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Treasury warns stronger growth may be unsustainable as imbalances are not unwinding (Update 1)
Treasury has warned in an otherwise upbeat Monthly Economic Indicator survey that the current economic rebound may be unsustainable and was not unwinding New Zealand's unbalanced current account deficit and international debt. (Updates with comments from Finance Minister Bill English and the NZ Manufacturers and Exporters Association (NZMEA)) The department that reports to Finance Minister Bill English said a pick-up in growth in late 2009 and 2010 may again be domestically oriented, as imports recover due to a high NZ dollar, retail sales increase and the housing market rises off its recent lows. But despite the 'green shoot news' that New Zealand's economic outlook has become more positive in recent weeks, Treasury warned that the composition of the pick-up in growth led to questions arising as to its sustainability.
"(T)here are several factors that suggest that the pick-up in New Zealand's growth that is likely to occur through late 2009 and 2010 may again be domestically oriented," Treasury said. "This is likely to see more of a recovery in imports than was expected in the Budget Forecasts. Ultimately this will mean less of a narrowing of the current account deficit and continued dissaving by households. With this occurring at a time of significant fiscal deficits, New Zealand's net international liabilities are likely to continue to trend upwards over the medium term, from the March figure of 98% of GDP." Treasury reiterated fears that the high NZ dollar was holding back an export-led recovery, especially as global demand for New Zealand's exports had started to rise again. "Continued rises in the exchange rate over August meant that the New Zealand dollar over July and August was around 21% higher than in the Budget Forecasts, limiting the gains from the recovery in overseas demand. There are also signs that domestic spending may be increasing with retail sales volumes recording their first quarterly increase in seven quarters in June." "Together these factors suggest that imbalances such as the current account deficit and household indebtedness are less likely to unwind significantly." "Net migration has risen, and is likely to rise further, as departures have fallen. Stronger population growth is one factor helping promote a recovery in the housing market...with house prices having grown modestly over much of 2009. It is also one factor, alongside the improved global outlook and higher confidence, which will lead us to revise up our economic forecasts for the Half Year Update." "However, the composition of growth may mean that stronger growth will prove unsustainable. In addition, with tax revenue behind forecast, a stronger economic outlook may have a more limited impact on the fiscal position." Bill English chimes in Later on Tuesday Finance Minister Bill English told reporters he was also concerned about an unbalanced recovery. "Our concern is that in the longer term we need a sustainable recovery -- a recovery that is built on more debt and higher prices for houses isn't going to last too long," he was reported as saying. "We're looking for how to make sure we get a sustainable, export-led recovery." English said it was too early to say the economy was recovering. "We're coming off the bottom of a long recession but we need to have the economy moving quite a bit faster to absorb the jobs that have been lost and give people a sense of job security. That's our task over the next two or three years." NZMEA says government must respond to warning The New Zealand Manufacturers and Exporters Association said the government must act on the Treasury warning. "With house prices and consumer spending starting to increase again, it is looking increasingly like we will see another domestic economy bubble form; much like the one that just burst," said NZMEA Chief Executive John Walley. "This growth profile simply sets New Zealand up for a further economic shock further down the track. New Zealand cannot pay its way in the world while the export sector continues to contract." "It is important that the Government takes steps to encourage investment in the tradeable sector to correct these imbalances. A more stable exchange rate and a balanced tax system are the keys to achieving this," Walley said. The Reserve Bank also needed an additional credit control weapon in its arsenal to control inflation more effectively without pushing up the currency. "A Capital Gains Tax is also needed so that all forms of income are taxed allowing more investment to flow towards our productive industries," he said. "The Treasury has spelt out the risks to the economy; now it is time for the Government to take notice."
Imagine you are on the
Imagine you are on the deck on one side (port or starboard, your choice) of a REALLY BIG SHIP (like one of those super tanker) where you cannot see the other side of the boat.
The ship was taking in water a year and half ago and you could notice the sinking because the water level seen from the deck is rising.
Imagine now you see the water receding from the deck and you think the ship is actually rising higher because the hole in the bottom of the ship has been repaired. But in reality the ship has began listing to the side and is actually sinking sidewards....
That's the position NZ is in now....those Treasury guys are just being nice (or don't dare to tell the politicians the honest truth ??)
Looks like Treasury have finally
Looks like Treasury have finally woken up and realised we have a big debt problem, why did it take them until now to realise?
Was there too many Labour government friendly people in Treasury in the last few years to tell it like it was?, when were accumulating the bulk of all this debt.
Jeez Phil, rule one in
Jeez Phil, rule one in the State sector is DON"T rock the bloody boat.
Phil - I would'nt say
Phil - I would'nt say the National Govt are doing anything constructive to address the debt problem... i.e. Lets borrow 8.7 Billion to spend on "ROADS", what do you think the Future Value of that spend will be when:-
1- Peak Oil arrives earlier than expected... and we can't afford the Gas to drive on them roads.
http://www.thenational.ae/apps/pbcs.dll/article?AID=/20090906/BUSINESS/7...
2- We Commit to a 10 to 20% Reduction below 1990 levels in CO2 Equivilents at Copenhagen.
http://www.climatechange.govt.nz/
Sometimes sound advice does'nt get listened to, because it can't be heared over the "Ka-CING" sound of special interest groups making party donations.
please remember that when national
please remember that when national came to power we faced the biggest depression since, well the Gt Depression, first thing is to stabilise the systems and make sure you dont do anything rash in the first 90 days...
then you start the changes, we are having the debate now over benefits on tv, radio etc, change is coming... on the basis of unafforability...
but key needs a consultants report to put before the people, it may well be a ratings downgrade at some point....
right now the us is sinking in the mire and nzd is rising like fresh bread.. bread does have a shelf life however...
quote <i>"..the New Zealand dollar
quote "..the New Zealand dollar over July and August was around 21% higher "
WRONG... the USD$ was 21% LOWER...
Quite frankly the Treasury should know better.. the NZD is NOT rising, the USD is falling !!! And there is absolutly nothing NZ can do about it.
Also, if NZ doesn't like the low USD, then sell stuff in NZD .. there are a number of countries either already doing trade with currency swaps, or planning too, and its high time NZ started doing the same. Forget about the USD, its sinking like a stone and there is no point chasing it,..
Mouse, my understanding is National
Mouse, my understanding is National have only really brought forward the roading projects that were already earmarked to happen anyway, even if labour were in, so a smart move really in a deep recession.
As far as the govt debt goes, it's not really Nationals fault the tax take has gone down so quickly and dramatically in a worldwide downturn.
At least they are having a good look at what the govt can spend less on, unlike Labour who increased govt spending by a whopping 50% in their time in govt.
I'm with you Matt, would
I'm with you Matt, would really like to know what's stopping us quoting and dealing in our own currency? I'm sure someone can explain why we don't"¦"¦..
I remember Bollard and the
I remember Bollard and the head of Treasury saying we were out of or near the end of the recession at the end of 2008.Why should we believe their "dart board" predictions now?
I'm also with you Matt S re the NZ$. ( The worry is the US$ hasn't really started it's big decline yet. Will we see 1NZ$ = 1 US$ like it was in the early 80's ? )We have little or no real control over NZ$ -- it's just that the economists haven't worked that out yet.
If we deal in our
If we deal in our own currency with customers overseas, THEY have an exchange risk that is converted through the US$, rather than us. Someone ends up with the risk; either the domiciled party (price of goods risk) or the foreign party ( exchange rate risk) that has to be factored in somewhere.
Spidy, not sure why, maybe
Spidy, not sure why, maybe old habits die hard.
But the idea is sound IMO, and if two trading partners essentially do a "currency swap" (say NZ and Japan, or NZ and China for example), at an agreed rate for say 3 years, then not only does it lock in the exchange and interest rates for that period of time, it provides a great deal of certainty for importers and exporters, and of course provides a hedge against currency fluctuation.
NZ exporters simply need to price goods/services in NZD. Importers get quoted in Yen or Yuan (in this example) and there is a fixed exchange rate. Everyone knows where they are and the USD is nowhere to be seen.
Trouble is, MattS, everything IS
Trouble is, MattS, everything IS quoted against the US$, even if you don't see it. Part of the US$ being the reserve and settlement currency. eg : A$1 = NZ$ 1.25 is really A$1 = US$ .85; US$.85 = NZ$1.25 - the two US$ amounts cancel out and are not settled ( NB: Approx current rates of A$.85 = US$1 ; NZ$ .68 = US$1)
Harriet, yes your right absolutley
Harriet, yes your right absolutley on the relative exchange rates between currencies, but what I am talking about is a type of swap (a type of derivative), similar to an interest rate swap.. the technical bit is where the cash flow streams are in different currencies, and where the full principal and interest payments are exchanged without any form of netting.
The result would be that (using your example) the NZ$ would equal the AUD$ at a fixed rate irrespective of what the USD$ or any other currency was doing...
Think of it like you've just got a 2 year fixed mortgage with regular payments, while the floating rate is changing. The currency swap would in effect lock in that exchange rate for a fixed term, while on the spot market however the NZD/AUD cross pair would still fluctuate... hope that makes sense??
US$ weakness is clear but
US$ weakness is clear but take a look at the TWI ~24% appreciation since March, there is a NZ$ poilcy story in all this.
http://www.nationalbank.co.nz/economics/exchange/nzdtwi.aspx
Phil - "National have only
Phil - "National have only really brought forward the roading projects that were already earmarked to happen anyway"...
Firstly, Depression [a sustained period of debt deflation] is exactly what is happening... But this ain't 1930...
1- Burning Fossel Fuels is a major cause of Climate change http://www.environment.nsw.gov.au/climateChange/evidence.htm
2- and the very conservative International Energy Agency [who advise OECD on energy matters] tell us Peak Oil is coming way sooner than was previously thought. http://www.straight.com/article-176994/international-energy-agency-sugge...
National needs to consider if 1930's stlye fiscal stimulas [with Roading] is positioning the Economy for the future... or just wasting OPMand adding to the Taxpayer liability.
On the Kapiti Coast... National are planning to spend approx 1 Billion NZD on a Greenfields expressway that divides the Community and kills the Local economy.
Nathan Guy associate Transport Minister say's It will be warranted by Projected Traffic volumes in "10 to 15 Years"... really???, how does that reconsile with the above [1&2]and the new vehilce rego numbers decline that was reported on the website only a couple of days ago.
National needs to get it's head into the issues of 2009 and focus on allocating the Taxpayers Capital effectively... and if they can't do that... don't try, just give us the tax cut... and leave our communities alone.
John, true the TWI has
John, true the TWI has increased, but the USD$ weighting is about 30% of that, despite the fact that we don't do 30% of our trade with the US. The RBNZ use the language "currency area"... go figure. Link here: http://www.rbnz.govt.nz/statistics/exandint/twi/3515668.html
Anyway, the NZD$ is still relatively weak against the other currencies; AUD, YEN, and EURO, so while technically our dollar has "strengthened", if you took the USD$ out of the equation the picture would be very different. You could almost say returning to normal levels.
Matt S, True that the
Matt S,
True that the $ has been generally weakening but commodities are still priced in $ and that is where we get most of our export income from. This is part of the $ reserve currency aspect and that won't change in the near term.
We are also at a 10 yr high against GBP which, coming from the UK, I have always found to be a good signal for Kiwi$ value. Mind you the UK is going down the tubes as well.
And the US Fed had to give us a large line of credit referred to in this classic grilling of Bernanke
http://sustento.org.nz/chimerica-dis-ease-rumbles-on/
But really this treasury story makes me laugh. Haven't we had similar reports out about "imbalances" for the last 10 years? Has anything been done about it? Nope.
Our international debt must be repaid.....so let's just print NZ$ since everyone wants to own them and pay it off. Then our debt will be NZ$ denominated and we can start reducing it under our own steam.
I agree with Matt S.
I agree with Matt S. I think it's of more value to look at it versus other currencies, particularly the yen.
I still remember that fantastic b-slapping of the NZD by Christopher Wood (Bernard had the good sense and balls to post it on interest.co.nz ======== http://www.interest.co.nz/ratesblog/index.php/2008/08/15/what-greed-and-...).
Anyone who had read that and backed the yen would have done very well.
Since when did Kiwis listen
Since when did Kiwis listen to spokespeople from NZMEA? I'd imagine most Kiwis would rather hear from the chairman of Harcourts or the BNZ's uncle Tony (that's Tony Alexander who seems to be of the attitude that we're all better off going home early to watch Shortland St and spending our weekends attending open homes). The more stupid the general public is, the more influential these people are. And given that the mainstream media will publish anything they say, there appears to be little hope for positive change,
JC - spot on!
JC - spot on!
J.C well said, the general
J.C well said, the general KIWI public is financially dumb
In an ideal world, where
In an ideal world, where contracts were honoured to completion MattS, it would be great to fix currency rates for, say your, three year period. But here's what happens ! ( speaking from a much simpler experience than the one you advocate). If the "swap" rate suits the buyer of the goods, then all well and good. If the market rate moves against the swap rate, then the goods buyer wants to ' renegotiate' the swap. Just have a squizz at what the Chineses do with the Aussie iron ore exporters for a larger illustration of how fixed price contracts work.......
The question is whether tis
The question is whether tis better to be a Kiwi with the head in the sand, or a Kiwi politician with sand in the head. I guess the perks justify the sand in the head.
We're probably going into a
We're probably going into a level of detail in terms of currency swaps that we don't need to right now. I'm suggesting that NZ should look at other options in terms of pricing in NZD and exporting in NZD, and this is one that a few countries have already adopted.
Countries that currently use this are: China with a number of countries incl Brazil, Argentina, Korea, Hong Kong etc..
http://online.wsj.com/article/SB123849846162573407.html
Its about being proactive, thinking outside the box, and not waiting, as someone suggested until, the USD falls so low that its 1-1 with the kiwi or worse ..
I actually support your goal,
I actually support your goal, Matts, but practically I can't see it happening. After all we have a PM who it was happily noted as:
"Key says he does not believe a moral issue arises for the traders who make these speculative attacks on currencies......There is much more good gained from having a fully functioning financial market than there ever is not having that. We provided liquidity, we provided stability."
http://www.stuff.co.nz/national/politics/250525
Show me a leopard that has changed it's spots, and I'll show you danger.
clearly bollard needs more tools
clearly bollard needs more tools to address the high nz dollar,to the extent he can
he cannot just keep fiddling with interest rates
we need an approriate interest rate level to attract savings and investment
interest rates are now too low
yes all very well and
yes all very well and good
part of the answer lies in getting interest rates back up to a decent level and building investment capital