By Paul Glass*
With our currency effectively at parity with the Australian dollar and house prices booming everything must be great in the “Rockstar” NZ economy, right?
I’m not so sure. Let’s look at the economic growth that was achieved in 2014.
Headline real GDP growth was a very impressive 3.5%. However, population growth was 1.6% so per capita GDP growth was only about 1.8%. Commodity prices, and in particular, dairy had a big run up in 2014 resulting in a positive impact of around NZ$5.0 billion to nominal GDP. Working out the contribution to real GDP growth is difficult, but if we assume about half of this fed through directly into GDP then that accounts for about 0.9% of growth.
Likewise the Christchurch rebuild got into full swing and probably added a further 0.6%. So real GDP growth per capita, excluding the one off effects of surging commodity prices and the Christchurch rebuild, was about 0.3%. Not quite so flash. The big problem is that the quality of our GDP growth has been low.
Ultimately GDP growth per capita is a much better measure of increased prosperity than simple GDP growth as it adjusts for the growth in our population. New citizens’ place demands on our social and physical infrastructure and the costs of those demands needs to be met from the overall economic pie.
Given that the media, and most economists, tend to focus on overall GDP growth it’s no wonder that politicians are on hooked on the drug that is immigration. It’s an easy way to boost perceived GDP growth even if it occurs at a significant cost to our infrastructure. Those costs tend to be more hidden in the short term – upward pressure on housing, demand for social services including hospitals and schools and further congestion on a motorway and transport system in the main centres that’s already reached breaking point.
Given we are a small open economy we need to be smart about what we do. The world is finely balanced at the moment – global growth is tepid, China’s growth in particular is slowing rapidly and that may cause serious problems. Government debt levels globally are at record highs, Europe is a mess and Australia is facing real economic challenges with unemployment possibly rising to 7% by year end.
I sense that as a nation we lack a plan and there is a real absence of leadership at both a local and a national level. We need to ask what sort of economy do we want and how do we achieve it?
Let’s look at a number of areas where our policy settings may be sub optimal.
Firstly immigration - in spite of our unemployment rate trending up to 5.7% at the end of last year, and well above pre GFC levels, record numbers of migrants are coming in with the net annual inflow doubling to 54,700 in the year ended February 2015.
Immigrants bring new ideas, connections and an entrepreneurial spirit to the county to its longer run benefit. But is it sensible to allow in record numbers given the pressure on housing and infrastructure? Our focus tends to be on simple GDP growth, but should we be more focused on per capita or lifestyle measures? Are we valuing our citizenship and lifestyle highly enough or are we selling it too cheap? Should we be training our own people more effectively to fill vacancies?
Secondly, our interest rate settings. Over 20 central banks, including the ECB, have cut rates so far this year. But NZ has amongst the highest real interest rates in the developed world and an economy that may slow quickly from this point. Headline inflation is effectively zero. Our interest rates have artificially pushed up our exchange rate which is damaging the productive part of the economy.
Last year’s increases in the OCR rate were a mistake and would probably be being reversed now if not for the exuberant Auckland housing market. Apart from sensible steps to aid a more efficient supply side housing response, plus targeted immigration and limiting ownership to NZ residents, we should also limit the amount of bank debt available.
The big four banks are very heavily leveraged to one of the most overvalued assets on the planet – Australasian housing. As we saw in the GFC, banks are effectively tax payer guaranteed. The average return on equity amongst the big four is currently around 16% which is remarkable given the risk free rate is around 3%.
It’s a technical area but the amount of regulatory capital held against residential mortgages should be increased substantially, not just tinkered with around the edges as is currently happening. This would limit the amount of debt available for mortgages.
Thirdly, infrastructure – NZ in general, and Auckland in particular, desperately need massive expenditure on infrastructure. This demand happily coincides with a time when global long term interest rates are at all time historic lows and the world is awash with investors keen to fund long term infrastructure projects.
Yet our progress in bringing in private sector investment to help fund these infrastructure needs remains poor.
It is instructive to look across the ditch. Australia has attracted around $65 billion in public-private partnership infrastructure funding since 2012 while New Zealand has attracted only $1.5 billion, over half of which was for the Transmission Gully roading project in Wellington.
Australia has also used the high asset price environment to realise excellent value for taxpayers and ratepayers by releasing equity (though not control) in State assets such as ports.
We know there is a wall of capital willing to invest in New Zealand, we need to broaden our funding models and provide investor ready information and vehicles to make this happen.
I firmly believe we live in the best small country in the world, but we need to start thinking smarter about the type of country we want going forward.
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*Paul Glass is executive chairman of Devon Funds Management.
36 Comments
Now now Mr Glass , I can see through you ... you're trying to bring an element of commonsense to the economic debate , it just won't wash , Glass ....
... we're only focused on selling Auckland's houses to one another ... that's enough to keep our rock star economy from crashing and burning , and if you think otherwise you can pull the other one ... never had a property downturn in NZ for 45 years , so says our illustrious leader , " ponytails " Key .... hear hear I say !!!
I'm with you on the GDP indicator. In fact we need a new measure.....one that strips out all the liabilities and then measure what's left......
One of the biggest failures at the moment is the RBNZ!! Wheeler and his crew have consistently screwed up.......they got sweaty palms over the Chch rebuild and then made assumptions on inflation...are they really that stupid that they didn't understand the implications in Chch....extremely slow settlement by EQC and Insurers, high numbers of Govt workers, the length of time the aftershocks and other earthquakes went on for and a completely dysfunctional Council, then add in the other issues of the GFC, the obvious belt tightening that was going on across the whole of the private working class..........
.If Wheeler had dropped the OCR that would have assisted exporters....firstly in any debt servicing costs and then again with the dollar....farmers and exporters have always borne the brunt of the mad people in Wellington.
I agree with Paul Glass that NZ has leadership issues.....however the real leadership needs to come from business, farming etc.......and that is not happening due to the fact everyone in these areas are constantly being threatened and oppressed by some bureaucracy across the country.....
If we want NZ to grow you have to put the leash on the bureaucrats and take it off the productive people!!!! The system is arse about face!!
Much of the problem lies in the vested political interests. In this way we're developing the same democratic failure that is happening to Canada. Everyone has an opinion, and every specialist field is exposed to a hoard of filibusters from outside the field to stop economic development.
eg Rather than let RBNZ crank up the OCR "in case of farm profits being inflationary", a simple matter to slam through emergency legislation to make any dairy farm over 30% leverage, to deleverage and have evidence for IRD to check. But no, instead of strengthening the economy, they loot the farms and shove it into government coffers !
Back in late 1990's they tried to push the "information economy" and brought in lots of certification, destroyed the apprenticeship training system, created massive teaching requirements which were either government subsidised or a cost to the private sector (for NO gain). But where was the payoff?
There never was one! they chased yet another fad. Be it goats, kiwifruit, techdotcom, property, dairy they walk face first into every screw up. Now they're trying with globalisation.
These people have no idea how to run a business or create anything and they're taking instruction from random interest groups with no skin in the game.
Until they can turn it around, I'm going to make some good coin betting against their horse in the currency race.
I think it is the interpretation of "strengthening the economy" that is different between those in Wellington and those with skin in the game.......
The "information education" was Clark brainwashing at its best....did the woman ever hold a job outside of a university?? And then to have the gall to think she was a fine specimen with the right attributes and the gullible public swallowed her bait hook line and sinker ......what she failed to inform the public about was the fact that all these pieces of paper would ensure that bureaucracies would then be able to oversee all workers in every field......she sold off the people's right to be responsible for themselves and ensured that everyone would become accountable to some agency which would raise costs across the board.....extraction of profit via increasing all overhead costs. National have been no better!!! I remember Clark making speeches on agriculture and how the No 8 wire mentality was not suitable for a modern economy she swam around the fish tank like a menacing white shark that hasn't had a feed for a month......the other idiot thing Clark and Labour did was push for public servants to have parity with private enterprise...whatever she did at Uni she should have flunked any maths papers!!!! Anyone who thinks there should be parity between public and private employees should have their true agendas exposed as parity is a complete nonsense and does not provide any benefits at all!!!
If and when the other economies pick up around the world then I'm betting that is when NZ will face extreme financial difficulties!!! If there is a change in Government at the next election then I will assume that the issues will be amplified many times over.....so it would seem it pays to keep the feet straddled over an oceans or two!!!
It is instructive to look across the ditch. Australia has attracted around $65 billion in public-private partnership infrastructure funding since 2012 while New Zealand has attracted only $1.5 billion, over half of which was for the Transmission Gully roading project in Wellington.
The UK has some humbling PPP experiences to recount.
Take Private Finance Initiatives, under which – across the public sector – taxpayers owe around £229bn for assets worth a capital value of £56bn. Hospitals, particularly, are struggling under a debt burden that obliges them to spend up to a fifth of their income on PFI commitments each year. PFI was imported from Australia as a wheeze under Thatcher, first implemented under Major, enthusiastically embraced under Blair, then under Brown, then utilised yet further under Cameron.
Essentially, PFI is a way of introducing an artificial profit motive into public projects, to entice the private sector to get involved. Where does this profit come from? It is provided by taxpayers. PFI can only "work" for the taxpayer if the profit handed to the private sector is equal to the saving made by involving them in the first place. The figures suggest that this is far from the case. Read more
I fear that some people operate in a state of delusion.
Aussies and many others imagined that their jaw flapping, but impotent pollies would be able to exercise some influence over a separate sovereign nation and are bitter when it does not come to pass.
Climate change screechers think we can restore previously observed global weather patterns immediately if we just turn everything off right now.
Government departments have yet to figure out that they would need less security guards if they would only provide satisfactory service.
Paul Glass appears to think the current NZ government has some influence on the minds of billions of people who want to leave their country of birth, some of whom choose to come here. That Foreign exchange dealers will sit up and take note if we cry a bit, businesses in NZ should be told to do something other than farming, just because...., and that so long as the spreadsheet and graphs show bigger numbers than last time everything is the way it should be.
But you cannot blow against the wind...........
I would have thought we pretty much have a back door version of China's model now.
It doesn't matter whether you're in NZ or China if you want to do anything you have to seek the officials permission and then pay.
In NZ we have a plethora of infringement type fees which are managed by the various bureaucracies.....one is not committing a criminal offense so doesn't come under the Courts jurisdiction.....State oppression can be undertaken by numerous means!!!
Singapore seem to have achieved miracles in just
a generation with effectively a centrally planned economy
Not a bad model to aspire to
Targets the exchange rate - not interest rates
Externally focused with individual wealth generation
and quality of life prime outcomes
And does that centrally planned economy make the people of Singapore happy????? Not from what I know and have experienced......
What's wrong with the market being able decide the exchange rates and interest rates?? Market mechanisms are better at judging the effectiveness of Political moves rather than internal distortions.
"happy" is different to the comment that the centrally planned economy has been effective. there is also no what if comparison. ie if Singapore had stayed a backwater and not had tax free zones then just how happy would the ppl be? less so I'd suggest.
On top of that I'd suggest that the tax free zones as a policy has far more to do with free market thinking that centrally planned thinking.
Hip, Hip Hooray, Yippity Doo Da, Good On Ya.
Finnaly i am hearing someone say what i have been saying for ages
"Ultimately GDP growth per capita is a much better measure of increased prosperity than simple GDP growth as it adjusts for the growth in our population. New citizens’ place demands on our social and physical infrastructure and the costs of those demands needs to be met from the overall economic pie"
When we look at immigration we should consider this
humans need not apply
And here are a couple of Freebies. Well maybe not actually free, it depends on one's true definition and intent.
Maybe it seems, both "Sparking" a bit out outrage. And a bit of "Buyer Beware"
A bit like a Harvey Norman, "have I got an interest free 48 month deal for you".
http://www.stuff.co.nz/business/money/68152864/KiwiSaver-provider-plans…
http://www.stuff.co.nz/business/money/68163896/Sparks-free-wi-fi-claim-…
After Maori arrived, NZ was turned from a unmanned forestry land into a maned forestry land.
After European settlers arrived, NZ was turned from a manned forestry land into a a world class modern civilization built on a large pasture farm.
NZ stays that way since. not sure anything will change.
do you have a reference for that claim Scarfie? I have heard that assertion bandied about, but no one has ever preoffered any substantive supporting evidence and I couldn't find anything through Google.
In any one else I would assume such presumptions to be veiled racism. I don't actually agree with evolutionary biologists views that every set of human behaviours are determined purely by an organisms desire to survive and perpetuate their DNA. Its little better than the damage wrought by Pavlov and B.F. Skinner in psychology.
Maori were not shy about going to war. It was a normal part of life. When they learnt of the existence of Maoriori on the Chathams from Europeans, they quickly set off to slaughter them all.
Guns Germs and Steel gives a good account of pre European Maori, though there are sure to be better books out there. It's actually pretty normal behaviour, not being at war with the neighbouring tribe is very unusual when you look at history.
I wouldn't say they were eating each other because otherwise they would starve, but it's pretty effective PR. "We are going to kill them, claim their land and eat their hearts" not uncommon in tribal war.
He does better then most at pointing out the obvious, but overlooks the big one. You can't get infinite growth on a finite planet. If you look at the fact that debt has been growing faster then GDP for the past couple of decades, you should be able to have a clue about what is happening. Growth is becoming increasingly expensive, to the point where it takes more then $1 of debt to get $1 of growth. Yet in spite of this the global economic elites continue to flog the horse, having failed to notice it is already dead.
One of the best if not the best analyses of just where we are going.
Congratulations Paul Glass.
This would be the basis as a general policy for a political party.
The Nats are totally incapable.
The question is whether Labour and allies could jointly sell the aspirations to the electorate.
Or are many electors either too self-centred or too stupid to respond?
As an example do farmers realise they are being ripped off by an exchange rate which cuts them off from an economic profit all because of policies from their most favoured political party?
Do the general electorate realise that those here already are spreading our resources more thinly while subsidising the newcomers with infrastructural assets?
BB3: those here already are subsidising newcomers with infrastructural assets, spreading our resources more thinly
In its 2014 budget the Australian Government is now charging family re-union visa applicants $62,500 per individual applicant or $125,000 per two parents
That's the component to fix and that's one way to fix some of it.
21 May 2014
http://www.interest.co.nz/news/70035/new-zealand-records-its-second-hig…
This is a nice concise summary of the emptiness behind our headline 'growth' figures. I'd add that more 'growth' even if it is per capita growth, doesnt translate into a richer population-trickle down is a mirage. However migration isnt a simple policy lever that can be pulled easily. An increasing
return flow from our pool of up to a million kiwi expats could swamp any domestic changes here.
Glass: "Over 20 central banks, including the ECB, have cut rates so far this year. But NZ has amongst the highest real interest rates in the developed world and an economy that may slow quickly from this point. Headline inflation is effectively zero. Our interest rates have artificially pushed up our exchange rate which is damaging the productive part of the economy."
What effect is NZs high interest rate policy and restricted Govt spending having on our regions? And will the future OCR cuts be too late?
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