 100 basis points. That would be a time to see RBNZ actions (which they will factor in the May policy)
NZ should ease its laws on domestic tradesmen so that more people can enter and cost of production and labour can reduce.
Agree, just need to make sure there's accountability for quality of work, rather than the avoidance and outsourcing the cost of shoddy work to taxpayers that marked the industry in recent decades.
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