By Alex Tarrant in Tokyo
The official New Zealand line is that Australia has Dutch Disease.
Prime Minister John Key told a business audience in Tokyo, Japan, that the NZ government thought its Tasman cousin was suffering from the economic illness coined by The Economist magazine in 1977.
It describes how large inflows of foreign currency into Holland, due to a sizable natural gas discovery, drove up Dutch currency, to the detriment of its other exports and manufacturing sector.
Meanwhile, Key labelled quantitative easing policies enacted in the US and Europe as deliberate attempts by authorities there to devalue their currencies, sending the New Zealand dollar upwards.
Mitigating the high Kiwi was the fact imported components of New Zealand exports were cheaper, while the competitive NZ-Australian exchange rate also helped the bulk of New Zealand exporters.
Aussies turn orange
Australia had a very interesting economy at the moment, Key said.
"We think Australia’s got Dutch Disease."
He has previously noted Australia had a 'two-speed economy' dominated by the mining sector.
“It’s got a booming mining industry – Western Australia’s growing at 14.5%, Northern Queensland’s growing at 9%; the rest of the states around Australia have got very low levels of economic growth," Key said.
“That’s because the exchange rate is so high, it’s knocking its tourism industry, [and] its general exports in lots of other areas. So that’s a problem,” he said.
NZ vs the 800lb gorilla
Asked about the government's view on the high New Zealand dollar, and whether any action could be taken to lower the currency, Key noted the NZ-Australian exchange rate was competitive
The currency was part of the issue facing New Zealand's export sector right now, but the high dollar against currencies other than the Aussie did provide some upside.
“As was discussed at [at APEC in] Vladivostok, I think 60% of the world’s trade is now in what’s called intermediate goods," Key said.
“We produce something that’s ultimately a component part for somewhere in the world. So it’s not strictly true that the exchange rate always hurts us, because some of our exporters are commodity linked, and some of them have imported components, which are much cheaper," he said.
“Oil prices would be much more expensive in New Zealand if the exchange rate was lower.”
The New Zealand dollar was so high against the US dollar and euro right now, fundamentally due to inherent weakness in the US and EU economies.
“And a deliberate attempt to have an exchange rate adjustment through a quantitative easing policy that both Europe and the United States are following," Key said.
"They can’t engineer their exchange rates lower through monetary policy, because their interest rates are basically zero, so the only way they can do that is through quantitative easing," he said.
“The problem we’ve got is, we are this very small chimpanzee against the eight-hundred pound gorilla, and the eight-hundred pound gorilla is weighing very heavily on our currency. I don’t know quite how to change that.
“So even if the government said, ‘well look, we want to have a lower exchange rate,’ how could we do that? The answer would be we’d have to move away from a floating exchange rate," Key said.
“We’re a massive capital importer - we don’t have the luxury that some countries have. And if you look at what [intervention is] currently costing the Swiss National Bank, New Zealand cannot afford to follow a policy like that. It’s inherently very risky," he said.
Key said while new Reserve Bank Governor Graeme Wheeler was coming on board very soon, and was in the process of having to renegotiating a new policy targets agreement with the Minister of Finance, the early advice he'd had was it was very unlikely there would be any significant changes to the PTA.
"If there was an easy way of moving our exchange rate down, certainly [with] the New Zealand-US exchange rate we’d certainly do that, but I don’t think it’s easy," Key said.
44 Comments
Well thanks for stating the obvious John, big question, what are you going to do about it?
Low NZ's exchange rate - print NZD and buy offshore assets (like Brazil, Korea, Taiwan, China, Switzerland) - or sit, smile and do nothing
Reduce the 53,000 people moving to the two speed economy next door for better jobs and stop the breaking up of kiwi families - or sit, smile and do nothing
Actually grab Chch by the throat and do something about the city. I've recently returned to Chch after 8mths away and nothing has visibly changed. or sit, smile and do nothing
Stop the rates gouging by local and regional councils. The property I rent in Sydney, $1.3m value pays rates of just $1,300 + $1,000 (water levy) cheap compared to Chch and Auckland rates, or sit, smile and do nothing.
Make some changes - RMA, WFF, Capital Gains, reduce regulation or sit, smile and do nothing...
Well let’s see John.
You could start by putting back the core funding ratio (which had its implementation deferred). This would limit the amount of foreign capital banks could use in lending here; instead they would have to use local deposits – that would lower the demand for foreign capital here, limit lending, lower house prices and the exchange rate.
You could go even further and limit foreign farmland and residential housing purchases to people with New Zealand citizenship. That would lower farm and house prices, and lessen the demand for foreign capital which bids up the prices to crazy levels the locals can’t afford. It would also be a demand push downward for the exchange rate.
You could even, like Brazil has done, introduce a small tax on foreign speculative capital coming into New Zealand, something like a few cents in the dollar. That would lessen the appetite for hot money to come and hide here in NZ, and then put us at risk of a run for exits at some point. It would also help lower the taxes us locals have to pay.
You could set an example and lower government spending to balance the books, and borrow less offshore, instead of selling assets.
The list can go on and on. The real issue is not that it’s too hard to do. It’s that you don’t want to do it.
....... or better yet , fight back against the currency manipulators by lowering our taxes ....
Screeds of mega-rich French business folk are looking for a new home , since President Hollande began his 75 % tax policy .....
.... send 'em into an enclave , to help refinance Christchurch ...... they'd be at home in Akaroa ....
Draco T Bastard - Government spending is what keeps the economy poor!!!! Taking good money off private enterprise who earned it and then wasting it on public spending is what is holding this country back.
Government spending is nothing but a subsidy to the area the funds are employed. It is unproductive and wasteful and shrinks private enterprises ability to expand from internally earned funds.
Where's your proof Government spending is keeping the economy going?
What happens when you keep sucking funds from private enterprise into the public sector?
NZ Government cannot exist without private enterprise as it is private enterprise who generates the income that Govt uses.
South paw - Maybe there's a bit of neo-classical economist in me, but I think I'm far more aligned to Laissez Faire Capitalism than neo-classical.
I want everyone to have a fantasic life and enjoy equally in the gifts, pleasures by their own rewards - hardly a neo-classical view point.
My similarities in view to neo-classical economics lies in the area of efficiency of inputs and outputs. If people do things efficiently then they have more time and money to enjoy the world and everything it has to offer. I am certainly not into a system of slavery and servitude for anyone yet this is what our current system has delivered for so many.
It is actually the mix of Corporatocracy, Socialism and fake Capitalism (welfare capitalism and state capitalism) that has failed us and I can't quite understand why people insist that this is the path to individual prosperity when it always fails.
Get rid of the bureaucracy and BS that goes with these failing systems and everyone is better off.
Big Government = big spending = unafforable = crash = hardship for most people = lower Government spending = less bureaucracy = economy stabilisers = economic growth = Govt expansion = increasing bureaucracy = big Govt. It's not rocket science.
MB - one of the great things about the 1980's was the fact that the Govt ran out of money and they had to cut their spending on bureaucracy. The Councils back then had no money either - god you could get so much more done and so much more efficiently. Well you had to be efficient because interest was so expensive.
...... hold that thought , the two resident survivalists ( steven & PDK ) havn't arrived yet ....... and none of us has the heart to wake them up ........
Meebee the ceilings in their fall-out shelters collapsed onto them !
....... probably " made-in-China " ..........
We’re a massive capital importer
Of course, we don't actually have to be. In fact, being a "capital importer" is bad for our economy as it results in the benefits of the work we do going to other economies. If we developed the resources we have and lived within the renewable limits of those resources we would have enough to cover everything we want to do and be sustainable. And all the government needs to do to achieve that is to print the money and then balance that printing using taxes.
....the big thing with capital importing is if it's used to build productive assets - e.g. build a factory that employs people, and exports etc...it can be very beneficial to economic growth. If it's speculative capital - short term lending, property investment (not producing anything), it is destructive for the economy. We haven't had a government in NZ that's recognized the difference and formualted policy to manage it. I wish we had finance ministers that had some training in economics.
With the printed money idea, yes, there are many ways they can lower the exchange rate, that's certainly one of them.
NZ Heads to Fin - I disagree. Tinkering thinking as you put it would offer many benefits. Massive change leads to unpredictable outcomes.
If you ask some quality questions - Why are people/business's short-term parking funds here?
What is the possible benefit to those doing the short-term parking?
There is absolutely no reason why NZ shouldn't be clipping the ticket on this money on the way through. Any other industry gets to clip the ticket on people, goods etc coming through the country. If the Govt can creat revenue from this source of money then they should go for it - and they should reduce taxes here for residents accordingly.
Long-term parking has an obvious benefit and committment to the economy and so it would be rewarded accordingly.
Agree totally with both your comments NZ Heads to Fin. Problem is no one on the political landscape here seems to have a clue. No one is suggesting anything useful - David Shearer yesterday, free lunches, John Key today, we're a little chimp versus 800lb gorilla with exchange rate - really ridiculous.
Mitigating the high Kiwi was the fact imported components of New Zealand exports were cheaper
This is an often-repeated canard that ignores the fact that these same components will be even cheaper for the competitors of NZ exporters since NZ importing agents pass on only a fraction of any gains from an appreciating currency to the end user. Our company is typically expected to pay 20-30% more than the USD/GBP/EUR price (when converted to NZD) for the imported components that we use and this differential is aggravated not reduced by appreciation of the NZD.
This behaviour on margins is typical of NZ importers. Years ago NZ was so small that local NZers could own the franchise and the manufacturer (say panasonic) couldnt be bothered. These days the manufacturers have figured out that the margins they can hold in NZ are very high. So I actually try and parallel import but find that the agents abroad wont ship to NZ or if they do the freight is so high it negates most of the savings. For instance earlier I looked at importing dewalt knives for my planer from the USA, by the time I paid the "full US retail" and the US freight I was savings <$15NZ there just was no point. So I got my dad to pop into a local store in hawaii while he was on holiday and he paid $50US a set for me.....$80 NZD v $250NZD....Ive also done this on computer motherboards that I couldnt get in NZ unless I bought 5 and paid $150NZ each....but were $80OZ.
Oh and if you p*ss off customs with too many imports they stop them all and tell you to go to an agent who will charge you 20%+ just to do the "paperwork", I lost hundreds on that one...gave up.
regards
notaneconomist - that is possible for generic components (say, chemicals) when you can be confident that you won't need the warranty however for branded components you will usually find that overseas agents are not permitted to accept orders from outside their domestic market. Manufacturers often find that, having purchased a particular item of plant/equipment , they are then locked in to the local agent for consumable components & spare parts that that plant requires (and to the subsequent blood-sucking that that entails).
Recent example, branded component xyz from GE:
In NZ: NZD1122
In USA: USD627 (=NZD774)
In Germany: EUR451 (=NZD711)
In UK: GBP332 (=NZD656)
Usual arguments from agent NZD price higher because small market to service, freight etc. etc. however if NZD were to depreciate you would see a corresponding reduction in price differential relative to what competitors are getting and any (probably minor) increase in NZD price would be more than made up for by improved margin.
Neco - It could be worth a visit to the Commerce Commission on this one.
http://www.comcom.govt.nz/anti-competitive-practices
Read the "What is illegal section"
neco,
Well done on pointing out this canard- which Key mistakenly uses as his only example of an upside from a too high exchange rate. (The fact he makes the mistake suggests either he thinks everyone else is stupid, or in fact he is economically not really past first base). Even without the inflated local margins you talk of, intermediate goods are at best the same cost for everyone, regardless of the exchange rate.
The more we lose key parts of any industry, the more we wil in fact be at a disadvantage in intermediate goods, as the raw materials, or the processing, or packaging, or printing, or machinery, or expertise, have all gone offshore. So we will have extra margins on top.
Best we save what we can, and build on that.
You cannot be a pacifist in currency wars. Key is not only being so; he's handing whatever weapons we have over. All the other posters here have given him plenty of practical ways of intervening.
The Aussies have Dutch disease and we do not?
Surely the dairy industry is our equivalent of the Aussies' mining. And our government's passivity in the currency wars means every other industry, from manufacturing to tourism, is under great unnecessary pressure.
Separately, there is some risk in the Swiss policy for the Swiss, in that they continue to have a very significant current account surplus, so their currency all else being equal, should look to drift higher. So there is a chance that the foreign assets they have bought by money printing will decline in value once they stop orinting. Given though they have printed the money in the first place, and saved their industry in the meantime, they are well ahead. Suggesting we are cannier at finance than the Swiss is a dark joke indeed.
In NZ's case there is virtually no risk. Our currency should be lower, and has $300 million a week saying so. Use the inflated value to buy foreign assets (starting with our own debt), until the currency is at a sustainable level (popular wisdom is at about 20% less than now).
There is almost no risk that those assets will decline in value by the NZD again overshooting up; and it is a perfectly manageable risk even then.
The chimpanzee vs gorilla analogy also fails. The gorillas in this case would have to print trillions more to counter a few billion from us in terms of their own currency value. If for some reason the gorillas specifically targetted NZ and kept buying up our assets to keep our currency high, they actually take the risk that we will play chicken with them, and we can win, and they know it; so I don't believe they would try.
Sadly it looks like we are going to wait for Aussie, missing a very good opportunity, and even then, manage things half heartedly at best.
Stephen L - do you have any estimates of the dilution costs for your plan to get the NZD/USD ccy pair down. An idea you seem to perceive as a greater good for NZ? The US experience is not edifying.
If so have you factored in possible outlier events?
I ask as one amongst many, a long time ago, frantically working a Reuter's dealing system to affect a move in the global value of a currency pair. I was astounded at how much volume was required to make it stick. The greater good at the time was the integrity the dealing room bonus pool.
Stephen,
On the details of quantities of trading required, I have to defer to you. I believe though that if one of the counterparties is the government/ Reserve Bank of a country saying they are keen to get their currency down, then that is a much stronger signal than A N Other trader.
And if someone, or another country, specifically fights it, we can in the meantime in my opinion make some very conservative investments in our own interest. Buying back our own debt comes to mind; buying some of our assets back off foreigners is also an option. Buy enough until the currency is fairly valued. With these sort of purchases the only real risk is that we overpay for our own assets. And with printed money, if we followed the Swiss model. Any inflationary impact of the extra currency would actually go offshore and be someone else's very minor problem. For sure we have been wearing the results of their printing.
I imagine taking bite size chunks of $5-10 billion, and see where that landed in terms of the currency, inflation, current account, GDP and so on.
There would be some inflation caused by a lower currency- necessary price signals in my view.
Would there be other unintended consequences? Almost certainly, I accept, although they are not obvious. Lets at least have the debate, as Parker of Labour has commenced; and to try and be fair, Key has sort of now joined.
“And a deliberate attempt to have an exchange rate adjustment through a quantitative easing policy that both Europe and the United States are following," Key said.
Alexi San........The omission of China in manipulating their currency was glaringly obvious to the rest of us Chimpanzees down here on the farm.......even while playing Chicken with the Gorillas....
I should like you to revisit the statement with him and point ...that fact ...out , as I often wondered what he'd look like with that smug wiped off his dial.
Wakari masu ka?
Japanese Banking Minister found hanged by Golem XIV on SEPTEMBER 10, 2012 in LATEST
From Reuters this evening -
Japanese Banking Minister Tadahiro Matsushita was found hanged at his home on Monday in what police suspect was a suicide, Kyodo news agency said.
Obvioulsy very sad for him and his family. That aside I cannot help but wonder – why?
What the majority of people don’t like to accept - Fukushima and it’s consequences are all over the country - and for many years to come.
By the way – do we have in New Zealand strict import control of Japanese goods ?
It looks like the entire NZdelegation currently in Japan is very relaxed, walking around..
http://enenews.com/10-types-fukushima-seafood-sale-stores-crab-squid
Might also be worth noting A.J. That his other potfolio was Minister of Postal reform , back in 2005 he was ousted from his previous party because he did not support privatisation of the Postal system , He may have found himself right back where he left off with the new party.
Or maybe , he was clogging up the mail...you get the message..?
The plan NZ needs is simple, raise say 4 billion from a financial transaction tax anywhere from .5% to 1% Including all share and property purchases, trading, any financial transaction, the lot.
Then spend the entire amount building this county.
A second harbour crossing for Auckland, Transmission Gully for Wellington, Christchurch needs alot done, and do a major in Dunedin.
Hire a 2000 tradesmen and give them an apprentice each to build and fix up the housing NZ stock.
This would be real growth and not some start a job scheme, all sorts of business would start and flow from a simple plan like this.
We need to create work for our young and get people working so they have a reason to stay here and have a reason for those that have left to return. We could easily get this place going and give them an opportunity, people claiming the dole has increase 300% since National took office and that is simply because there is not the jobs.
A plan like this would tax mainly the finance industry and all that hot money we all slave to pay yields to foreigners.
It would also make for a stable dollar as there would be little trading.
Once the private sector starts to recover and employ more, some of these taxes can go to repay the debt Key and English love to burden us with.
How can we expect great things when we have an English teacher as Finance minister with no formal qualifications for the position he holds and a prime minister that smiles waves, talks the talk but does nothing.
The government is spending 'like drunken sailors on shore leave , as it is , and you want a new tax !
...... cut the middleclass welfare vote bribing policies , and you'll getcha $ 4 billion lickety-splick , without needing to set up a new ruddy bureaucracy .......
Tch Tch : I do wish Wolly was here , to sort you out , matey !
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