Well, that's what you call a game changer. And not in a good way.
The September quarter GDP figures released by Statistics NZ on Thursday were a shock on two levels.
Firstly, obviously was the fact that the 0.3% shrinkage of the economy in the quarter was an enormous surprise - the Reserve Bank (RBNZ) had forecast the economy to GROW by 0.3%.
But, secondly, arguably the more pervasive thing to come out of it was the revisions by Stats NZ to earlier quarters. Put simply, these show that our economy was in a much more sickly state, much earlier, than we thought. The RBNZ's high interest rate 'medicine' has been having a rather more powerful effect than was being portrayed in our official figures.
And just to try to explain - in a very simplified way - why there were so many revisions, Stats NZ adds in a whole bunch of new information and updates its data in the September quarter each year. And it's these additions and revisions that have produced the revised figures.
It turns out we HAVE had a technical recession this year after all. Stats NZ revised (again) the March quarter figures, taking the figures down to -0.2%, from 0.0%. Coupled with the -0.6% figure for the December 2022 quarter this gives us the 'technical recession' denoted by two consecutive negative quarters.
With the latest quarter's GDP figures also in the negatives, it now - suddenly - means that three of the last four quarters have seen negative growth.
And the one shining exception to that - the June quarter - is nowhere near as shiny as was earlier thought. The June figures were first reported as 0.9%. Now Stats NZ have slashed that back to just 0.5%.
So, our last four quarters of economic activity read: -0.6%, -0.2%, +0.5% and -0.3%.
This is in an economy that has been pumped up by the addition through net inbound immigration of 129,000 people during the same period. Many more hands at the pump and the economy's still sinking.
With all these extra people around, no wonder then that arguably the most salient measure of the economy, the GDP per capita figure, saw a 0.9% contraction during the September quarter.
What happens now then? What about next year?
Expect to now see a clamour for lower interest rates. And soon.
Even before Thursday’s developments, wholesale interest rate markets were pricing in THREE full cuts to the Official Cash Rate (currently on 5.5%) by February of 2025. These same markets were giving a 40% chance of the first interest rate cut as early as MAY 2024.
And this was before, firstly, the US Fed gave its clearest signal yet it was done with hiking and then, secondly, our GDP figures were released. Wholesale interest rates tumbled after these two developments.
So, there will be pressure. There will be cries for Kiwis to get interest rate relief.
The RBNZ, however, is not currently forecasting any rate cuts till 2025.
But so much will depend on inflation and particularly the domestically sourced inflation. The worry is that this is going to remain 'sticky' - IE higher for longer than anybody wants.
The RBNZ is sure as hell not going to want to start reducing the OCR till it thinks it has inflation where it wants it.
The December quarter inflation figures to be released on January 24 next year loom large in the calendar. What those figures say will be crucial.
We now - suddenly - have an economy which is in far worse shape than was believed. But inflation is still a huge issue. The worst kind of squeeze.
Therefore, if our domestic-driven inflation remains at 'sticky' high levels the Reserve Bank will resist calls for lower rates any time soon and next year might be a much bumpier year for kiwis than we had hoped.
We now know the high interest rates the RBNZ has been giving us for the past two years have already been having a much bigger impact than anybody knew.
What if things do now start to get that much worse than anyone could have expected? And what is going to happen with us having just added 129,000 people to an economy grinding to a halt?
And what is the new Government's reaction to be? It has acquired an economy in much worse shape than it thought.
This is definitely starting to look like a good election to have lost.
The RBNZ looks set to have a rather more uncomfortable summer than it might have hoped.
Remember, its next OCR review is not till February 28, 2024.
Somehow, I think we may well be hearing from the RBNZ before then - perhaps with a speech hastily thrown in sometime in January.
The RBNZ won't want to be forced off its path of knocking inflation at all costs. But will other pressures force it to yield?
81 Comments
Bank economists work their bank. Their banks pay them for their infomercials. Their infomercials increase bank profits.
Always seek alternative views from independent economists. (And take care - there are few truly independent economists. All have biases, and some are paid for them.)
Worked the City too. No self-respecting UK economist would have the gall to publish the bank biased nonsense those in NZ banks do. They stick to very real deep dark analysis of economic trends. Loved working with them. The maths was fun and having virtually unlimited compute power with very rich data sets was awesome. Agreed, poorly paid for the City but very well-paid anywhere else.
So, unsurprisingly, higher interest rates in an environment full of debt is slowing people's spending, leading to lower GDP. Domestic inflation is still much higher than 1-3 %, so the RBNZ probably won't lower the OCR in February. If the RB lowers interest rates by May, the economy will be in a worse state and these lower rates will take time to "juice" the economy. I cannot see how 2024 will not be worse than 2023. Then again, I predicted at the beginning of this year, that "something will break by the end of 2023". I was wrong !
"Domestic inflation is still much higher than 1-3 %" - are you sure? I guess we will find out in January.
The annual figure will still be higher than 3%, but that is useless anyway, who cares what happened 12 months ago. But if you annualise the quarter, I reckon there is a good chance we will be within the RBNZ's 1-3% target, or at least close. From memory it was about 4% annualised last quarter, and since then food and fuel has fallen in price.
One does not have to be a rocket scientist to realise that many sectors are struggling. Retail, hospitality , motor vehicle sales and low house sale numbers for a start. Even Air NZ has recently forecast dropping revenue numbers. Why are the economists so wrong in their predictions. Like the Reserve Bank they have access to data we mere mortals never have access to. Maybe because they are on incomes that insulate them from the real world out there. Many New Zealanders are currently struggling to make ends meet. Many New Zealand businesses are struggling to survive. They know that things are not great for New Zealand fiscally. Why cannot the economists see that with all the data and information they are privy to. In saying all this I am not saying the economists are overpaid. I am just saying they can probably pay all their bills a lot easier than a lot of other people around them.
Why are the economists so wrong in their predictions. Like the Reserve Bank they have access to data we mere mortals never have access to. Maybe because they are on incomes that insulate them from the real world out there.
Many reasons. One of the main reasons is that they have to conform to consensus views that please vested interests. And remember the nail that sticks out gets hammered down.
Richard Werner was one of the first economists to be asked into the WEF flock back in its earliest days. His criticisms of the ECB and economic POV saw him asked to leave. But Werner is not your typical 'career guy.' He wasn't prepared to temper his views for a paycheck; the prestige; the networking; and the cocktail parties.
Joining Jfoe, me and others at last, David?
Yes I think you're going to be right. Those loving words from the RBNZ's MPC will come much earlier and something said just after Christmas makes sense.
Let's not forget that the RBNZ can drop the OCR whenever they like. They're not bound to a published schedule. And an official cut in the OCR is already being priced in so the announcement may have little immediate effect.
And of course, our banks (scoundrels, liars and thieves for the most part) love rocket and feather pricing so it'll be months before many see any significant change in carded rates.
So the questions now are:
1. How many cuts?
2. And by how much?
My guess is regular, but small. So 4 x 0.25?
IMNSHO that'll probably be too little, too late. Dominos falling and friction (and fear) will see further deterioration.
I'd be going for a big one, 0.5% or even 0.75%, as early as the data allows (which is very close now), with words to the effect, "Now we're going to do nothing else while monitoring the situation". I.e. no hints of further cuts while letting the market do its thing. (A single big cut forces the banks to move fast rather than allowing them to prevaricate and dither.)
In the meantime the RBNZ must get DTIs in and be ready to ratchet down ratios. And government, if they insist on restoring interest deductibility as fast as they say (slower would be better), must work with other parties to get a CGT in - ideally one that includes the family home but doesn't apply when the family home is being switched for another family home.
"it'll be months before many see any significant change in carded rates" - I think the opposite: if the market starts pricing in OCR cuts (which they must be pricing in much more with todays news), wholesale rates will come down, and so will mortgage rates. Even if we don't see OCR cuts until June next year, I get the feeling we will see some pretty big decreases in mortgage rates well before then, maybe even January.
Hope you're right.
But banks have a history in this regard. They keep the carded rates high so people on rollovers and FHB don't get wise. The wise will be negotiating and switching banks at the drop of hat if their bank hasn't sharpened their pencil. The wise will get the rates reflected by markets - everyone else get a pathetic 'discount' on the carded rate for not causing any trouble. Any not negotiating and/or switching banks will get fleeced. Same old, same old.
There would be more support for CGT if govt fixed NZs poverty inducing current superannuation savings system. People buy property to provide for their retirement because our pension system is so bad (and the state pension so low). Follow Canada, Australia, USA and revert back to the former EET (Exempt, Exempt, Taxed) system we previously had. Then a sensible CGT could fly if it's locked in on a bi-partisan political basis.
Whats “rocket” and “feather” pricing??
Also - what is the real cost to the banks based on their whole loan book? At present OCR is 5.5%, and they don't even pay that on normal savings accounts. My bank, TSB, pays a paltry 4.2% for example.
Then what proportion of their lending is actually wholesale from international markets, that they need to add a direct margin to, in order to meet costs. 10%, 15% of their loan book? These are constantly used to justify carded rates when these are only a small proportion of their overall capital as I understand it.
Would be interested in a response from those who have a good handle on actual figures for ASB, ANZ, BNZ and Westpac.
When prices of a product (in this case loans) go up (rocket) way before the supplier (the banks) actually experience higher input prices (i.e. what cost they borrow at, e.g interest rates on term deposits). And when their input costs fall they are slow to bring down their prices (the feather). Banks make a fortune by doing this.
Many on here have been warning of a downturn for sometime, New Zealand is all in on property which is obviously way over valued people should expect a major haircut like kojak on property investments.Anyone over leveraged will be in a huge financial hole, hopefully housing market will find a bottom around 2016 price level.
The downturn is with us, due to emergency rates pushing up house price and debt levels causing inflation the pendulum swung back other way, rates will stay around this level as central banks will think twice before lowing to silly levels again. This is just the way it is Pa1nter the people who will get stung the most are the ones with large debt who overpaid for property which is already down 20% from highs in many areas at the same time inflation lifted 15% and NZD lost around 15% of its value.
The downturn is with us, due to emergency rates pushing up house price and debt levels causing inflation the pendulum swung back other way
No. That happened, alongside other things.
In these sorts of environments, those already with less fare worse than those experiencing asset depreciation. The average folk you speak of so often.
New Zealand has had one of the largest property price crashes in the world from the peak prices. In the US property prices have increased, and their interest rates are even higher than NZs. But their economy seems to have recovered a lot better than NZs. Likewise Australias property prices are doing a lot better than NZs
The September quarter GDP figures released by Statistics NZ on Thursday were a shock on two levels.
Firstly, obviously was the fact that the 0.3% shrinkage of the economy in the quarter was an enormous surprise - the Reserve Bank (RBNZ) had forecast the economy to GROW by 0.3%.
But, secondly, arguably the more pervasive thing to come out of it was the revisions by Stats NZ to earlier quarters. Put simply, these show that our economy was in a much more sickly state, much earlier, than we thought.
Stats NZ: 0.0% revised to -0.3%, and a whopping near 50% drop from 0.9% to 0.5%. This is unacceptable and accountability is needed. The country needs to know that we had a recession and be querying why the media and government have been smiling and waving the whole time knowing this. Unacceptable.
Many of us knew they were fudging the numbers to make it all look like we were 'just' avoiding a recession, likely for fear of the behavioural changes that would come from the overall announcement.
It won't be fun, jobs and homes will be lost, but inflation hurts us all irrespective of wealth or creed and needs to be targeted. We know Orr doesn't have a spine, but maybe he can prove he has b*lls in the next 6months.
The writing was on the wall. When Stats NZ reported about the trade deficits the last 6 months, it was based upon both imports and exports being down by big margins compared with 2022. So for me it comes at 'no surprise'.
Worldwide demand is collapsing and New Zealand has nothing to show for. We are a low value commodity producer and not like the Swiss, Swedes, Danes, Koreans and Dutch, who's economies are producing stuff the rest of the world is prepared to pay premium prices for.
Mate, there was an election on and the Govt lackeys were doing the jobs they were hired to do - covering up Labour's cockups. Those extra 15,000 bureaucrats hired in the last 3 years know which side their bread is buttered and went all out to tilt the election in their favour. It was not the only data that was fabricated, manipulated, massaged, hidden, unreleased, buried ..... still lots more to come out.
I saw it too. What people didn't see is that freight for future uses went down while freight for immediate consumer actually rose slightly. And further disguised by some vehicles making routes without a full load. Logistics provides many insights. The Truck'o'meter could be way better.
Unfortunately for many cartage firms - the order they placed for new tractor/trailer units 12months ago or more are now starting to be delivered at long last - only to find the work is quite there for them...
Many are being left unpainted/unbranded so they can put up for sale...
I remember a few years back these GDP figures meant the economy shrank. Now days they're interpreted as "negative growth". Perhaps the change in terminology is designed to keep us focused on the wonders of growth, while glossing over the fact activity shrank? That way we can psychologicaly fool ourselves even shrinking is growing? I'm guessing that's the point?
What if things do now start to get that much worse than anyone could have expected?
We abandon NZ for Australia.
Except the Labour/Green/TPM voters who will all be on the dole and finally will understand what happens when all the productive taxpayers flee the country.
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