By Neville Bennett*
What will happen to New Zealand if Australia falls into the mire?
I ruminated on the problem and do not have all the answers. Yet I felt I had enough info to start a discussion.
Some of the points I want to talk about are based on the idea that Australia is already in the mire.
I think it has classic Dutch Disease with knobs on as it is subject to huge capital flows.
Its economy is slowing, and that could be hurting us: a factor in the fall in manufacturing which is a major point in NZ’s poor GDP returns filed this week. I think Australia has become too dependent on the resource boom and its economy will now fall as international demand cools.
If I am right, the Australians are in for rather grim times, and their housing market will face a huge correction as confidence falls.
I can also perceive a probability that the international banking and trading community could rapidly revise downwards their confidence in the Australian dollar. I will get a bit technical on this point (sorry!) but it will establish an argument for a quick fall in the Australian dollar. I think currency traders tend to lump Australia, Canada, South Africa and New Zealand together, so if the Aussie falls the Kiwi falls. Both have impaired fundamentals.
Low growth in Australia and New Zealand
The New Zealand results came in on Thursday at 0.3% for the quarter, which was about half what the Reserve Bank and other economists expected.
It means that NZ growth over the last year is a pathetic 1.4%.
Note also for the moment that agriculture contributed 3.5% but manufacturing fell by 2.5%.
We expect agriculture to fare well, but we ought to wonder more about manufacturing’s fall: could that be because foreign markets were slack or was it because the Kiwi is too high? The immediate point to note is that NZ growth is vulnerable to any shock: be it foreign markets, credit, exchange rates, government expenditure, capex, or interest rates.
Let’s make the point at present that foreign holders of Kiwi securities will be nervous at present about our prospects. There was some selling off in markets. I think this could be increased as foreign perceptions change. Moreover, low growth makes it harder to raise interest rates, so traders might start expecting the Kiwi to fall.
The Australian Reserve Bank (RBA) recently asserted that growth would be “close to trend’ of 2.75% p.a. I will eat my hat if this is correct. This is “talking up”.
The Aussies ought to know that they are in the forefront of destructive capital flows. I found that they took a huge hit to the economy in late 2011 when panicking European banks sold down their Australian holdings.
The recent release of data on the December quarter of 2011 showed a small increase in GDP, and a year-on-year growth rate of only 2.3%, less that the expected trend-rate of 2.75%. Australian commentators have seized upon a blip in investments as a cause of the fall. Business investment was down by 1%. I have seen no attempt to explain this fall.
There are times when I refuse to go with the flow, and I want to know why business investment fell in the December quarter. I had to cast a wide net before getting a possible inclination. I looked at the Bank of International Settlements website which showed that last year European banks pulled $US8 billion of investments out of the economy at a time when many Aussie companies were trying to refinance loans.
European banks obviously had fears of their impending crisis. Their actions would have created a blip in Australian investment. This may not be terminal as Asian and American banks are lending, but it illustrates an Australian vulnerability: Australia is capital-short and must go overseas for credit. It can anticipate acute contractions if there is capital flight.
Dutch Disease
Australia has a bad case of Dutch disease. Dutch disease is an interesting concept. It arose when Holland received high returns from North Sea oil and Gas. The markets caused the guilder to inflate madly so Holland’s export sector withered. The currency was high and imports were sucked in. Everyone said how great it was to be Dutch but the Dutch people got little out of it.
True there was increased employment opportunities in the export sector (that always happens in cases of Dutch Disease) but employment in manufacturing fell more sharply.
The cost of living shot up, assets inflated and the Netherlands became a less favoured place to live. Brazil also has DD at present and UK firms are pulling out as it is too expensive to place staff there.
Australia gets little benefit from its minerals as much ownership is foreign. Companies like Rio Tinto have comparatively few Australian shareholders.
In Australia contraction has set in, consistent with Dutch disease. GDP was down because the terms of trade are moving against Australia. Commentators have missed this point. They say things are good because exports were up in the December quarter by 2.2% and imports down by 0.4%. They completely missed the essential point that the terms of trade were down by 4.7% because exports were under pricing pressure, and this pressure may intensify as exports to China are sharply down.
Australia has become over-dependent on the China market.
The contractions show in a small increase in unemployment by 0.1% in February to 5.2%. Observers are inclined, like Treasurer Swan, to blame much of this on the “cautious consumer”. This is economic fiddlesticks. Consumption is above trend, especially in cafes/restaurants. Australians are using the internet for many purchases and they are travelling abroad to buy: overseas holidays, up 8% in December.
In addition to Dutch Disease, Australians have the associated illness of a housing bubble.
They had tons of cheap foreign credit and have bid up house prices. Everyone knows that there will be a correction. Standard and Poors predicts a 10% fall if China has a hard-landing. Building approvals are sharply down by about 15% year-on-year. This means that the construction industry is not pulling its weight and therefore that GDP will contract and keep growth below trend.
Aussie Dollar
There are good technical reasons to short the Aussie dollar at present. Their Reserve Bank has signalled falling interest rates. Its 5-yr bonds has a 2.6% premium over US 5-years. But how convincing to traders is this differential? Australian inflation has been 1.06% higher than American in the last three years, so the net benefit of investing in Australian bonds is about 1% net of inflation.
US investors might look sideways too at Australian equities. Both have p/e's of around 14%, but Aussie stocks yield 4.8% while the US S&P’s 500 yields 1.96%. But the Aussie market depends on China and is lagging while the US is progressing well. US investors might wonder if the Aussie dollar is over-valued, and decide to short it.
I think the Aussie has got too high against the US$ and will correct.
Unfortunately, if there is capital flight from the Aussie, people in the northern Hemisphere will also look acidly at New Zealand which is linked in their eyes to the commodity currencies. The more sophisticated will note the Christchurch earthquake and slow growth in GDP of about 1% despite holding a successful rugby world cup. I suspect our slow growth is partly because the Australian economy is slowing down.
I think when the Aussie goes the Kiwi will go with it: but that is good as it will rebalance our economy towards manufacturing and exports.
--------------------------------
* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.
nevillebennett@clear.net.nz
www.bennetteconomics.com
38 Comments
Thank God that someone has the balls to call it . John Key certainly does not see the reality thru his rose tinted glasses
Well done Neville
Dutch disease is already a feature of the Aus economy .
NZ also has a classic albeit smaller version of Dutch disease . Rural New Zealand is surviving on Dairy and Meat , BUT our manufacterers are being so gutted by the strong NZ$ that they cant even supply the domestic market competitvely
link this all to a possible slowdown in China and we are all stuffed
Personally , I am not optimitstic , so I am using this time of low interst to eliminate all debt on my portfolio , and build up a warchest .
Stuff it , I am baby boomer , and I dont need this instability and BS at the time of my life when I am building my retirement fund.
PDK. That is one measurement. There is another. You dishonour the families who were devastated and diminshed as a result of the second world war, who in turn did NOT enjoy the one-shot-ever fruits you claim. Of the returned service males in my extended family only one uncle made it past the age of 50. My older brother served two tours of vietnam with long term health consequences resulting in him retiring age 35 on a disability pension. The best of it? Our family never saw it. And we were not alone.
Icon - with respect, no. Wars are awful, and for those who mourn the fallen, ongoing (the fallen don't know).
But - WW2 was about resources, when you come down to it. Greed, aquisitiion, empire, dispacement it was all there.
Vietnam? Sorry. There a bit of difference between WW2 and Vietnam. Nobody has any right to invade another country, for a trumped up reason. That goes for the 'communism/domino' nonsense, as much as for the 'weapons of mass destruction'. I knew enough to be marching against the involvement, in 1971, and fully understanding why. I was 16 at the time....... There are thinkers who lead, and the mass who follow, one can feel sorry for the followers, but to say they were right just because they suffered, doesn't necessarily follow.
Always look to the empire involved - empires essentially such resources - wealth - from the periphery inwards. Cecil Rhodes and his railway, the wool clippers, the East Indiamen. Eventually they run out of places to such from, which return a positive EROEI. The Romans famously hit 'peak wood', where the energy in the wood, landed in Rome, didn't equate to the energy taken to get it there. The Romans carried on, cutting further-away trees, exactly as shale-oil won't deliver the EROEI now. When the invasion has no resource reason, the empire is on the way out - just going through the motions, it's devouring itself. You could have picked - by Vietnam - that the USA was on the way out.
PDK - you really do go off on tangents. The point I'm making (regardless of the right or wrong), is, this was NZ . NZ went to war. They were NZ servicemen. (you will note I make no reference to defending NZ). There wasn't a choice. It was called conscription. They were called up. They went. CMT didn't finish until the mid 60's. The cost in economic terms to family was enormous. Many potential dynasty-makers of that time period either didn't make it, or didn't survive long enough, or maintain the health necessary to enjoy and acquire and thus pass on to their progeny, the fruits of the time period that you assert. It was hard scrabble, it was struggle street. Your sweeping statement that "your generation had the best of it", is glib, inaccurate and thoughtless.
Iconoclast
As much as I respect PDK I have to agree with you here, firstly the misapplication of the generation label "baby boomers" irritates, This was a label conjured up glib glib social scientists to describe the post war period, PDK should realise that firstly that generations are contiuums and secondly that the perjorative use of this term in respect to resource consumption is not globally applicable, I challenge you to show how NZ families squandered resource post WWII. In fact it is only post the 80's and the removal of import controls that NZ really got into the habit of conspicuous consumption. My character was formed by parents that struggled with 4 children and grandparents that lived thru flood, earthquake and a depression.
Also since i'm a BB by only 2 years shouldn't I be only slightly emabarrassed?
thought provoking article.
I don't quite agree with mining having minimal benefit to Australia. I see the point about many of the profits going offshore, but the state governments earn a lot of tax revenue from mining, and there are a lot of supporting industries that benefit. And there's the new mining tax.
Over reliant on China? Yes, but when most of the rest of the world's economy is dead perhaps this "Sin" is forgivable?
Many here (in the media, and man on the street) seem to think that yes times are a bit tough, but things aren't far away from being strong again. People look at me a bit strangely when I say I think its going to be many years of sub-trend growth. To me Aus feels like NZ in 2008 - house prices falling moderately, economy weakening. I think we could well see some rapid OCR cutting here, ala NZ in 2009, which will limit house price falls....unless China tanks
MIA. Mining and the benefits to Australia via tax revenues need to be considered very carefully. I am sceptical. I think the direct benefits that actually stick to the country are overstated to the point where the Minerals Council of Australia's job is to parrot repeatedly how good the benefits are. The Mandrake-the-Magician effect.
Several points you should consider.
Mining Royalties are STATE taxes. The main revenue stream to the economy is via royalties which are FIXED state based rates charged on tonnages shipped. The doubling and trebling of commodity prices over tha past 10 boom years has not benefitted the Australian economy at all. Because the royalty rates are fixed. But it has stuck to the fingers of the 3 giants BHP, RIO and XTRATA, the 3 overseas owned giants, in the form of profits.
Look up the web site of the Northern Territory and research the state royalty rates. You will find a list of exemptions as long as your arm, vested in the form of Long Term Agreements with the Miners. The Northern Territory is not a wealthy State
Western Australia. This is the big one. Most of the mining activity occurs here. The base rate of the Mining Royalty is 6%. But under some strange arrangement both BHP and RIO have a "long term" fixed agreement with the WA State Government that gives them a favourable rate of 2% or 3% for some many years into the future.
The Federal Government wants to extract $10 billion per annum in Mining Resource Taxes
The Mining Polluters receive $10 billion pa in subsidies.
Why the Federal government doesnt just cancel the subsidies I dont know.
But that's just too simple.
I was in Aus very recently and came to exactly the same conclusion - Aussie seems a couple of years behind us in terms of downturn, felt very much like here in 08-09. There is a palpable sense of economic stalling over there, but it's not like the place is tanking just yet. They do seem a little more resigned to a downturn in housing, unlike over here where our own PM tries to talk up a new housing bubble.
I think Aus weakness was held off by the big fiscal stimulus Rudd brought in, plus mining. But non-mining economy is really struggling, there isn't much stimulus left, and even mining might be pulling back if China is slowing
Political incompetence? Well Rudd vs Gillard was a joke, Abbott is a joke, but I've actually got a bit of time for Gillard. She has got some pretty bold policy passed, unlike "Mr Do Nothing" John Key
I heard Paul Keating interviewed on the radio yesterday. I didn't really know much about him. I was very impressed, and went out and bought his book of post-PM speeches "Afterwords". A very intelligent man
Why bother Neville – manufacturing isn’t part of Kiwis culture ??
Mining, drilling and NZdairy making milkpowder, ruining the country incl. NZ tourism is working properly in this country. And why do we need NZmanfacturing, when 90% of products are cheaper made overseas. And who needs a decent NZjob, when we sell houses, insurances, finance companies, energy to each other – and have Trademe, Marmite and beer - daily. So - why bother brother ?
Looks like Steve Keen might well win his bet then,
http://www.debtdeflation.com/blogs/2010/05/12/a-monkey-off-my-back/
"If I am right, the Australians are in for rather grim times, and their housing market will face a huge correction as confidence falls"...welcome to the dark side Neville...many on this site and on other sites have been pointing out where the farce was heading for a very long time.
I see the NZ state of indebtedness has gone into the red again...too much borrowing going on and all intended to fake some nice looking numbers to spin to the public.
The LVR farce, the Covered Bonds, the near ZIRP by Bollard....all point to the banks keeping total control of NZ...and why not...it's their private cash cow.
Lately we have yet more spin from the Labour depts 'spinster'...predictions of jobs here and jobs there by golly jobs everywhere...bollocks.
"I see the NZ state of indebtedness has gone into the red again"
If this graph is to be believed, shall we say that the household sector was onto deleveraging a year (or starting from peak three to four years) ago,
http://www.rbnz.govt.nz/keygraphs/Fig5.html
Surprisingly far sited of households? I think you will find they are quite a lot brighter than given credit for, in terms of whats good for them.
Try not to get distracted by the graphs colour scheme in future, and look at what its actually showing...
Red flags are waving on that graph Nic...high rates at the start of the 90s and lower debt level...that situation was heading for better times..falling rates...but today it's high levels on debt on cheap credit...Bollard's Near Zirp and the LVRs at 95%...facing rising rates at any time...and that means pain...an awful lot of pain.
You can bet that Treasury have a graph or three and a ton of data to show what will happen for each 1% rise in the average cost of household debt...they will know dam well what not to release to the media ...a media which is too useless to know what to demand.
Consider today average cost is what...about 6.5% say...then look at an average of 9%...foreclosures and rising bank losses...blood on the balance sheet...rising unemployment...bigger deficit hole...NZ downgrade...rates up higher on govt debt...hello Greece !
That's why we get the BS report from the Labour dept and a continuing spin about recovery and growth and a time to borrow more and splurge.
The BoE is telling the UK banks to boost capital BOOST IT FAST...why? Why the hurry?....Why now?.....didn't the QE madness solve the problem?....oh dear no that was just a bit of can kicking....
If that's the call from the BoE, you can bet the banks here are facing the same crisis. AS they see the blood flow they will rush to extract as much as they can take from their victims...mortgage rates will rise rapidly...and that trend will make matter worse as more families go under and the aussie housing chunder event reaches over here.
First of all you can basically claim lower debt level until 2005 can't you, guess what that carries back to the end of WW2. Don't know if there is data available, but thats certain to be the case in NZ as much as it is anywhere else in the world.
http://www.gfmag.com/tools/global-database/economic-data/10403-total-debt-to-gdp.html
Mortgage rates will certainly rise rapidly if Bollard puts the OCR up, isn't that what you keep calling for him to do.
I think that graph shows the household sector weaning itself off easy credit (very gradually of course), up to 2007 it was basically doing the opposite. Since the household sector (and the pattern is consistent for agriculture, business and other non-government debt in NZ) is doing this for itself, and of course its causing a recession while doing it, why would anybody want to exacerbate and provoke it by raising the OCR?
Its only natural that the government has a problem, because they need this to go away inside their term otherwise they are out. They can't control the market direction (despite many repeated ridiculus accusations that they can), at best they might be able to greece the surface a bit (as raising the OCR could be described), but until the market starts leveraging again, its deflation city. If you don't have an alternative to can kicking and sticking plasters then can kicking and sticking plasters it is, but the fact that this is the government tactic doesn't imply there is an alternative for them. Unfortunately its the right of the narrow spectrum at present in power, so they have to hurdle the reds to get to anything which would work, and blues are not going to like that kind of thing anyway.
I don't anticipate any Douglas esque atheletic political hurdling from the National party, they strike me at too dull, not prone to acts of super heroism/or super villany (depending on your political bias).
Unfortunately for Key and English they are in a hard spot, because a bunch of their favourite voters, friends and morons are calling for the immediate provocation of the market and the economy to do its worst. This leaves them walking a tightrope between implementing some destructive policy to please their support base, and actually doing enough to keep the economy on life support and get re-elected. So far I give them pretty high marks myself, I don't think there are many around who could pull this off better.
NZ is actually comparatively well off internationally,
http://articles.businessinsider.com/2011-12-04/markets/30473957_1_household-debt-uk-safe-haven
though there is going to be further pain for certain.
The money has to be on self interest.
The 4 Oz banks have becomes so big, that for their own survival (and that means ever growing profits) that they can not afford to have people repay debts. [The give credit, but in our hands it debt. To them a loan is an asset].
If the volume of debt does not grow, then they will increase the cost/interest rate, so that their interest rate margin pins up earnings.
So, what are we seeing:
1. low/no deposit home loans, a drive for new home borrowers - hooking new people in
2. rise in loan approval, a dash to snatch market share (taking loans off each other) - beggar thy neigbour.
3. a marketing war to gather big fish customers.
They are playing a fine game driven from Sydney and Melborne, but at the moment its about them individually, not us or the interest rate market. They regard earnings as their life blood.
In ag terms, you are on the combine and just finished the wheat paddock, you look round its all now low stubble, and you feel good, but you also have that feeling that you don't want to stop, you want more (especially given what the machine costs). We have 4 large financial combine harvesters roaming the hills.
Mr Smith [ANZ Chief in Hong Kong this week for the rugby sevens] defended the recent move by Australian banks to increase their lending rates despite the Reserve Bank holding its cash rate steady.
"If funding costs go up, what do you do?" he said. "If you don't have a profitable bank you would have an unprofitable bank. And, believe me, that is not the situation that anyone would want."
I totally agree with the author, one only needs to look athe the Baltic Dry index to see a global slow down is still in play. http://j.mp/GQTEYd
Invest outside NZ in a hard asset while the NZD is as high as it is, you'll get some protection on the exchange and hard assets are great inflation hedge, which you'll need as printing presses go into full bore mode!! http://j.mp/zU2zMG
Neville's first line refers to what happens to NZ if the Aussie economy is mired........ " if " .....
........ the histrionic headline queries what happen to NZ when the Aussie economy tanks ...... " when " .....
..... so who was it in Bernard's office who created the gloomsterising headline ?.. how is that person so 100 % sure that the Australian economy will " tank " ?
Yeah, from now on no negative scenarios are to be considered. After all they might not happen and on that basis there is no point getting all negative and discussing their impending ness and certain doom and all that stuff.
Sincerely, the positive attitude police.
Queensland's Unsustainable economic model:
April 12, 2011
Thousands of jobs will be lost under new capped infrastructure charges announced today by the Bligh Government, according to the Property Council.
Speaking at the Building Revival Forum in Brisbane, Queensland Premier Anna Bligh outlined wide ranging changes to local government charges on new development in Queensland.
“This is a devastating decision for all Queenslanders,” Mac Dermott says.
She says the property industry is not only the biggest contributor to Gross State Product (12.6 percent) and directly employs around 280,000 Queenslanders, but draws a considerable amount of tax.
“The property industry is the single largest contributor to State taxes – providing $3.8 billion, or one third of the State’s total tax revenue.
“In addition to this, local governments across the State collect over $4 billion in rates and charges.”
Arguing for more of a focus on economic survival rather than revival, Mac Dermott says she is concerned that between 2006-07 and 2009-10 the value of residential and non-residential building activity in Queensland declined by 2.6 percent.
“Over the same period NSW and Victoria recorded 21.4 and 26.7 percent increases respectively,” she says.
On the employment front, Mac Dermott says the State Government’s own figures show that over 11,000 construction jobs were lost in 2010 alone.
“After this morning’s announcement, we can expect thousands and thousands of jobs to be lost in 2011.”
http://www.qbr.com.au/news/articleid/73217.aspx
Why are we so deeply in trouble there can be no way out!
"...stubbornly stick to the bankrupt idea that economic growth is driven by consumption. This is confusing cause and effect. Healthy consumption follows profitable production in excess of consumption, resulting in savings – accumulated capital – that can either be spent without harm or invested in future growth."
http://www.marketoracle.co.uk/Article33767.html
We don't have savings in NZ....we have parasites that lend credit which is now used instead of savings...and the RBNZ thinks it's an ok thing to do...and the govt doesn't know the difference.
"Unfortunately, that process has barely even started. In fact, since the bailouts started in 2008, these things have gotten much worse. If the government had gone cold turkey back then, cut its spending by at least 50% for openers, and encouraged the public to do the same, the depression would already be over, and we'd be on our way to real prosperity. But they did just the opposite. So we haven't yet entered the real meat grinder…
L: Those false signals the government sends to the market being artificially low interest rates?"
Every organism that survives in the long term has a strategy for down times as well as up times yets present day humans believe the answer is more economic growth.
In hard times we could rely on the bicycle and good urban design (including prescience about energy scarcity). Unfortunately private ownership of land and a dominant profit motive steers us away from an optimal solution in a capitalist society. Consumer choice should incorporate (amongst other things) electing an architectural / planning team.
No worries right Hekia Parata...just "sorting the wheat from the Chaff"
"Six Auckland schools are stranded with unfinished buildings after Alliance Construction went into liquidation."
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10794390
Hey Bill English....is this an example of your recovery...poor business managment...or why the whole building system is a shite? Tell us why Kiwi families should be silly enough to contract a NZ construction company to gun nail a new pine box together.
Over the weekend's the state election in Queensland, Aust Labor Party (ALP) had its butt kicked in a big way... down to just 7 seats in a 89 seat parliament. Look like Federal ALP may follow similar path in next year election.
Hope NZ isn't going the same trend, otherwise it will be bye bye David...
Chairman Moa,
the incumbents were thrown out.
Much like John Howard (Australian equivalent of National) was thrown out in 2007 after 12 years. And Helen Clark(labour) was thrown out in 2008 in NZ after 9 years.
The population gets bored with the incumbents and will decide to vote against them eventually.
In Queensland Labor had been in power for 20 years at State Government level.
Interesting that Neville notes a reduction in business investment in Aussie in the December quarter.
Wonder what the impact of the new Federal Mining tax will be if it looks like Chinese demand for iron ore and coal cools a bit. You could imagine dozens of projects being put in cold storage until the sun shines again.
Neville,
"In addition to Dutch Disease, Australians have the associated illness of a housing bubble.
They had tons of cheap foreign credit and have bid up house prices. Everyone knows that there will be a correction."
Agree re the bubble, dont agree that everyone knows it, certainly not the mainstream media, govt and man on the street (or at least they are not letting on there is a bubble). One of the refreshing things about NZ over the last 4 years is acknowledgement of a bubble. I rent a house in Melbourne, niceish suburb, 2% gross yield, 1.2% after costs. No bubble though, solid fundamentals ....
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.