By Alex Tarrant
Finance Minister Bill English has agreed that a technical recession in the second half of 2010 is possible, but says those kind of "bumps" are part of the process of a significant readjustment of the economy.
He was supporting comments made by Prime Minister John Key and reported on Interest.co.nz on Monday.
Appearing before Parliament's Finance and Expenditure Committee, English said the recovery would continue to have some challenges over 2011, and the onus was on the tradeable sector of the economy to grow jobs in order to get unemployment down.
After appearing before the select committee, English told media it was possible there was negative growth in the December quarter, but would not be drawn on whether he thought that would continue to the current quarter as Australian GDP growth weakens and China raises interest rates.
Australian slow down a risk to NZ exports
The New Zealand economy had been flat as people saved harder and paid off debt quicker than government had expected, English said.
"They’re not rushing back to the shops and are not rushing into the housing market. And the big export prices haven’t started feeding through yet," he said.
"So it’s possible [there was a recession in the second half of 2010]. We’re focussed on the longer term, which is getting sustainable high incomes from a growing export sector."
When asked about what he thought for growth in the current quarter, English replied, "Look, we’ll let the Statistics experts sort that out".
"We’re focussed on how to strengthen the economy in the longer term, because we can’t actually influence the quarterly figures," he said.
There were risks from the Australian economy, where the non-resource economy seemed to be slowing quite fast.
"That could affect our exports, and that’s another risk," English said.
"I don’t want to guess what the quarterly numbers will be, I’ll let the experts sort that out. What I do know is the adjustments New Zealand needs for the longer term are starting to happen. That is New Zealanders being careful with their spending, paying off debt. They’re not trying to pump themselves up by buying houses off each other," he said.
"They had accumulated very large debt. Debt in New Zealand households went from about NZ$60,000 in 2003 to NZ$107,000 in 2009 on average. So the average household now owes over NZ$100,000. Now they face rising interest rates at some stage in the next two years.
"They’re being pretty careful, and we think that’s sensible. That’s better than some short-term fizz recovery that gives us a couple of good quarterly numbers then falls flat on its face," English said.
Deleveraging warning
Speaking to the Finance and Expenditure Committee, English warned there would still be considerable adjustments the economy would have to go through as households paid down debt, or deleveraged, after a big increase in debt levels over the last decade.
Even though households were being careful about their spending and focussing on reducing debt and increasing savings, they had just flattened that out, English said.
"So if you think that the right level of household debt is almost twice as much as it was in 2003, then even to hold that level of debt, we’ve got pretty subdued [household] spending – a subdued housing market," he said.
"If you thought that households actually need to reduce that level of debt, then there would still be some considerable adjustment for the economy to go through.
"Where we were talking about economic growth, then that build-up of debt has been very substantial, and even holding it flat means that in the short term we wouldn’t be expecting consumer spending or the housing market to pick up in a big hurry," English said.
Consumer spending and the housing market were generally the drivers of growth out of a recession, and were to a large extent absent this time around, he said.
Jobs to come in tradable sector
The same kind of issue was relevant when it came to employment, English said.
"When we had this increase in consumption and debt, and a fast increasing housing market, you had employment in the tradable sector from 2003 and 2009 actually fell by 12%," English said.
"That represented a loss of 55,000 jobs in the tradable sector. But the tradable sector is a relatively smaller part of the employment base. The non-tradable sector in that period grew by 18%, which represented 267,000 jobs. So the non-tradable sector is just much bigger," he said.
"If it’s not growing jobs, then that has quite a big impact on total employment growth. So what’s happening at the moment is, in the export sector, job growth has come back.
Since 2009/10, jobs in the export, or tradable, sector grew by 6%, which was 25,000 jobs. In the non-tradable sector, there were more jobs – 35,000 more jobs, or 2% growth, English said.
"So looking ahead over the next few years. Because our non-tradable sector has had a lot of debt, it’s got to clear out that debt, it’s got households being careful – you’re going to have relatively low job growth in that area, which is actually about four times the size, in job terms, as the tradable sector," he said.
"So we’re going to need to see, off the back of these high commodity prices, fast job growth in the tradable sector to see unemployment sustainably drop.
"You will get growth from the non-tradable sector, but nothing like as fast as it was in the last decade.
Tradeable sector job growth would turn around “pretty vigorously” on the back of good profits and strong investment, if New Zealand was going to get a much faster drop in unemployment, English said.
The good news was that New Zealand’s export commodity prices were as high as they had ever been, he said.
(Updates with comments on jobs, deleveraging, comments after the FEC)
44 Comments
Indeed Kate, they are funny people eh. Hot off the NZMEA presses ....
More of the same
Judging by Prime Minister John Key’s opening address to Parliament we are to anticipate more of the same in 2011; that means a continuation the economic funk seen over the past two years, and the resulting build up of debt. The New Zealand Manufacturers and Exporters Association (NZMEA) is calling for significant policy changes so that the tradeable sector can reverse this slide.
NZMEA Chief Executive John Walley says, “There seems to be an assumption that with high commodity prices the economy will just look after itself. We need to spark more investment and capacity expansion across our entire export sector; that is manufacturing, agriculture, services and tourism. It is worth noting that manufacturing contributes about the same to GDP as agriculture and tourism combined. We will not get rich exporting raw materials.”
John Key commented during his address to Parliament that, “The Government will continue to support stable and predictable monetary policy, focused on maintaining a low level of inflation and thereby minimising price increases across the economy. We note that this is not the position of some other parties in this Parliament.”
Mr Walley says, “Over the past ten years inflation in the tradeable sector has averaged 1.5% and inflation in the non-tradeable sector has averaged 3.7%. Price based inflation targeting has addressed inflation by killing off the tradeable economy via an overvalued exchange rate. A vote for a different approach to monetary policy is not a vote for higher inflation but it is a vote for supporting investment and expansion in our export sector.”
“Continuing with a monetary policy framework that overvalues the exchange rate is a recipe for a low export, low wage and high unemployment economy. Until this policy nettle is grasped, talk of rebalancing and recovery will be just that, talk.”
http://www.realeconomy.co.nz/151-more_of_the_same.aspx
Yep, just a bunch of jokers.
Show me some examples where a Govn has been effective in "holding down" the exchange rate pls.......From what I can see the high rate is partially from our economy being seen as fairly robust compared to many others....so if say National decided to massivley print that would work..........um....no....
I can see that there is nice financial margin being made on hedging and our currency is highly traded, a tobin tax, say on incoming $ only would help quieten that....yet its off the table....it seems around the world touching anything financial is a no no...........
Lets not forget that Key has gone out of his way to personally get finance/hedge funds to work from here....as long as the money isnt invested in NZ......so just why would anyone come here? Why not register a dummy company, employ a $35k secretary as a front piece and not actually bring any jobs here? It can be done electronically from what I can see...yet another money laundering scam..........
So we see any such "efforts" for domestic NZ owned operations? uh no.......deaf it seems...
regards
steven - go to the FT website, look at the 'Money Supply' section. (A free account will let you read 30 articles per month.) John W ficked me one this morning called 'Turkey data defy the doubters.' Have a look at that and the link back to an earler article on 'unorthodox monetary policy'.
In the 'Money Supply' section you will find a good few examples of some countries trying various means, eg. Chile, South Korea, Brazil. The obvious example is Singapore and I seem to recall we discussed this before, where I went through the key lessons we could learn from them, without having to be like them in other ways. I think I also referred you to an RBNZ paper by Casino and Wallis where the basic conclusion is that our higher than average interest rates are the driver of our currency valuation. So, we could take a leaf out of others books and control inflation by means other than the OCR regime. I've been through that a few times, but have a look at that article on Turkey to get an up to date example.
The reality is, there are reasonable alternatives. To say "there is no alternative" is not true.
Cheers, Les.
I have already read similar to these, note as you admit "trying" Quite a few are putting in controls for differing reasons, eg to curtail large amounts of cheap US money being dumped into their economies, eg Brazil. So I would say that these examples are being done for differing reasons and there is a question on them even working.
NB I wont go into the FT's "free" paywall on principle....the Internet should be free....the good information is free, supporting paywalls will encourage ISPs and content providers to throw up yet more paywalls....
In terms of lowering our interest rates, from what I can see this is very much a two edged sword, in fact I think the cheap credit problem is the sharper side...with that the banks have happily lent heavily into property and shunned businesses....
For instance has cheap interest rates helped the US? Alan Greenspan's "put" seems to have delayed the inevitable bust/blow up and made that worse...
Has low interest rates helped real US businesses? no it seems its only the banks who have profited....in fact lending to US small business has either ceased or got too expensive....
Inflation can no longer be controlled via the OCR IMHO....the OCR is a tool that can only be used when ppl have too much money chasing too few goods....ie pull inflation....From now on we will see push inflation, ie the raw materials and especially energy or fossil based feed stock input to businesses will push up prices and ppl wont buy as much or not at all.....our economy is more likely to shrink from this effect than grow....
The second biggest factor effecting businesses is that NZers are now taking on less debt and paying it down, changing the OCR isnt likely to effect ppl who dont want debt or more debt....ie they wont be spending with businesses who are over-capacity, ie set up for a debt economy....our economy is more likely to shrink from this effect than grow.
The biggest factor is energy, that cost is rising and painfully, dropping the NZD will make [transport] fuel even more expensive, that is a big input to most businesses....so dropping the NZD say 10% but putting up your energy costs is probably somewhat self-defeating......our economy is more likely to shrink from this effect than grow.
So there is a lot of re-adjustment to do....and a lot of pain to go with it.....I expect un-employment to go past 10% before 2015 and possibly 20% by the end of this decade....
regards
steven - at least they are "trying", whereas our CB is pretty much sitting on it's hands. The different reasons, sure, but one of the primary objectives is to take northward pressure off their currencies. The one of course that has tried and won is Singapore.
Yes, a reduced ex.rate is a two-edged sword, however, managed well it helps with rebalancing and retaining market share in tradeables, which is what we risk if things continue on as they are. Note, Don Brash had the idea to actually vary fuel excise tax to supplement the OCR regime in controlling inflation.
Take your point about the US businesses and banks, but we are not the US and don't have to make the same mistakes.
Also business debt and reduced OCR; business credit has slumped, but if tradeables people saw more stability in returns resulting from a more stable and less overvalued exchange rate, it is likely they would do more than invest for maintenance, which is what we have seen to a degree while the ex.rate has been high - a bit of a silver lining to the cloud at least.
Or, do what we are doing now, nothing - but I just can't see how tradeables will be come Bill's knight in shining armour if all that happens is the tinkering and talkfesting.
They are trying eg Brazil because the problem is so "intense".....Im not sure on the Singapore example...the problem is context. Singapore I would suggest isnt NZ, they have I believe huge cash reserves. URL?
Stable exchange rate, an in coming only tobin tax has been suggested as a stabilizer, NZ is highly traded, sure take that aspect out.........I have no issue with that what so ever. (Then credit NZ exporters with it back where its a genuine business deal ie a good exchanged)...
Do nothing, I think there is a balancing act going on plus I think intervention is fraught with costs and dangers....CB jumping in occasionally and burning a few traders, all well and good...At the moment Im all for a floating rate, it may not be perfect but no one yet has convinced me anything else is better and more importantly works and has the desired long term effect(s) with no nasty side effects...
Also manipulating the exchange rate may bee seen as a method of back door import restrictions/tariffs where NZ is highly free trade orientated....The US might also take that as enough of a reason to hit the likes of Fonterra with duties into the US which its dairying industry wants.........
regards
steven - apols, I thought it was you I'd discussed Singapore with a while back. It was Raf. Have a squizz at this:
http://www.interest.co.nz/kiwisaver/savings-working-group-recommends-single-default-kiwisaver-provider-and-soft-compulsion-considers-rai#comment-600389 As I said in comments above, we don't have to be like Singapore, to perform more like Singapore. I agree on floating, their's does essentially, within that 'undisclosed' band - err, well that's even if there is a band. It'd not surprise me that they simply ward off specs when they see speculative flows out of kilter (enough) with trade 'real' trade flows, who could say that's unjustified? The US are always complaining about China's undervaluation, meaning of course (so much tongue, so much cheek) that of course they would have no problem with properly valued exchange rates, would they .... ? (You make a good point though, because like us they can't play cricket!) I've not got the charts to hand, but I recall SGD has charts showing steady appreciation on ex.rates, but their TWI is pretty flat. (That stuff will be on the one of the NZMEA websites if you are interested - which are mainly free, to users. ) Anyway, note the point about reserves in the link above and don't forget they had to start somewhere and given the probable context of their early situation - trading as I outlined is maybe how they kicked off. Yes they do have good savings capital/reserves - but I doubt they needed it to start the management process and we don't need it for our context presently. Cheers, Les."Now they face, rising interest rates at some stage in the next two years".
Gosh...I wonder what that will mean.
"I made the mistake of believing the textbook theory on interest rates.
That theory was based almost entirely on the economy and inflation. When we had more growth and inflation, interest rates were supposed to go up. When we had less growth and inflation, rates were supposed to go down.
Nobody looked at interest rates as separate and apart from growth or inflation, and neither did I.
Boy, was I in for a big surprise! In fact, just as I began to watch rates more carefully, every single thing I had read about them went by the wayside.
Here’s what happened: After the Crash of 1929, interest rates fell sharply, which was to be expected, because of deflation.
But then, something absolutely astounding took place: Although we were still in a deflationary era, although the economy was still sinking, interest rates began to surge dramatically.
The immediate reason: Bond markets collapsed"
Have updated with comments on jobs and deleveraging.
These are some pretty heavy comments from the Finance Minister, especially after the PM saying there are a whole lot of positives to look forward to in 2011.
English is saying there could still be considerable adjustments as households reduce debt.
He is saying we can't rely on the non-tradable sector to contribute to lowering unemployment because it has so much debt.
The govt is relying on our export sector to expand vigourously, create jobs and save the day. Key and English have now both expressed concern about the Australian economy (our biggest market). Key is also saying the way out is on the Asia train, but that there could be an asset bubble in China (where they keep increasing interest rates).
Before English, Fed Farmers president Don Nicholson made an interesting comment.
He said he thought commodity prices were so high because certain countries were hoarding - ie buying a lot now in bulk. He then said he thought commodity prices would soon come off their highs when the hoarding slowed or stopped.
Cheers
Alex
I say good on English for telling it like it is. Compared to that twat spouting all that spin....
Look you have to be John Key, a bank economist (AKA "Real estate Economists" by the Unconventional economist) or a property spruiker to believe that the economy is going to pick up in any really meaningful way in 2011.
But its one thing to (partly) acknowledge the issues, another to do something about them. Agree with Les Rudd and Kate.
Is wong right or is wong wrong!
"Building approvals were likely to stage a strong rebound in late 2011 and early 2012, underpinned by quake rebuilding and also repair work on leaky homes, Wong said."
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10705066
We need to celibrate, Muzza..it's not often we have steady growth..winz will be pleased..they are in demand...all that paperwork and cross checking and rubber stamping..gosh they'll need a complete new set of woop de doo computers and another software upgrade..a new office for the head honchos. All very GDP positive. Just as well they didn't go ahead with that idea to feed the unemployed into the aussie labour market over the last two years...think of the damage that would have caused. Just the sort of election year voting feast that Dunne and the morons in the labour minor party were looking for.
C'mon now, Who's really surprised about any of this? Not me.
The equation is simple:
Political Incompentence+no real productivity+negative current accounts+personal debt increases+ sheeple living on ponzi property and fairtales= Totally screwed for decades!
PI+NRP+NCA+PDI+PP= THUCKED
"Similarly the housing market of the past decade may have masked a sharp fall in New Zealands competitiveness which now may lead to a period of prolonged and higher unemployment. ""
Very good point. Think about it. The 90s were pretty sluggish. The 2002-2007 housing boom certainly was an illusion that distracted us all. Remember at the time everyone was talking about it as a new economic glory age (and we had a baby boom in the wake of the boom just like the 50s!!!). but it was based on very shaky foundations. Since 2007 the truth of our frail economic base has been exposed severely.
.....I've worked in the sharp end of the tradeable sector for twenty years and ten since I've come back to NZ from my 'OE' I've seen nothing but contempt, neglect and political ridicule in favour of short term thinking, malinvestment, speculation, cheap trading and the permeation of the low wage non tradeable economy mindset agenda........and now "the onus was on the tradeable sector of the economy to grow jobs in order to get unemployment down". Gee really? Horrah.......I'll put in a real burst just for you guys to waste on pontification, incompetence and bureaucratic fubar.
The effects were all fairly obvious of course to a minority of rational independants but the mass illusion is that we're being directed by some superior rationality and perhaps common good motivations. Pollies are propelled by a kaleidoscope (circle of mirrors) of different motivations than the people at ground level of course and don't adhere to the same rules because their pay isn't ultimately based on what the people think or even what the economy earns. They're conduits of power....the (future) sales connection between the global finance co-ops and the people. They're the ones that sell the basic reality configuration of the debt constructs at a local level. The sales team gets fired or replaced depending on their performance.....but we're just buying a superficial construct of red or blue pathways to the same event: Debt servitude.
Welcome to the Matrix.
Problem gov has is that so many jobs have been created around the building industry so as the housing bubble burst that increases the unemployment line, so most head to OZ. Then they expected us to have an export lead recovery....did not happen and wont happen when the xrate is so high (yes blame the US and we are so small nothing we can do about it) so they need to start telling us how it is, I believe we have slipped back into recession. We may be selling a lot overseas but you need to sell twice as much when the xrate rate is high 70's to cover costs.
I have not had a chance to read this yet but it looks like it could be very interesting........it basically covers what it thinks are the top 20 economic theory pieces....
http://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.101.1.1
regards
""Tradeable sector job growth would turn around “pretty vigorously” on the back of good profits and strong investment, if New Zealand was going to get a much faster drop in unemployment, English said."....................hands up all those who believe this...come on hands up.....somebody please put a hand up......oh for *&^%$ sake.
Bernard...good Sir enjoyed your piece on this mornings telly with Corrin (the talking head)Dann........almost made me homesick for the site...particularly liked your parody on the Horsie and saddle bag thingy.....and you almost got to flogging a dead horse....ah happy days yes indeed..!
miss you guys...BUT I'LL BE BACK..............YOU'LL SEE.
Bugger...just when Bill's tradeable sector promises looked like slipping past the spin censor....
"Ravensdown chief executive Rodney Green says the growing worldwide demand for food and energy is strengthening fertiliser commodity prices.,He says the urea price has increased by $US100 a tonne since September, DAP has almost doubled in price since November 2009 and sulphur, which is commonly about $US50 a tonne, has risen to about $US200. Shipping charges have also increased." RNZ
Just one more cost rise thanks to Ben the fraud at the Fed.
Wally. um, Ben is only the face for the whole system.
This is a physical scarcity vs escalating demand issue.
The continued clinging to the belief - and it is a belief - that only fiscality is to blame, kind of reminds me of the religious folk who found it impossible to contemplate the new understanding of glaciial action, given that the timescales implied made a nonsense of their beloved text-book.
Did you retire before enquiry learning?
Wolly, Im about to throw a bit of money away on the stuff before the prices go up. $30 soon followed by another $30, a tonne that is. The high stock prices are hurting traders, the farmer down the road winters 800 big steers, normaly that would cost $900 a head he said he needs to budget on $1400 ahead this year and he hasn't got the balls to borrow 1.2 mil. Hes going to buy lambs instead and try to get them all contracted. Another mate is in the sh*t with the bank, owes 6 mill, how they ever lent him that much is a mystery to all that know him.
Yes yes yes I know all about oil PDK...the whole friggin world economy depends on it...and they only made so much...and it's running out...and weak nations like this one are in the shite.
The supply of natural gas is gargantuan as you well know. Cars and other crap run on CNG and LNG. So do trucks. About the only critical oil burners are bleeding ships and bloody trains.
By 2050 expect to see wind turbines covering the place like pine trees. Expect all electric and hybrid bussboxes filling the motorways. The geothermal potential of this place has barely been scratched.
We are at far greater risk from an end to the bees.
you didn't read it through. It shows. Go and stand in the corner.
for your detention attention:
http://www.theoildrum.com/node/3673
note the gas - gargantuan? and the EROEI of converting that to, say aviation fuel?
nope. re-read the archdruid.
Electric cars and hybrids are no answer - they're just less of too much already.. So much cognitive dissonance, so much self-delusion grasshopper. And I suppose you'll build the highways with gas too ? and the alkathene and the polybutylene and the epoxy and the.....
good luck.
Hot off the presses , brought to you via Gummi-Leaks : ......
.....The world's reserves of oil have been boosted by 40 % , as teams of engineers and salon staff make their final assesments of how many trillions of barrels of crude are sequestered within Winston Peter's hair .
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