By David Hargreaves
There was a time, feels like just yesterday, when the business of cooking up a recipe for economic growth was deliciously uncomplicated.
Take one large Canterbury rebuild, roll it in money, add a dusting of very expensive milk powder (possibly golden in colour), heat rapidly with strong inbound migration and an expanding workforce, bring to the boil, then allow to simmer with low inflation and interest rates, garnish with rapid house price appreciation (well, yes, in A particular city) and voila, one tasty economy, coming right up. Cooking with gas, as they say.
But even the finest cuisine has a 'best before' date that seems to sneak up on you before you know what's happened, and so is the case with our economy.
Our national dish, our economy du jour, which was so mouth-watering in 2014 is, less than a year later, going off at a rate of knots and starting to develop a bit of a whiff.
But is it going to end up mouldy, or simply just rather lukewarm and lacking in flavour?
Well, this is where we swap the cooking utensils for a crystal ball. Unfortunately, the crystal ball I've got in front of me is full of mist. Please feel free to try your own crystal ball gazing and share the results with us all at the bottom of this. Well, I won't be able to stop you really, will I?!
Anyway I will try to make some sense of it all: In fairly simplistic terms, we are likely to look back at the past couple of years as a period in which various disparate factors came together in a virtuous blend. High dairy prices, coupled with the need to rebuild Christchurch and strong migration flows (partly to help with the rebuild), with the net influx assisted by a faltering Australian economy that meant the large numbers of new immigrants were not offset by equally (and usually larger) numbers of Kiwis trying their luck across the ditch.
Just in case there was the chance of exuberant behaviour driving up prices, a rampant New Zealand dollar kept import prices down and then, heck, even that often troublesome oil stuff came to the party with massive falls in the price last year and now into this too.
If we could, however, explain the economy's recent past as containing a series of harmonious ingredients, working together, then it has to be said the future economy seems to be attracting a combo of much more discordant factors, many of which seem likely to work against each other. The extent to which these factors do or don't work against each other seems likely to determine whether we move into a period of ho hum growth (but growth nevertheless) or get another unwanted taste of recession. At the moment I’m not sure all the relevant factors have moved themselves sufficiently into place for us to definitively call a/ that we are heading for recession or b/ that we are not.
Let's look at some of the factors in play:
The Christchurch rebuild, having seemingly taken an age to get started, now seems to have ridden over the top of the peak and be heading down the other side. All too quickly. The silver lining here could be that it might be possible to re-allocate a lot of the resources going into the Christchurch building effort into the much touted and talked about ramping up of Auckland residential construction activity. So, that's one issue that could resolve itself quite well. Whether Christchurch's local economy suffers a post rebuild hangover is a key point as is the extent to which such a regional hangover might be felt more nationally.
What, though, about the dairy sector, which was seen joyously riding a cow off into the vivid red sunset only last year? But hang on. Did somebody talk about the sun going down? Oh boy. Did it. The sheer pace at which our golden milk powder turned to, well, dust, has been beyond unnerving. The economists' confident talk only a few months ago of a recovery of prices as we got into the new season has been washed away by a torrent of dire global auction results.
Unless prices miraculously start to recover pretty darn quickly - and we are talking the next couple of months - it will be too late for anything other than damage control in the current season. We are already really in the situation of measuring this season in degrees of badness - bad or atrocious, depending on what happens from here.
Two difficult years
This means that by this time next year farmers will have come through two very difficult years. It is an open question how firstly they will fare and secondly what impact their poor returns will have on their spending and therefore on the wider economy. The banks will need to remain very supportive, or risk having a withdrawal of support or attempt to play hard ball come back to bite them later. But presuming there is no miraculous dairy price recovery this season, it then becomes paramount that something good happens next year. And is there any guarantee of that?
It has been interesting to see some changes of view from our economists in recent weeks. Whereas previously there has been among some at least a kind of blanket view that prices will recover because, well, prices DO recover there are now some slightly different opinions. ANZ economists this week talked of 'structural shifts' in the marketplace that could produce lower average dairy prices in the medium term than has been the case in the past. The point is, unless there is a marked recovery in prices over the next year then our dairy industry might be in for quite a big and not necessarily pleasant overhaul. What such upheavals would do to the broader economy again remain conjecture. But in the short term...well, not pretty, surely.
Migration
The fact that the labour market now appears to have turned again seems likely to further fuel the fire on what is an appropriate level of inbound migration. There's always been a lot of migration here. Heck, I'm a migrant. The surge in migrants has in the recent past helped to fuel demand in the domestic economy as well as people to fill extra jobs that were being created.
In the past, signs of a downturn in our economy (such as we are now seeing) would invariably be greeted by the sound of running feet in the direction of Australia. When that's happened in the recent past then the subsequent population and labour market gap here has been filled by migrants.
There is, however, a real reason to believe that this pattern won't be repeated this time. The simple reason is that the Australian economy's not showing real signs of recovery. A bolt over to the 'lucky country' has always been a bit of a safety valve for Kiwis. Maybe not just at the moment. So, it is speculative, but what happens if the Kiwis stay at home, the job market starts to tighten and the same numbers of migrants keep coming in? It would be a recipe for both economic and social stress.
Migration in the New Zealand context is nothing like as simple as everyone likes to think, I would suggest. How would our tertiary institutions fare financially if they could not keep bringing in large numbers of overseas students, for example?
The Government's been reluctant to go anywhere near this issue, but it might have to in the next 12 months or so.
The inflation poser
There's many many more things that could be talked about, but in the interests of keeping this shorter than an encyclopedia, I will finish with interest rates, inflation and the currency.
The wonders of hindsight tell us it was a mistake for the Reserve Bank to raise the interest rates, through the Official Cash Rate (up to 3.5% from 2.5%), last year. The RBNZ expected inflation to blip up this year. It hasn't so far. The oil price and a stubbornly high Kiwi dollar provided two reasons. But clearly the RBNZ is seeing changes (that it is somewhat mystified by) in how inflation is transmitted (or isn't) through the economy. I saw some suggestions recently and, apologies, I can't recall from where, that the increasing use of online technologies may be blunting the old ways in which inflation was transmitted. Sounds logical to me. The very low cost base of an internet business means the traditional model of arriving at pricing no longer applies.
The dollar is now falling, helped a lot by the expectation that the US will soon put interest rates up. It will be very interesting indeed to see what happens if the expected September rise is deferred to December or even into next year.
But for now, the dollar IS falling. That should help exporters a lot. It should also start producing inflation here as the cost of imported goods will go up. But again, you wonder if the old transmission mechanisms will kick in as they once did. Internet-based businesses may be able to bear cost increases better. In any case, this is now a very consumer-driven society. Quite simply these days if people think something's too expensive they won't buy it. It's entirely possible suppliers of goods will have to absorb a fair bit of the increased costs themselves, meaning that inflation won't really kick up that much...but what will it do to the suppliers of goods taking a hit on their profit margins? Is the new reality of imported inflation that we see the middle guy squeezed out?
RBNZ and inflation
The RBNZ still sees meaningful inflation on the horizon. I'm not so sure. With one or two remarks that have been thrown around by the Government, you get the impression it's becoming rather impatient about the length of time the RBNZ has now been presiding over inflation outside of its 1-3% targeted range. It might not remain tolerant of a central bank that it could accuse of not adhering to its Policy Targets Agreement. The RBNZ is being watched.
If I read the RBNZ's current thinking correctly (and I have been wrong on that score very recently), I reckon the central bank's certain to drop interest rates again (to 2.75%) next month but then look for at least a 'pause'.
However, I think by December it will be clear that inflation genie is certainly not out of the bottle and the RBNZ will have to take the OCR back down to 2.5% And I'm now beginning to agree with those (Westpac among them) who think more reductions may be necessary next year.
But as this missive attempts to debate, there's so many variables - more so than usual - at the moment, that it's really hard to pick with any certainty what might happen over the next 18 months. And that's not something you could say about back in 2013 when the course looked very clear and predictable.
Around about the time of the Global Financial Crisis, company directors - it suddenly seemed like just about all of them - came up with an expression that was half hilarious half infuriating, namely that they had "poor visibility" of future market demand for their products. In other words they didn't have a clue what was going to happen, but didn't want to say that.
Well, I think we are entering another time of "poor visibility". The mist in that crystal ball's getting thicker by the minute.
40 Comments
There doesn't seem to be much attention to the synchronous nature of what's going on. I mean, oil, gold, dairy, forestry, NZD, AUD all falling together against the USD. It seems to me this is important as it suggests we are being tossed about by world events. Our central planners don't seem to have quite understand that central planning leads to concentration of risk.
As an example, we have adopted a centralised milk production facility based on a commodity production model. This ignores the fact that anyone can put cows in sheds and feed them grain if the prices are right. It also means we are not well set up to sell premium products such as grass fed or organic dairy and beef. We worship the monopoly for some reason.
Are we really better off with a central bank that manipulates interest rates? Would we be better off with market rates and focus the RBNZ on regulation and crisis intervention?
No, I dont agree free markets lead to concentration of risk. Milk production isnt an example of true centralised planning ie govn "socialism", but the creation of an effective monopoly by business.
"Are we really better off with a central bank that manipulates interest rates?" Yes, in the past anyway, now after peak oil, not so sure. NB The central bank manipulating the rates is a symptom or reaction to the initial problem not a cause of our problem(s). In terms of the OCR there is nothing I am aware of that forces banks to follow the OCR, ie a bank could charge any rate it wants.
The centralisation means that whatever fonterra does effects all of NZ dairy.\
Having unnecessary standards pushed by MBIE (ryhmes with nimby) means that all of NZ dairy gets crippled not just a few bad decision makers.
Excessive taxation drives down the ability for all businesses and people to repay debt quickly so cripples all of the private sector. Effectively making the choice of the planning to central gov, while the risk fallout lands on everyone else.
Draconian pro-labour laws that don't encourage hiring, make all business suffer by expensive contracts and over entitled "rules lawyer" employees more intent on their pound of flesh than making the business fly. And a justice system which panders to such activity. The Risk-decisions are made in central government away from the coal face, the effects hit everyone else.
The milk planning was driven by government. Farmers did not put Sir Henry on the board, farmers did not want DIRA or a company with dry shares options, Farmers did not want Fonterra pouring money into Chinese based farms (since every sign said their was already a glut of production in the market |: re: price sensitivity to volume and adverse events).
/those were all pushed by government
Are we really better off with a central bank that manipulates interest rates?
And stock market values.
We were amused to learn that in the quarter in which AAPL stock almost hit a new all time high, the Swiss money printing authority which reported a record $20 billion loss in the second quarter, and a record $52 billion in the first half, added another 500,000 AAPL shares, bringing its new grand total to a whopping 9.4 million shares, equivalent to $1.2 billion as of June 30 (well below that now following the recent 10% correction). Read more
My guess is that commodity producers got totally sucked in by the artificial demand from China...
Chinas' response to the GFC was MASSIVE stimulus in the form of investment and infrastructure spending, with the use of debt...
Now it is swinging the other way....as Chinas' demand for raw materials readjusts ....and probably over reacts.... as China goes thru its own debt crisis...
These are all things that executives that are paid mega salaries .... should have foreseen and accomodated...
Artificial stimulus causes all sorts of unintended consequences...
All these people who squeal for , forever , lower interest rates might be better served by thinking thru the higher order effects of that... ( lower interest rates are not simply an input cost... they are the Monetary mechanism for influencing the demand for credit )..... over production is just one of the effects.
http://www.democracyjournal.org/pdf/36/the_coming_china_crisis.pdf
That statement "Our central planners don't seem to have quite understood that central planning leads to concentration of risk" ....sums the whole of our economy up and the much of the rest of the world RW.......and stupid organisations like the IMF who push their economic agenda with a one glove fits all philosophy amplifies the risk hence the GFC.....
The trouble is NZ has enormous numbers of bureuacrats who desire rubbing shoulders with wealth!!! Unless we have a clean out of all the wannabes then we get another round of more of the same incompetence.....and the reason they can be incompetent is the fact they don't have to put their own hand into their own pockets.....the taxation system has to be completely destroyed before we will get any change!! Taxation was never meant to be compulsory it was meant to be voluntary......who removed one of the most important checks and balances ???
I suggest anyone who wants to understand 'whats going on' to go and read some of Gail Tverbergs work at Our Finite World, and/or Nicole Foss. Both had this situation nailed long long ago.
The economists persist with models that worked for only a brief time...the clock that is correct twice a day.
Batten the hatches, the debt ponzi is taking on water...maybe that should be find your liferaft!!
or is stolen by the greedy who create the bubbles as running real businesses making goods isnt profitable enough for the lifestyles and minimal effort they would like.
The substance isnt rotting away, its collapsing as there isnt the cheap and growing energy supply to keep growing, so the entire systems is now consuming itself.
System consuming itself is precisely how I see what is happening nowadays. Growth may actually now be at an end but we haven't come up with a way to deal with it (there is one, but it is going to require a quantum leap in our thinking).
Thing is, capitalism is not going to do the business in a world minus growth.
TeamNZ probably needs to think more about China and the Australian Banks.
In a which part the paddock do we want to play them/are being played sort of way.
Policy isn't without standards
Relationships are hard work. Dependencies more so and with gteed poor outcomes.
PS. keep checking and rechecking the assumptions (its like checking the weather).
Mr Key addresses that concern.
Prime Minister John Key says people outside Auckland are telling him they want Chinese buyers in their area because they increase the value of their homes.
Mr Key also said this morning a large proportion of Aucklanders did not want house price inflation to fall because it was making them wealthier. Read more
a plague on both your houses John Key - with apologies to Shakespeare
never mind, you would think that, hang on a minute - has it really been 7 months...
http://www.farmingshow.com/on-demand/audio/john-key-the-pm-live-in-the-…
key should be flogged for that statement. he of all people should know you dont have a productive economy if you do not invest in productive assets. hes encouraging the bubble, not deterring it. never have i seen a prime minister have such reckless regard for an economys real growth for atleast 40 years.
So these have been the drivers of our economic well-being? Christchurch, dairying and immigration.
The Christchurch rebuild is the result of a devastating earthquake. Hard to build an economic future on these events.
Dairying has been a brief ride on a commodity upswing – little or none of which has been under our influence - at the price of enormous debt and an unfolding environmental calamity.
So we’re left with immigration. The economic effects of this appear to be dividing between low-paid workers (as needed in Christchurch, dairying and horticulture), asset sales, and housing sales, as in Auckland.
Maybe it’s time we had a government, or some sort of policy consensus, able to articulate a national vision. Plenty of other smallish nations around the world have managed it. We seem to look again and again for the next big thing, hoping to see it in effect by swilling tea-leaves round the bottom of a cup.
It’s easy to be blinded by prosperity. Maybe a period of adversity will help us get a grip.
From other article on interest.co.nz "\Average ordinary time hourly earnings rose 0.8% to NZ$29.01/hour in the June quarter and was up 2.8% from the same quarter a year ago." about the rising unemployment.
Don't worry it's only NZers losing jobs, not imported well paid skilled occupations, and the low skill immigrants can take their earnings home with them.
So what are you complaining about exactly?
Should a position be paid based on the nationality of the worker? or based on the value it adds to the business?
NZers losing their jobs and immigrants not loosing them (really?) makes me think that the NZers loosing their jobs were receiving bigger salary for something an immigrant can do for less.. But that's a contradiction with your first statement in which imported skilled occupations are better paid.
As I said I'm not sure what's you're complaining about exactly.
PS: I don't know any immigrant unemployed or living out of welfare, do you?
Oh yes a position should definitely be paid (related too) on the nationality of the worker.
If I set up as a yoga swami in India would they take my pale face seriously? What about if I said I was a genuine Indian Shaman? (hint: Shaman is Russia/European)
A business operating with customers in community of NZ, under cultural and society of NZ has reasonable level of duty towards the culture and society in which it grows itself. That means having a solid duty towards improvement of the next generation of it's people. Or are people just just some sort of use and discard resource? Water and land are worth protecting, but not people and the next generation??
And hey, it's not just the incoming immigrants - not playing a race card here. Immigrants themselves find it to, the company downsizes and disappears, or the qualification they had back home is suddenly not worth what it was to the previous country, then they end up in the same situation as our school leavers and retrenched people. Seeen a few seasoned engineers and doctors stacking trolleys in supermarket carparks (and they were the lucky ones).
However, many of the immigrants get brought in by larger organisations, and as senior people in the company they're not as fungible as more commonly skilled staff ... and often have more to say in the written reports on who goes.
Such high positions frequently take years to turn over. So NZers in a small isolated country have little chance of building the skillset _specialisation_ requested, where foreign countries often have several second tier people keen for that career break that they won't get until their boss moves on/dies.
But my real complaint is that such positions influence cultural and decision making for NZ, AND that such positions tend to have great remuneration. This makes it much harder for NZ born citizens to sponsor or develop NZ people or NZ communities - and it completely removes pressure for NZ government and public funded institution for providing skills and training appropriate for our children - no matter where their parents or grandparents came from.
Such constant movement of high paying position to outsiders (be they Norman conquest, Europeans into US, Eurioeans into India, Brits in Ireland, Brits in India or Australia, UK into NZ Maori) _always_ creates a poverty trap for the indigenous people AND THEIR CHILDREN (even of naturalised citizens!!!!!)
Yes I do know immigrants out of work and on welfare. And a lot of Kiwi's too.
But what I don't know is any immigrants who are fighting to make NZ government create better business and training incentives and environment for NZ , do you? Most [emplyed] immigrants that I know just think it's their own hard work and that they just tried harder than others to get ahead so feel no reason that NZers "should get a break" [in NZers own country]
I agree and have held the same view for a few years.
TLDR; Get a man with a plan to lead NZ.
From my reading the Govt refuse to do the vision thing, preferring instead to manage in a hands-off, light-touch regulation kind of way and let things play out. I'm an immigrant (of the "fell for a Kiwi girl in London" kind) and I travel a bit with work to various global cities that Auckland gets compared to. I love New Zealand and the people here are so welcoming - but I've always struggled to see the engines of the economy.
There is dairy. There is Christchurch rebuild. Then you have a huge services sector of which a whole lot will be around property management/improvement/development and probably focused in Auckland. After that I see the odd tech company, chat to a dude from Orion health, admire Vend from afar, kick myself for not buying Xero shares when I was one of their first users around 7 years ago. There is tourism of course - probably the great hope as the dollar falls and more air routes via Asia open up. There are lots of retirement homes - maybe it could be the world's retirement home for the wealthy and survive on that?.
As a passive manager, John Key is bobbing on the ocean without any oars. He doesn't do intervention (unless it's a rich mate who needs sheep and cash). But you can create industries and economic engines with state support - see Irelands' software sector which has been developed over 20+ years and went from low-grade call centres to R&D featuring Google, Dropbox, Facebook, Intel etc. The Industrial development authority in Ireland made a conscious decision to court US companies and put in place specific degrees and PhD's in third-level education, the Govt of course reduced the corporate tax rate. Ireland is lucky to be the first stop on the way to Europe, with a relatively young well-educated population. But having 9 out of the top 10 software companies base strategic operations there was not an accident - it needed the vision thing.
I'm not singing the praises of Ireland's politicians - that is for sure! And New Zealand is geographically isolated (though well positioned in terms of access to Australia and Asia). It doesn't take much to get talent to move here - you all know you're living in a special place. But as an outsider settling here I find the "do nothing" approach to the economy a bit scary.
There doesn't seem to be much value creation, no strategy except to encourage foreign debt, finance and students into NZ without caring where they go or what use they are put to. We end up with bubbles and distortions. There is no plan, or strategy from what I can see and the country is dependent on what it inherited (the amazing landscape) and on primary production with no control on pricing.
Maybe I am too negative but with no hand on the tiller and a storm brewing it seems that the country just has to see where it washes up. Or it can take control, make a plan, get everyone on board and implement it. But having a banker in charge means you have someone who knows the price of everything but the value of nothing. It's a trader mentality. He's never created real value in his career and doesn't see a place for it as PM either. The vision thing and having a plan with some state intervention / tax adjustments is not his beloved free market in action. I get the feeling he'd see it as communism!
As long as the good times roll, no-one minds. Referring back to the headline, I can't see anything but a downpour unfortunately as a series of unfortunate trends bring an end to the sunny days. NZ is still a fab place to live but it needs a Govt with balls that will do more than look over it's shoulder at poll ratings and instead think about the country's future, not just about retaining power.
I'd be worried about the next couple of years... get an umbrella.
because the migrants don't come in at the low income and entry level end.
They have secure jobs or decent training they got elsewhere and couldn't cash in on it back home so they come out to NZ where experience is much much harder to get, and standards are lower. Pushing out local applicants who need to upskill/get experience.
Many migrants are already well off so they can afford to have a lifestyle which they would get taken off them at home.
for the low skill labour migrants things are really bad at home some anything they can do to make a profit in NZ is better deal than what they got elsewhere, and nlikely kiwis they haven't had to deal with NZ upbringing and NZ overheads, or put up with NZ partners or government ("oh you're a poor migrant, have a bunch of cash and case workers to help you out. Oh you're a NZ citizen? you lazy unemployable slob get out their and getta real job"
think sleet....driving horizontal at below freezing.
before 1850 we used no fossil fuels to speak of after 2050 there wont be any left to speak of.
Dont accept that? well now explain how we will have the global industrial society we enjoy now (well 2billion of us) and feed 7+billion with no fossil fuels by 2050.
I'm finding that the Solar Hotwater I'm using isnt anywhere near as efficient as the paperwork says.
40 tubes on 300 litres gets 38 - 44 degrees if I shower every other day.
Cylinder is outside and yet to have a lean-to built around it which should reduce the losses especially overnight.
I have yet to turn on the electric element, in order to have pure data.
Without electrical grid, and without fossil fuel to build and service the generators my observation of a simple thing like safe usable Hot Water is going to become a serious issue for modern populations.
I'm looking at going to 70 tubes (another $3k on top of the $10k already spent) but cash is starting to get thinner (post-farm). Also some cover/shielding to stop radiation at night and reduce wind loss is in the pipeline when I get a moment.
Today is the day that yesterday the bad economists were saying would never happen.
Who has the extra money required, for all the extra spending? Seriously who? Who now is rich enough to spend our GDP into growth? Who has the unemcumbered collateral + cashflow, and can borrow money for a profitable venture? Drowning in debt, all the money has been blown on over inflated asset purchases, such as Auckland housing, Dairy farms, and other profitless ventures like Xero. Where is the spare cash? It's all been malinvested, and about to crash back to reality.
and a few bright spots on the horizon too - thank goodness there a few doers out there.
"The problem for the Saudis is that US shale frackers are not high-cost.
..."The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. "The freight train of North American tight oil has kept on coming," said Rex Tillerson, head of Exxon Mobil.
He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period. "
...Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry."
http://www.telegraph.co.uk/finance/oilprices/11768136/Saudi-Arabia-may-…
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