By David Hargreaves
Well, that big old shiny neon elephant has left the room and gone for a stroll down Auckland's Shortland Street, the main hub of New Zealand's business sector.
For the uninitiated, the concept of an elephant in flashing neon comes from a combination of comments made by the Prime Minister around the country's plunging levels of business confidence.
This issue has come from nowhere to be the biggest one this Government faces - and that's clearly recognised by the PM herself who attempted to meet the charging, flashing, beast head on with an address to business leaders on Tuesday and through the formation of a new Business Advisory Council.
I can't readily recall the subject of business confidence becoming such a huge issue.
Yes, business confidence ebbs and flows - but not like this. This is something different, and I'm still not sure how we should be taking this and treating it.
I confess that in a fairly long career in business journalism I have mostly happily ignored the ANZ's Business Outlook monthly surveys (and I'm afraid I can remember them when they were the National Bank Business Outlook).
Here at interest.co.nz we've mostly ignored them in our news coverage - although we've always kept a weather eye on them every month. But, since the election (or some would say non-election, and that seems to be one of the problems) of this Government, the monthly surveys have become a 'must read'. And yes, we've been reporting on them and giving them prominence.
And we are not the only ones of course.
I suppose someone somewhere might be able to find previous examples of the New Zealand dollar directly reacting to release of the ANZ's monthly Business Outlook Survey, but I certainly can't readily recall a reaction like the near half a cent drop in the value of our currency that apparently directly stemmed from the release of the latest survey on Thursday.
That's just remarkable.
Are we being ridiculous?
I'm afraid what's going on at the moment is definitely what I would term 'frightening yourself'. It's putting on a scary mask, standing in front of a mirror, shouting 'boo!' and then recoiling back in shock.
For me the most telling graph in the ANZ survey is this one:
Okay, the bit on the far right that shows investment intentions of NZ businesses going through the floor is reasonably interesting.
But more interesting for me is to look right back through the graph at the correlation between rises and falls in investment intentions and rises and falls in the GDP growth rate.
Yes, that's right they ARE correlated - but not at the moment. At the moment we are in uncharted waters where the investment intentions are falling off a cliff, but GDP growth is, by historic standards, not terrible.
Look back through history as charted in that graph and you can see that previously GDP and investment intentions have risen and fallen in tandem.
So, what's happening now?
Grumpiness is global
Grumpiness does seem to be a worldwide trend - witness the kneejerk election results we've seen in some places and the move to populism. But things are changing fast and a lot of the 'old' rules, the way 'things worked' just don't seem to any more. Once upon a time we had inflation, which we didn't want. Now we want it and can't get it.
There's a lot about today's fast pace and technological changes that appears to be leading to a permanent change in how economies behave. Are we now suddenly in a situation where sentiment leads the business cycle, rather than taking its cue from perceived changes in that cycle. Right now, in New Zealand, it kind of looks like it.
The Government is trying to turn around the sentiment by talking nice but, to this point, business ain't having it - that's despite the economy still for now chugging along okay.
But as the fall in the dollar tells you, as the move to extreme 'dovish' sentiment from Reserve Bank Governor Adrian Orr tells you, the risk of a self-fulfilling slowdown of a meaningful nature is now real.
When sentiment becomes reality
It's one thing for business to throw a collective hissy fit as happened after the election. But once that extends into the actual intentions of the business - to not invest, to not employ etc - then the economy is in trouble.
A half cent fall in the value of the Kiwi dollar is a very real consequence from a negative attitude. It shows that real damage can come from business getting down on itself.
In her Tuesday speech, the PM again reiterated that the Government will be sticking to its fiscal cap.
Specifically, she said: "We will also meet our Budget Responsibility Rules. These rules are not a nice to have. They are a firm guide as to how we want to manage the economy.
"Some people have called for us to relax our borrowing rules or simply spend more. We won’t. The rules are an important part of ensuring long term fiscal sustainability."
Well, this Government has shown itself pretty keen on making big symbolic gestures - such as the oil and gas exploration ban.
The grandest gesture
I would suggest it is now high time for another one - lose the fiscal cap, announce that more money will be borrowed, and get alongside the business sector to make concrete (literally) progress in building some much needed infrastructure.
Words are cheap. But the action stemming from the Government being prepared to stimulate the economy through spending and growth might be the only thing that gets business out of its grey hue.
The Government has some thinking to do.
Given the way the economy is at risk of setting like ready-mixed concrete, announcing some stimulatory spending might be the only way to go. Sooner rather than later.
81 Comments
Isn't it ten times more likely that the collapse in business confidence is a reflection of real world issues? Look at other currencies, especially the AUD and the CAD, they have been travelling down with us, so presumably they too are reacting to world events, not in shock at our local politics.
Something is affoot, what's happened to Venezuala, Argentina and Turkey is due to the global USD shortage exposing previous malinvestment, not local politics.
Come on business confidence hasn't collapsed in other countries. Sure things have slowed in NZ it’s the uncertainly which surrounds this Govt which is adding to the problem, major tax changes, crazy employment laws changes back to the past etc etc . They keep demonstrating that they don’t really know what they are doing hence endless enquiry groups, what are these advisory groups going to recommend adds to the endless uncertainty. My sense is the slowdown is gaining momentum fast it’s going to take a major game changer
Thank you Roger.
I own a consumer discretionary business in Auckland. More than that we supply other businesses in the same field. So we are both at the coalface and we are supplying those at the coalface.
Business is slow for us and the people we supply and has been all year. Normally in Auckland things really pick up around March, and that builds more or less through the year. This year, after easter things fell off a cliff and they have not really got going. This year will likely see our first drop in revenue in 7 years.
This isn't because we are talking ourselves down. I didn't start this year thinking this is going to be a bad one. People just aren't spending as much and aren't coming as much. And I don't believe it has anything to do with the government.
Instead of trying to blame bad attitude, why don't we address the real issue. We have pumped trillions of dollars of debt into an asset class that doesn't really create jobs or wealth. And our productivity is rubbish.
And I share your view globally Roger, China is looking grim as well. The majority of global conflicts start with trade wars, the Trumpecile is ramping things up there. And just like with shooting wars no one wins in trade wars we all just lose.
Thanks for the encouragement. I never know whether to pile in and rant, or not. I think there is something big going on, these currency collapses are like bank runs, once they start, everything gets unpredictable. Except, that if you see a long queue stretching out of the door of your own bank, then, unfortunately, the only sensible thing to do is to join it.
As credit tightens worldwide it causes breaks in the chains of payments, some of these cause an avalanche of default, and some don't, they are just absorbed. So some banks and builders go bust, some take big losses but survive. Trouble is, the world becomes a minefield full of unexploded ordinance, so everyone treads very carefully until the crisis is over. I can't help thinking the big bombs have yet to go off.
Agreed.
Cheap credit washes over cracks. But the structure is still unsound.
Economists, bankers, talking heads they all talk about credit as if it is some magical grease that makes things move quicker and don't worry about the future, somehow the debt gets taken care of.
The numbers have become massive and we have all become numb to them. What else can we do in the face of billions or trillions?
We have lost site of what debt means. It has been commoditised and made overly complex like so many things.
Debt is a promise. Historically it was deeply entrenched in the human psyche as part of ones honour, duty, and reputation. It was shameful not to repay and there were serious consequences if you didn't. Everyone expected to get paid back. The local banker knew everyone in his town and knew their families. Debt was also about relationships because it was also about trust.
Now it's just something everyone does. You go bankrupt who cares move on to the next thing. Fill out a form, get a credit card. Easy. But should it be?
I also feel people have forgotten debt is future earnings. If you borrow now you have to pay later. You don't get around that, whatever financial chicanery you apply. But when pay later becomes pay now.....no one wants that part. They just want to borrow more and more and more.
It is unsustainable and I think we all know that at some instinctual level, but then some economists says something about efficient markets or deficits not mattering and everyone just nods their heads and says he must be right. He's got a nobel prize right?
I'm not saying we shouldn't listen to experts. I just don't know how it is that economists got to be experts when there field is so wrong so often. If physics had the predictive power of economics would anyone fly a plane? Really economics is as much psychology as mathematics but many still don't accept that.
Totally agree. There seems to be a lot of political claptrap being thrown at this Govn when in fact they are not to blame IMHO.
I cant figure out really why things are so glum on the domestic front unless businesses are looking at the world events like say Turkey melting down, Trump madness (and he is mad) and deciding this is looking really bad. Now it certainly can be and the RB appearing to give up on raising the OCR is a bit of an eyebrow raiser also.
"business is slow" interesting as ppl around me seem to have being saying that for 5 odd years now, if its even slower, bugger.
"spending" when my fixed costs like rates, travel (are up 6%) and petrol, coming insurance hike and probably power hike all exceed my pay increase by x2 then I have less discretionary money to spend. No wonder some sectors are a bit down when this has been repeated annually for 5~8 years now and they are in the same boat as me.
Your situation is not unique, i have spoken to quite a few relatives and friends in business with similar stories especially those in retail. A lot of people would argue businesses are just sulking at the election results and talking themselves into doom and gloom.
With this reality and mixing in wage inflation pressures of staff (if you have any), things really don't look so bright anymore. However the same people will argue that if your business can't afford to pay "living wages" you have no idea how to run a business and do not deserve to be in business at all.
Truth: The real elephant in the room is non-productive lending. Banks have only (pretty much) been lending to property speculators to willfully inflate house prices. Wannabe entrepreneurs haven't had a look in and have been crushed by the cost of living .. now here we are. Yeah I told it - the truth.
Right. The banks perceive "business lending" as "too risky". It's much easier to "lend into existence" with mortgages knowing full well that the govt has your back should it all turn to custard (which is looking like a distinct possibility across the ditch in Australia).
Non productive lending? I sold a property a few months ago and I was thinking about this. All my rent went to the bank, probably about 400k. I'd say that was very productive for the bank!
Yes, The banks were able to generate that income by simply creating an asset and liability digitally (as long as it aligned with capital ratios). It's the most charmed and privileged business model in existence.
"We will also meet our Budget Responsibility Rules. These rules are not a nice to have. They are a firm guide as to how we want to manage the economy.
"Some people have called for us to relax our borrowing rules or simply spend more. We won’t. The rules are an important part of ensuring long term fiscal sustainability."
It is not surprising that the PM doesn't seem to understand the relationship between public debt and the private sector (sectoral balances). "Fiscal sustainability" is not about the govt operating like a household that is constrained by income and debt. Nor is it about increasing taxes for the govt sector to prime the economy. Unfortunately, you can also throw Grant Robertson, Stephen Joyce, probably north of 90% of MPs, Mike Hosking, etc into the deep well of misunderstanding.
We are well and truly screwed if this dogma continues.
J.C. you are correct - every time I hear a MP compare government spending to household spending I shake my head. Government's make money when they spend money (GST, income tax, new business, etc) - households don't.
When these Members of Parliament contradict themselves and talk about stimulus - they come across as thick as thunder thighs at the local strip club~!!
Offensive But True - they've been Brandoed~!!
This sounds to me to be the classic "sale" talk of bargains. You know the one where if you buy this gizmo for $1000, you'll save $200! What people tend to forget is you have to spend $1000 first!
If a Government spends $100 mil on a project the return from GST, taxes the returns will only be around 30%. this means they will still have spent about $70 mil. True there is some economic benefit to spending, but it is not profit unless theyare making something that produces a return.
And a concern here that I have is if they borrow to pay for what you want them to do, they have to pay back that loan. An infrastructure build on its own does not support new business, it supports existing business. Sure new business might come along, but to continue to neglect infrastructure makes it harder for existing business.
So the picture is significantly more complex than most of the superficial discussion we see here. the problem for the Government is to create an environment where business flourishes, and enables their socio-economic goals while not crippling the country with over or under regulation, or too much debt.
But that 30% is only the first level of spending. Every employee of the company that built the bridge or whatever the govt spent the money on then goes out and spends the majority of their paypacket on things.. food, sending the car in for a service, taking the kids to the zoo etc. Govt gets 30% of that spend too. And so on down the chain.
It's all about the velocity of money and marginal spending increases.
Steve Keen is always expressing loan growth (which for some reason he calls credit?) as a percentage of GDP. I wondered what that looked like for NZ so I plotted it. Data from RBNZ c5 and m5 series. Here it is for anyone interested. I wanted to overlay recessions but ran out of time before work.
Any particular reason you are using C5 instead of M3 money supply? Afterall all money is introduced as interest bearing credit. I worked out a while back that the ration of M3 money to GDP has risen from 43% in 1972 to over 120% today. The money has to go somewhere, so if not in the productive economy if finds a place in asset price growth, otherwise known as a credit fuels asset bubble. Successive governments of both persuasion have fueled it.
C5 is simply the name of the rbnz spreadsheet recording monthly lending by sector. https://www.rbnz.govt.nz/statistics/c5
If you open the spreadsheet the Housing & personal consumer lending is the only data series going back to 1990 so I used that. likewise m5 is the RBNZ name for the GDP quarterly data - nothing to do with money supply in this context. Keens idea is that money lent into existence adds to aggregate demand. That's why a graph of loan growth as a percentage of GDP is so interesting (note the units are both $/unit time). In the real world when bank lending contracts then it causes recessions and unemployment, that is unless the government steps in with it's capacity to create money, or the country suddenly starts exporting way more than it imports.
But the money doesn’t stop at the property. The person selling the house then takes that extra money and does as they please. I guess the problem in a hot property market you could have a real estate money-go-round with notes flying off here and there for real estate commissions etc but otherwise the bulk money staying confined in one sector of spend.
I disagree with the point as you have made it although potentially I have misunderstood something.
If you spend more than you earn (run deficits) then you have to borrow to make up for the difference.
Technically a country can get around this by printing it's own currency, except that technically a government can't (at least here or in the states) because the central bank is supposedly independent of the government.
If you can't make the payments on your debt you default. Sure a government can print money and pay it's debts back in more devalued currency, and inflation can do the work. But you are still defaulting. Just dishonestly. And you can keep issuing bonds but eventually there will be too many bonds and people will stop buying. Nothing in our system is infinite.
A government gets income from taxation and spends it on various services. How is that different from a household? The modern economic view that deficits don't matter and that somehow a government is aloof from the laws of mathematics is just another example of the doublespeak nonsense spoken by Greenspan and his modern "economics as a science" ilk.
A massive problem in New Zealand is that foreigners own more NZ assets then we own foreign assets by around 50%. If there is a rush by foreigners to sell those assets, the price will obviously crash and we will not have enough foreign holdings to liquidate to slow the fall. Foreign owners are also exposed to a double whammy as those assets will also be falling in their local currency terms (due to NZD devaluation), unless their currencies are falling in the same way as ours.
We are a debtor nation and heavily exposed to foreign debtors. We are not in control of our destiny, so what the government does, or the reserve bank does is largely irrelevant. It is what happens to the people who own all our assets, that matters. That's what happens when you are heavily indebted to someone regardless of whether you are a country or an individual. Debt is an obligation, the larger the debt the larger the obligation.
I have said before I see a continuing NZD devaluation and rising interest rates to try and ward it off. It is the only hand the RBNZ has to play to stop a complete run on the dollar and NZ assets. And given our small size I doubt that can help much either. But they will dance the dance because that's what they do. Standing back and letting the system re-balance has not been an option for 60 or 70 years, if it ever was. We can't have recessions they are evil, not a natural re-balancing of the system, light nightfall, or winter.
Of course all forecasts are largely worthless including mine, but it's nice to think aloud.
Sure a government can print money and pay it's debts back You answered your own question. That's the fundamental difference between a household and a government with a central bank. If the government is running a surplus then the money supply will be contracting, that is unless the commercial banks are lending like mad on housing speculation.
But that is still defaulting. If you can't pay and have to print you will get high inflation which is pretty bad for most people. So the government has still defaulted just like the individual did. They just spread the pain everywhere through inflation instead of just one place.
So I don't see a difference. Deficits matter and printing money only appears to take care of a problem. Really it kicks the can further down the road.
Further, and this is a major issue for New Zealand, printing money only works for debts denominated in that currency. A large amount of our debt is denominated in foreign currencies and the foreigners who own all our assets need to get paid in their currencies. Money printing is not an option in those situations.
Its not defaulting, the bonds are in NZD and government spending is in NZD, the exchange rate is floating. there are only two institutions in the economy that can create money private banks and the government. The government creates money if it distributes more than it takes in taxation, and banks create money when they issue loans. If the economy is growing then you need to have money creation. Private debt in NZ is a whopping 90 something percent of GDP, while government debt is only 20 something percent of GDP. At some point it will become unsustainable for commercial banks to keep pumping asset prices- there's a little headroom at 90% I guess. I take your point about foreign debt but that just means we should be trying to run a trade surplus. We should be producing value added stuff that the rest of the world wants to buy. What ever happened to buy NZ make and keep your country working. Japans government debt is over 200 percent of GDP and it has no trouble selling it's government bonds, why because it has a trade surplus.
I agree, except I dont think you should blame Labour (too much) especially but the voters who if Labour had not promised to be so anally fiscally responsible would have voted for National instead.
In effect of course you are espousing Keynesian economics and that just isnt done!
The grandest, and most appropriate, gesture would be for the PM to acknowledge that it was a mistake to announce the end of oil and gas exploration without first listening to advice from officials, without discussing the matter with Cabinet colleagues, and without consulting with industry.
Promising to listen from now on is just not good enough. No one takes her seriously when she says that.
Yes she was, as any non-idiot can see. You obviously care about CO2 production - her 'captains call' will increase it, not reduce it, with the nice side effect of doing a whole lot of NZers out of jobs and costing us another few billion a year in imports and propping up despotic regimes with bad environmental standards.
Come on Foyle, the stupidity of engaging in exponential growth has been pointed out enough times on this site that you really have to be pretty stupid to subcribe to it. Capitalism, the best system ever used for the exponential growth of finite resources.
Now you talk about environmental standards, by best mate is an oil drilling engineer (you know a guy with real brains and supreme practical capability) that has explained the extreme risks of drilling deep for oil, which we much do in New Zealand. There is a certain incidence of failures when undertaking drilling, if one of these happened in New Zealand waters it would be a catastrophe. The entire profit from all out untapped oil could not pay for the magnitude of the clean up that would be requred. It is lunacy to drill here.
Quite frankly you don't qualify for the non idiots group.
Except a) officials were and are a vested interest with no balance for the long term viewpoint, that was clear from their reports.
b) it is no mistake
c) The industry is dying, its been given a small bit of life support while we move to new opportunities, simple really.
d) I can tell you wouldnt anyway so no loss.
Some people have called for us to relax our borrowing rules or simply spend more. We won’t. The rules are an important part of ensuring long term fiscal sustainability.
Perhaps the Hon PM had better send That memo to PT, who, if my old and intermittent memory serves, was waving away suggestions of a debt limit and planning to find a dusty off-balance-sheet-account carpet in some corner, lift it, and neatly sweep a slew of New Debt under it.....
It's inconsistencies like That, that keep the elephant toddling and the neons luminescing...
Too easy, and tramples on empires of bureaucratic classes administering those regulations. Ideologically unsound as well as reduces power of government.
P.S while we're at it lets roll back all other construction industry regs to circa 1990. Get rid of the incredibly overbearing and expensive council consenting and inspection regime and let builders or buyers buy insurance/warranties against construction issues if they choose to.
A major recession may be exactly what this country needs to get itself sorted. Yet the 1987 crash here achieved little. Indeed, quite the opposite. Neoliberalism has been a total failure and uncontrolled migration may blow up in our face but there is much hope that we may not have Europe's problems.
there is cycle of a ten year big correction so we are due
https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_mar…
1987 black Monday
1997 asian crisis
2008 gfc
With a populist government it is not about rationale but rather keeping their constituency happy.
Whether or not it was 3% or 30% is irrelevant - it was about pleasing their constituency.
Same with foreign home ownership - Stats NZ said only 3% but again very significant in pleasing their constituency.
Plastic bags - 99.999+% of people are responsible, find subsequent use for them such as bin liners, and don't pollute the oceans - but total ban highly popular with their Green coalition constituency.
Shane Jones running around the regions - especially favouring NZF's beloved winable Northland - as the fairly godmother is about being a populist .
Do I go on? :) :)
David,
I'd suggest that sentiment, in itself, might not be so meaningful.
Sentiment , in my view is also contextual... eg... we are sad when someone dies... NOT ...someone dies because we are sad..
Check out Kieth Rankin.... He called the 2008 downturn back in 2002.
http://www.scoop.co.nz/stories/HL0207/S00129.htm
In 2017 he called a downturn for 2018
https://eveningreport.nz/2017/12/20/keith-rankin-analysis-the-next-econo...
https://eveningreport.nz/2017/09/12/keith-rankin-analysis-new-zealands-c...
In my view, There are manifold causes for economic downturns..... Sentiment is just one factor..
Business cycles are alive and well....
Have tax rates increased?
Has immigration and international student intakes stopped?
Have interest rates increased?
Has unemployment increased?
So Auckland house price hyperinflation has had a small rest.
Is the NZ economy now completely dependent on house prices increasing?
"Is the NZ economy now completely dependent on house prices increasing?" Yep!
Welcome to Nationals false economy which needed the Neon Asian Elephant to keep pushing up property prices. Oh dear it appears to have done a disappearing trick.
Don't feel too bad though, the Ozzy's and Canadians are also having easy money withdraw symptoms, guess we'll have to build a real economy instead.
FT article : Chinese property investment in Australia plummets
https://www.ft.com/content/0e1e411c-62ed-11e8-90c2-9563a0613e56
Update to the PT/HNZ $2.9b borrowing off-balance-sheet: even Stuff has it under obs.
A coupla billion here, a coupla billion there, pretty soon it adds up to Real Munny....
Tom Waits springs to mind: another neon light on the galumphing elephant, another letter in the sign....
'sweet little bullet"
And it's raining its pouring
And Hollywood's just fine
Swindle a little girl out of her dreams
Another letter in the signNow never trust a scarecrow wearin shades after dark
Be careful of that old bow tie he wears
It takes a sweet little bullet from a pretty blue gun
To put those scarlet ribbons in your hair
I guess without a constant fresh supply of skilled "trainie managers" to flip burgers for below minimum wage and foreign buyers bidding up house prices our economy is doomed. Maybe the COL should just bring in a minimum house price and raise it whenever they need a support boost?
When the winter period of the business cycle comes, is it really the governments job to make sure the sun keeps shining? Shouldn't have the hay been made and everyone prepared for the cooler months? (especially when so many have been gloating about just how much hay they've been making?...)
Banks been making significant profits - but we can't generate sufficient tax income to pay for public services? Hmm do we need to change the rules society is governed by?
Or do we just keep paying bank CEO's $10 mill a year to make record profits while under paying teachers and nurses?
If one were to make judgement of 'hard work' would that be in terms of how tired one feels at the end of a work shift, or how much positive impact they make on other peoples lives?
And would you say that the average bank CEO works approximately 150 times harder than the average teacher or nurse? I'd like to see a scientific method of proving this - for it it were true, then bank CEO's must be superhuman (they should be dead)!! But given the likes of the GFC, we know they're certainly not superhuman, so how do we justify such outrageous salaries?
Well that's what Keynes thought.
However everyone seems to forget the part where he said government should increase taxes and reduce debt in the good times so that they could then decrease taxes and increase debt in the bad times.
Now Keynesianism seems to mean increase debt all the time.
As I posted in a similar topic, it is very clear to see that banks are doing their best to interfere in NZ politics. You have a former National PM, Chairperson of ANZ whose bank continues to use business confidence surveys to undermine the current government.
I agree with David, take these with a pinch of salt. I'm curious that if National had remained in power, and with the looming economic downturn would their sentiment be the same?
https://www.newshub.co.nz/home/politics/2018/08/mitch-harris-aussie-ban…
The paragraph of the week https://www.stuff.co.nz/national/106710058/damien-grant-airnz-ceo-chris…
“We are the real face of New Zealand business. We employ those with tattoos that Air New Zealand rejects. We run the wineries not good enough for the Koru Club and drive their customers to the airport.
Luxon does not represent me or the vast cohort of similar business owners who grind out a fragile existence on the edge of sanity. He cannot understand my business any more than I can understand his.”
A country is not a company
https://croakingcassandra.com/2018/08/29/a-country-is-not-a-company/
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