The New Zealand economy has continued to storm on as we come towards the end of 2022 with few emerging signs at all of the recession the Reserve Bank is attempting to engineer from the middle of next year onward.
The amazingly strong figures likely guarantee that the RBNZ will push ahead with at least a 75 basis point increase to the Official Cash Rate when it next reviews it towards the end of February. The RBNZ delivered a 75 bps increase to the OCR in November and revealed that it had considered even 100 bps.
Statistics New Zealand said GDP grew 2.0% in the September quarter - which obliterated the average market forecasts of 0.9% and the RBNZ's pick of 0.8%. And as well, Stats NZ has revised up the already strong (1.7%) GDP figure for June 2022 to 1.9%.
The economy's strength is helping to fuel 7.2% inflation, so, the RBNZ won't be pleased with these figures - albeit as economists like to say they are a 'rear view window' picture of the economy - and don't point to the future picture.
RBNZ Deputy Governor Christian Hawkesby conceded in a speech on Wednesday, ahead of the Thursday GDP release, that the central bank had seen little impact of higher interest rates so far. The RBNZ has ratcheted up the OCR from 0.25% as of October 2021 to 4.25% as of now and is signalling it may go as high as 5.5% by the middle of next year. Fixed mortgage rates have rocketed from the 2%-3% range not much more than a year ago to around 6%-7% now - but many mortgage holders have yet to move to the much higher new rates.
Economists were suitably taken aback by the strength of the latest GDP figures.
ASB economist Nat Keall did say, however, that "a fair chunk" of this quarter’s "whopper growth" is an artefact of one-off drivers: the big surge in service activity and exports driven by the opening of the NZ border.
"And we still expect growth to slow over 2023 given the pervasive headwinds facing the economy – higher interest rates, slowing global growth, ongoing capacity challenges, and the cooling housing market to name but a few.
"Still, the strength that the NZ economy has shown thus far suggests activity is proving exceedingly resilient. The starting point for economy activity is substantially hotter than the RBNZ will have anticipated as it embarks on the remainder of the tightening cycle. The calculus in February is likely to be between 75 and 100bps [OCR increase] rather than 50 vs 75," Keall said.
In terms of the nitty gritty of the latest 2.0% increase in GDP for the quarter, Stats NZ said it was driven primarily by the services industries, which were collectively up 2.0%.
The transport, postal, and warehousing industry was the biggest contributor to growth, up 9.7%.
“With borders opening to all visitors in the September 2022 quarter, we have seen more spending on both international and domestic air travel," Stats NZ's national accounts industry and production senior manager Ruvani Ratnayake said.
“The business services industry also contributed to the result, driven by computer system services, recruitment services, and travel agency and tour arrangement services.”
Restructuring within the health care sector during the quarter saw some activity reallocated from the government administration industry to the health care industry.
Goods-producing industries rose 2.4% driven by construction, up 5.1%.
The rise in construction was mirrored by increases in residential building, non-residential building, and infrastructure investment. Expenditure on transport equipment and plant, machinery, and equipment also rose in the quarter.
Investment and exports were the leading contributors to a 2.0% increase in the expenditure measure of gross domestic product.
Exports of goods and services rose 7.8%, driven by higher exports of dairy products, travel services, and meat products.
Somewhat offsetting these increases were falls in central government expenditure and household consumption.
Some of the highlights in the September 2022 quarter compared with the June 2022 quarter:
- GDP was up 2.0%
- expenditure on GDP rose 2.0%
- service industries rose 2.0%
- goods producing industries rose 2.4%
- primary industries fell 0.2%
- GDP per capita rose 1.9%
- real gross national disposable income rose 2.2%
- GDP rose 2.7% over the year ended September 2022
- current price expenditure on GDP rose 2.8%.
Economic growth
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143 Comments
Nonetheless, selling the infrastructure, underpinning productive enterprise, to foreigners persists.
2degrees is owned by Voyager Australia so its not ours to sell. Same could be said for Spark as its a public company.
If we look at the problems created by the sale of our refinery maybe we should keep essential infrastructure ownership with the crown. What are ACT/National planning to do if they hype themselves into power?
Marsden point refinery cannot process our own oil. It only processes medium sour. Ours is light sweet.
NACT will just revert to type: Tax cuts, sell assets, cut government spending, run down public services & Infrastructure, increase immigration, crony capitalism. Though only on steroids if ACT have their way.
You cannot run a country like a business.
This is what happens when you attack supply side inflation with demand side monetary policy. I’ve been travelling and the country is booming. Major staff shortages in construction and hospo. Most are getting wage rises that are allowing them to deal with higher interest rates so OCR is having no effect. Sure, house prices are soft but unless you have to sell who cares. The good times are here, maybe Orr is a genius? Certainly the country is on fire.
Anecdataly i have to agree, if people were finding it tough the local lunchbars near work would be quieter, and the expensive fancy one would by the quietest, however its usually flat out, and if you try to go there after a midday meeting the shelves are picked bare. Doesn't seem to be much of a shift from the nice but expensive ($8+ filled roll, $6 slice of cake) place to the $5 filled roll and $4 slice of cake place. And neither are deserted as they would be if their was widespread hardship.
My theory is that the ones who are in hardship now were never out eating in cafes to start with.
We had that "K shaped recovery" and the people on the bottom half of the K probably dropped out of that discretionary spending culture a long time ago.
For the people at the top of the K, life is actually pretty sweet. And people are used to easy credit and spending lots.
'Somewhat offsetting these increases were falls in central government expenditure and household consumption.'
Supply side inflation doesn't seem to be affected by falling consumer demand; but maybe rising interest rates are affecting this?
Housing costs have been rising above inflation for years, so isn't it time wages started catching up? Won't be the end of the world if wages and housing gets a re-balance, though unfortunately some are going to suffer, while the banks profits probably increases again.
I suspect the rate increases we have seen to date has mainly only impacted what purchasers can afford to pay. As a result, sales volumes have dropped.
Vested interests, regularly featured in media articles, have been insisting for months that rates will soon start falling and property prices might start rising again soon. This has convinced people to “hold on” to negative yielding investments (or just unaffordable mortgages) on the belief low rates (or price rises) are on the horizon to save them.
The question is where is the capitulation point where sentiment shifts from “I just need to hold out a few months” and instead people start rolling into increasingly unaffordable rates, and start becoming sellers
This is where the 2018 Brightline is going to come into play. Those that bought in 2018 were on 4.5% rates, they rolled off a two year into 2020 low rates, and are now rolling off again on to 7% interest rates. They are sitting on decent capital gains and have been waiting for the Brightline period to expire before selling, which will begin in March. In 2024 the 2019 buyers will do the same. If house prices drop below the investors purchase price though, the Brightline becomes irrelevant and there is nothing to stop them all putting their properties on the market next year.
Agreed Miguel. I think there is also the big question as to how long builders can hold unsold stock.
From what I hear there is currently very little interest in new builds and we have all this stock slowly being completed as a result of supply chain issues.
Up in Whangarei we have a new development area called Totara Parklands. We had a drive around last weekend and spotted no less than 25 houses at various stages of completion it and appeared every developer has completed unsold units.
The developers will be paying 10%+ to fund unsold inventory and in a falling market they will get to a point they will undercut the secondary market to clear the decks and repay their loans.
Add to this the deceased and forced sales and, as you state, it is just a matter of time before the floodgates open.
In one of my lines of work I have a bit to do with developers or people who work with developers.
I can tell you now, based on what I have seen and heard in the past two weeks, that LOTS of small to mid scale developers are teetering on the edge both financially and from a mental health perspective. The latter is especially concerning, I have seen and heard of some that I suspect may be suicidal.
Whilst trying not to make light of mental health issues, usually suicides are the result of long suffering mental illness, rather than one off events.
I think a lot of it extends from the depression era trope of stockbrokers jumping from windows, which apparently never even happened. In fact, suicide rates often decrease in times of increased societal stress, rather than the other way round.
That said if anyone's feeling upset find someone to talk to.
Overall earnings are keeping up, but certainly the wages of many won't be.
https://www.stats.govt.nz/news/hourly-earnings-rise-7-4-percent/
Especially if they're a near-median income family with WFF or a SL: -> at 7% inflation needs approximately ~20% gross pay rise to offset the loss of tax credits as well as increase in tax paid AND student loan requirements., to get a 7% net income increase.
There wasn't much difference in that calculation between single or dual income households, either (the dual income required very slightly less income increase due to the lower tax brackets).
I calculated this using a combination of paye.net.nz to calculate pay after tax, and IR271 to calculate the loss of tax credits.
2 people work on an Island bagging sand. The employer pays them $1,000 each a year. The Island grows 2 coconuts and each person buys 1 for $1,000.
In year 2 the employer increased the employees pay to $1,020 and the two coconuts were bought for $1,020 each (2% CPI). The employees earned 2% more in year 2 but as the goods for supply were limited (2 coconuts) the prices increased 2%. The Island had 2% growth (good thing but ultimately no increase in employees living standard as each only has 1 coconut still).
In Year 3 only one of the employees gets a raise to $2,121.60. He is able to buy the 2 coconuts paying $1,060.80 for each one. The other person who still only earns $1,020 cannot buy a coconut as they are now too poor. CPI is $2,121.60/$2,040 (2 coconut price in year 3/year 2) = 1.04 = 4%
There is economic growth of $2,040 to $3,141.60 = 54% (the same as wage growth in this example). Economy is richer, people are richer ON AVERAGE, however, the person who is still only earning $1,020 is poorer now and has no coconuts (but he is not the average).
Your example of a person who had $1,000 under their bed and a year later after 8% inflation are not richer is correct. But the point is to get that 8% inflation someone else in the economy is not only paying more, but more importantly IS ABLE TO PAY MORE. So the economy/country is richer (on average) = inflation good = supplier willing to invest money to get more $ (e.g. coconut farmer may decide to grow 3 now price has risen from $1,000 in year 1 to $1,060.80 in year 3).
Hilarious attempt but you forgot the punchline: they still only have two coconuts.
The coconut farmer has no incentive to grow more because his coconuts are still worth the same in terms of bags of sand, which is apparently the only other commodity in your island.
Yeah he's also forgotten the bit about the island's central bank manipulating the supply of money on the island and preventing the free market from discovering the true cost of capital by artificially and arbitrarily setting the rate at which Islanders can borrow.
Relevant article: https://www.economist.com/finance-and-economics/2022/04/23/does-high-in…
Only the Finance Minister can change this buddy..... seems that the finance ministers objectives are being met - lower house prices.
Context I have bolded the best part for you -> The government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.
Monetary policy plays an important role in supporting the government’s economic objective. The Reserve Bank of New Zealand Act 2021 (the Act) requires that monetary policy promotes the prosperity and wellbeing of New Zealanders and contributes to a sustainable and productive economy. Monetary policy contributes to public welfare by reducing cyclical variations in employment and economic activity while maintaining price stability over the medium term.
This remit is issued by the Minister of Finance to the Monetary Policy Committee (MPC) under Clause 3, Schedule 1 of the Act.
1) Monetary policy objectives
Under Section 8 of the Act, the Reserve Bank, acting through the MPC, is required to formulate monetary policy with the goals of maintaining a stable general level of prices over the medium term and supporting maximum sustainable employment.
2) Operational objectives
- For the purpose of this remit, the MPC’s operational objectives shall be to:
- keep future annual inflation between 1% and 3% over the medium term, with a focus on keeping future inflation near the 2% midpoint. This target will be defined in terms of the All Groups Consumers Price Index, as published by Statistics New Zealand
- support maximum sustainable employment. The MPC should consider a broad range of labour market indicators to form a view of where employment is relative to its maximum sustainable level, taking into account that the level of maximum sustainable employment is largely determined by non-monetary factors that affect the structure and dynamics of the labour market and is not directly measurable.
- In pursuing the operational objectives, the MPC shall:
- have regard to the efficiency and soundness of the financial system
- seek to avoid unnecessary instability in output, interest rates and the exchange rate
- discount events that have only transitory effects on inflation, setting policy with a medium-term orientation
- assess the effect of its monetary policy decisions on the government’s policy set out in subclause (3).
The government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.
Hon Grant Robertson, Minister of Finance
Adrian Orr, Governor of the Reserve Bank of New Zealand
It was a component in that surge & splurge alright. That little statement came not much longer after the comment professing expertise on the housing market based on the fact she had noticed the house across the road from her had sold. The problem with talking around in circles is that eventually you are likely to meet yourself coming the other way and here it is. A good number of home owners expecting that to be an appreciating asset are now going to be walloped instead and especially if they took the other incentive on offer, to borrow at the extraordinary low interest rates. A double whammy indeed.
I don't agree she professed expertise based on a sale across the road, a Stuff article from April 2021 quotes her as saying “I can tell you from my neighbourhood ... a sale across the road only further reinforced for me why we needed to act. The increases we’ve seen, be it from my house, the house in my neighbourhood, or in Auckland generally are wrong. It’s unsustainable.”
As much as I would like that, I don't see the OCR getting there. 75bps in Feb see us at 5.0% and you can be sure the economy will start to turn south by the second quarter of next year. The moment the data starts to turn, the RBNZ go on hold. I see a peak of between 5.0% and 5.5%.
Core inflation in the US looks to have already peaked and next year the global macro-economic outlook is ugly.
The housing market is toast either way. The damage has already been done and as long as the RBNZ don't whipsaw themselves into a sharp easing cycle at the first sign of economic pain (we can't rule that out by the way) then another 20% decline next year is almost inevitable. At that point there will have been so much pain in the property market that buyers will be very cautious and you could easily see another 5% or so decline over 2024.
"The RBNZ has ratcheted up the Official Cash rate from 0.25% as of October 2021 to 4.25% as of now and is signalling it may go as high as 5.5% by the middle of next year."
From the 1st Scroll.
"The OCR Forecast Peak Goalposts will continually be Moved Higher and Higher ! "
Amazing the reserve bank doesnt have a better estimate of the effect of %OCR increases. Surely they would have better data.
One suspects that there are a ton of cashed up people, with huge equity or $millions in the bank and safe jobs or pensions who are spending up big, for these peeps the OCR raises and inflation has probably barely registered on their budget.
Meanwhile those who bought houses late, the poor, young families with mortgages or big food bills, and leveraged up investors .. these people have already stopped spending are unloading houses cheap and will be getting more and more hammered and depressed with every murmur of a raise or food price hike.
I know a couple tradies/builders who have back to back work to Q2/Q3 2023. They arent fussed.. new rangers on back order.
The way to stop it was 12-24 months ago by raising the ocr and stopping the house market bullet train that is now gonna derail with the whole economy
On a nominal basis annual Sep22 GDPE grew 8.2358%. Interest rate repression persists.
This is one of those jokes which is funny until you realise how close to home it actually is.
Here's another option (stop me if you've heard this one before): we could introduce a central bank currency and simply control how people were allowed to spend it, if at all! Lol!
We have 85%+ mortgages on fixed rate.
USA has <9% òn fixed. Australia 60%ish on fixed (might need updating).
So every time we raise the OCR it affects maybe 1 in 36 peeps with a mortgage that month. So it has 1/30th ish the impact it does in the US and maybe 1/2 the impact it has in aus.
Hence if we raise at the same rate as those countries then measure the impact much later than they do... guess what we actually are way behind them in stopping the inflation train and then act surprised.
At the same time we will for sure overshoot everyone else on the required ocr.. as we need a much higher ocr to have an impact in the short to medium term. So we will kill our housing market and with it our economy.
Better for RBNZ to insist on more floating rates so they have some control.
90% are fixed. Around 11% earlier this year were adjustable (as rates were heading upwards).
https://www.bloomberg.com/news/articles/2022-05-11/adjustable-loans-for…
Yes and most of those people took advantage of low rates and refinanced at fixed rates of 2-3% for 30 years.
As long as they are happy to stay in their home they are gravy. Inflation will eat their debt.
Meanwhile they look at our house prices and our DTI ratios. They cant believe it is all financed on what they
would consider subprime adjustable rate mortgages.
Over 90% of US mortgages are fixed on a long term basis. This is due to most US mortgages being securitised through Freddie Mac, Fannie Mae and Ginnie Mae and onsold.
40% of Australian mortgages are currently on fixed term rates, up from the usual 10-15%.
"As a result of the RBA generously lending $188 billion of three-year fixed-rate loans to the banking system at an annual cost of between 0.1 and 0.25 per cent during the pandemic, the share of fixed-rate mortgages surged to almost 40 per cent of the stock.
The RBA estimates that around 23 per cent of all Aussie home loans – worth almost $500 billion worth – are fixed rate and will switch to variable rate by the end of 2023."
https://www.afr.com/wealth/personal-finance/interest-rate-shock-just-ar…
Wow if you want or need to sell your home get it sold as soon as possible as housing will be under pricing pressure in the new year. Central Banks hate inflation. Borrowing rates will be increasing next year. People not only will want to borrow as little as possible but Banks will be very careful over how much they will lend to borrowers as no one knows the end result other than we are going into a recession and businesses will fail and jobs will be lost. What looks like a bad offer now could very well look like a good offer when looking back next year. Don't be greedy.
This is a part of that 'much better alternative' that Adrian Orr told us he would rather deal with - "easier to cool an overheated market than to resuscitate a dead one" (or words to that effect)
What better print could the RBNZ have wished for in their endeavour to change the dynamics of the New Zealand economy, than being able to reinstate positive Real interest rates into the face of a 'strong' economy!
If the RBNZ ever needed an excuse to light the touchpaper of Change - this was it.
Yes, I think that's right. New Zealand will increasingly become seen as a profitable risk play, with interest rates likely to be well elevated over the next couple of years. Mrs Watanabe and her boyfriend, the Belgian dentist are no doubt contacting their broker as we speak.
Exactly, all that growth during the Key-English years, was basically zero when you calculate it per capita
https://datacommons.org/tools/timeline#place=country%2FNZL&statsVar=Amo…
Lagging indicator. The transport, postal, and warehousing industry was the biggest contributor to growth, up 9.7%.
Same quarter saw a record 29 billion. Current account deficit due to surging imports.Where do you think all these imports end up? Could it be the transport and warehousing industry by any chance?
But then. Even in September Quarter
"Somewhat offsetting these increases were falls in central government expenditure and household consumption."
What do you think is happening with household consumption in the December Quarter? What will happen to household consumption in 2023?
New Zealand has approx 1.9 million dwellings. 2/3 of those are mortgaged and 50% of those mortgages are rolling off low fixed rates to interest rates 4% higher in 2023. Do you those half million occupiers may come under some financial strain by way of increased rent or mortgage payments.
Which is where the wage demands of 20% will come from. They have to with an employment market is such rude health.
This thing is off and running now, and short of a much bigger recession that we've been asked to prepare for, then expect industrial disruption to get worse.
You can demand all you like but you won’t necessarily ‘get’.
I think the labour market is going to get much less tight in many areas, especially areas like hospo, construction and its large number of related sectors. Tightness will ease due to demand destruction AND increasing immigration.
There will still be high wage pressure in some parts of the economy, especially in healthcare. But overall by mid 2023 wage pressure will have reduced to moderate levels.
Great comment. The lag between ocr increase and full effect is very long. So far only the full effect of early timid 2021 increases felt, later ones only partially. With 2/3 of properties mortgaged and 2 year fixed typical, half of mortgage holders haven’t seen any effect yet; the other half only partially. Even if RBNZ make no further raises the greatest effect of existing raises is still to come. But there will be more raises, so mortgage stress will continue increasing for at least another 2 years, and property market lagging that further. By the time the house price falls stop in 24/25 banks will carry substantial non performing loan portfolios and be extremely cautious of lending.
These numbers can't be true. Fonterra reports milk collection is down 4.3% compared with previous 12 months to October. Zespri has to downgrade for almost 600 M NZD of fruit due to a skin issue. House sales are down 27% compared previous 12 months. Log exports are down about 15000 tons a day due to the construction decline in China. Quote from latest treasury update publishe 1st december about the four months until 31st October: GST revenue was $0.2 billion (2.3%) below forecast. The weak private consumption in the June quarter signalled some weakness in general consumer sentiment, and this has likely continued. Somebody should go back to NZ stats and check their numbers!
Live NZ GDP tracker a useful tool things are definately coming off the boil since the period ending September
As GDP is relative to the previous quarter or year, and we are emerging from 2.5 years of a lockdown and closed borders, why is anyone surprised that we have growth? Added to this there has been a reasonable amount of on-shoring as companies look to buy locally due to the difficulties of sourcing from overseas , especially China. We are always being told growth is a good thing, why not go with it rather than pour cold water on it. It may not lead to inflation as we may be selling more stuff, rather than selling the same amount of stuff for more money. We shouldn't talk ourselves into recession when what we could be looking at is a 1950's style rebound following a global crisis.
I'm kinda thinking if JK was in charge,he would be saying it is a good problem,a successful economy and folk would be slapping him on the back...hard to argue unless you are heavily leveraged...full employment,economy growing,exports rising,house prices falling...
GV,I'm not saying it ain't gonna be hard for some,been there done that,mortgages anywhere from 8-19% ,3 kids under4,single income...just saying is the other option stagflation? Genuine question.Having high employment and business growing is good no?
I meant no malice or ill on anyone,as I said,been there myself.
King Spruiker Tony Alexander's view that the housing market won't collapse in 2023 will be his famous last words
NZ economists and bankers seem to base their predictions on the recent past. They don't seem to read the live data or look for leading indicators. Hence Orr pumping the housing market for too long and then putting the brakes on too hard and too late. Inflation has been high but all the indicators I see would suggest it has peaked and is falling rapidly. Container rates are now below pre-pandemic levels and inventories are high. I think we will see big price drops across a range of goods by Easter.
Some of us hate Roulette, so when we got big wins in Nov 21 we took our chips off the table, we cannot lose now as we have no bets on.
We have moved over to the Blackjack table and have been counting cards, we think that the HOUSE may be in for a bit of a fall here.
I have sat on enough trading floors for long enough to know, if you are not convinced then don't place a bet.
Good luck on Red here, I think Blue has a chance.
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