Here's my summary of the key events overnight that affect New Zealand, with news the Federal Reserve Chair has indicated the US can expect an interest rate rise "in coming months".
Speaking at Harvard on Saturday, Janet Yellen said ongoing improvement in the US economy would warrant another hike, however she stopped short of hinting whether the central bank would act in June. She expects inflation to hit the 2% target over the next couple of years provided fuel prices and the strong dollar stabilise, and the labour market continues to improve.
Yellen made her speech as US GDP for the first quarter came in at 0.8%. While this estimate was revised up from the first estimate, it's come in lower than market expectations. The increase reflects positive contributions from personal consumption expenditure, residential investment and government spending. Real GDP rose 1.4% in the fourth quarter of last year.
Yellen will be keeping a close eye on the CPI data, non-farm payrolls report and Beige Book report out this week.
Over to China, there are more signs of slowing growth. New data shows profit growth in the country's major industrial firms slowed sharply in April, adding to concerns about downward pressure on the economy. Profits from large industrial companies were up 4% in April, year-on-year, compared from 11% in March. An official from the National Bureau of Statistics attributes the slow down to poor performance in the electronics, electricity and auto industries. Meanwhile o
The Australian newspaper is reporting Fonterra's chief executive, Theo Spierings, might be on his way out and Air New Zealand chief executive, Christopher Luxon, could take his place. It says speculation of Spierings' departure is mounting, but doesn't say where talk of a move is coming from.
The price of the US Crude and Brent benchmarks are still hovering above US$49/barrel.
The price of gold has fallen to US$1,214/oz.
The NZ dollar has weakened to 66.9 US¢ further to Yellen's speech over the weekend. It's eased back slightly from the end of last week to 93.3AU¢ and 60.2 euro cents. The TWI-5 index has fallen to 71.2.
If you want to catch up with all the local changes from last Friday, we have an update here.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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41 Comments
When was the damage really done? It was only when Mr Norgate got the job that the first million dollar salary was paid.
Isn't it more about timing the commodity cycle rather than ability? We get confused about what to expect from a leader but without any of their own capital in the game these are all overpaid.
http://www.nbr.co.nz/article/fonterras-40million-ferrier-revealed-dw-12…
Fonterra has paid former chief executive Andrew Ferrier an $8.2 million golden handshake.
This was confirmed by outgoing chairman Sir Henry van der Heyden at today's annual report press conference in Auckland.
All up, Mr Ferrier would have grossed more than $40 million for his eight years with Fonterra.
Sir Henry told NBR ONLINE the $8.2 million payment is based on the company's performance, such as net profit, and had very little to do with the milk price.
If we are going to become the Switzerland of the South then homeownership will inevitably fall further.
http://qz.com/167887/germany-has-one-of-the-worlds-lowest-homeownership…
Agreed. The point I am trying to make that it if is the intention to make NZ the Switzerland of the South(by that I assume that is attracting High Net Worth Immigrants) then one of the consequences that is likely to have(rightly or wrongly) is that homeownership is likely to continue to decline.
I'm for immigration but would like to see a quota system(like Switzerland)so that we can grow the infrastructure accordingly.
For the Chinese it is a no brainer buyer property(on a long term basis) over here since any property bought in China is for a maximum leasehold of 70 years. How they get the money out of China is another thing.
One other thing I don't quite get from the Govt/RBNZ is they say they want a weaker currency. If you are going to be the Switzerland of the South them a consequence is your currency will be strong as you have low debt and are seen as a safe haven. You can't have it both ways. Switzerland consequently has had to subsidise its farmers for decades to offset the strong currency.
As a matter of fact I did - in deference to you I went and read it again - the 2005 NZ Herald article posted by xelnaga - thinking I may have been suffering from psychological blindness - but nope - Key trumpets the Irish model grandly according to O'Sullivan's reporting - looks like both psychological blindness and psychological deafness on your part
The gap between rich and poor is closer in Germany and in Japan too. Interesting as they were the key Axis powers. They also both make a lot of quality machinery.
One theory was that the Allies looted a lot of the industrial machines so the losers had to replace it. The replacement machinery naturally was more advanced and gave them an advantage. Funny how things work out.
That is a really interesting read. Such a different approach to housing. Would be great to see some body in leadership putting fwd some of these ideas in a modified form for our sitn. I think the idea that renting can be a very good option would be a revelation to most. The fact that many advanced economies are making this work well through government policy settings makes our our feeble attempts conspicuous.
Financial Times,
Young Germans and migrants compete for city housing
--
A different view from the Financial Times.
it`s all about supply and demand.
Stefan Wagstyl in Berlin
--
Prices rise in big cities as lifestyle and job prospects lure new arrivals as well as locals
Read the full article at: http://on.ft.com/1sjqoYc
Chinese tourists don't want to see Chinese!
"They don't want to see so many Chinese when they're travelling - it's not a taste of New Zealand. You need balance. When people travel they don't want to see Chinese," she said.
Not a taste of New Zealand?
Probably best to avoid Sky City, the whole of the Big A come to that.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=116…
If it stops jobs being exported to China then probably yes. Michael Pettis explains why, it's a bit long but utterly brilliant:
http://blog.mpettis.com/2016/05/the-titillating-and-terrifying-collapse…
Basically, he is saying that investment flows (capital account) usually cause trade flows (current account), NOT the other way around as is commonly assumed. The surplus in one must cause an equal and opposite deficit in the other, but the cause can be in either.
But what about the extremely low savings rates in the US. Don’t they prove, as Yale University’s Stephen Roach has often pointed out, that the US is savings-deficient and relies on Chinese and European savings to fund US investment, or at least the US fiscal deficit, because the US consumes beyond its means?
"What the candidates won’t tell the American people is that the trade deficit and the pressures it places on hard-pressed middle-class workers stem from problems made at home. In fact, the real reason the US has such a massive multilateral trade deficit is that Americans don’t save." [says Roach]
This is one of the most fundamental errors that arise from a failure to understand the balance of payments mechanisms. As I explained four years ago in an article for Foreign Policy, “it may be correct to say that the role of the dollar allows Americans to consume beyond their means, but it is just as correct, and probably more so, to say that foreign accumulations of dollars force Americans to consume beyond their means.” As counter-intuitive as it may seem at first, the US does not need foreign capital because the US savings rate is low. The US savings rate is low because it must counterbalance foreign capital inflows, and this is true out of arithmetical necessity, as I showed in a May, 2014 blog entry.
It must happen because, to repeat what I have said earlier, if foreign exports of capital to the US increase, by definition so must the excess of US investment over US savings. Because there are no productive investments in the US that investors want to make but cannot because of the unavailability of capital, increased net capital exports to the US do not cause investment to rise. In that case they must cause savings to fall, and they do so either because of the wealth effect or because of the increase in the current account deficit driven by the increase in the capital account surplus (often as capital inflows drive up the value of the currency).
Thus in New Zealand, we have a current account deficit because we allow a capital account surplus. To put it plainly, the money flowing into NZ to buy Auckland houses causes the NZD to rise so exports decline by the same amount. It must balance, that's why it's called a balance of payments.
Surely all that money coming into New Zealand is seeking a home for one of two reasons. Firstly a return on that investment, or secondly the security of, or return OF that investment. But it is an investment, so at some point in time the money will flow in the other direction. Or the investment might still be destroyed because the future can't pay.
I agree China is looks a disaster zone. Just a matter of time. What will happen over here as a result is the more difficult thing to judge. We presumably will be seen as a relative safe haven and we only need a few thousand immigrants out of a population of a billion to keep coming here to keep the demand side out of balance with the supply side.
Thanks for the link Roger,
excellent article
quotes ( and ditto for NZ):
"The two conditions under which foreign investment is positive for the economy – i.e. it leads to higher productive investment – are conditions that characterize developing economies only, and not advanced countries like Japan and the US. These conditions also do not characterize developing countries that have forced up their domestic savings rates to levels that exceed domestic investment, like China."
The confusion that arises from a failure to understand this affects a whole series of policies around the world. Recently, for example, Canberra blocked the acquisition by a Chinese buyer of the S. Kidman & Co estate, “the largest private land holding in Australia”. This land holding was “approximately 1.3 per cent of Australia’s total land area, and 2.5 per cent of Australia’s agricultural land”, and it was blocked on the grounds that it was not in the national interest, according to the April 29 statement to the media on the subject by Scott Morrison, the Australian Treasurer."
"Morrison did not provide much greater detail on the reasons for blocking the acquisition, but he assured the press that Canberra welcomes foreign investment. “Foreign investment has underpinned the development of our nation,” he wrote, “and we must continue to attract the strong inflows of foreign capital that our economy requires. Without foreign capital and investment, Australia’s output, employment and standard of living would all be lower.”
"I think it used to be true that foreign capital was necessary to increase Australian output, but it is much less true today. In fact I would argue that foreign investment is only likely to be positive for Australian growth under specific conditions, and these do not apply to the Kidman transaction."
"Australians are clearly concerned about the political implications of a major acquisition of Australian assets by foreigners, and although this was not a formal part of the reason for blocking it, there is no question that the nationality of this particular foreign entity mattered. Some people argue that in evaluating large foreign purchases Canberra should not distinguish between a Chinese buyer and, say, an English buyer, and that to the extent it does this can only reflect hidden assumptions about racial or ethnic superiority."
>>>>>>>>>>
"While they may understand the politics, the economics of the transaction are probably not what most Australians assume. The Chinese purchase of the Kidman estate impacts the Australian economy primarily through its impact on the Australian balance of payments. The net amount of capital flowing from China to Australia will cause a reduction in the Australian current account surplus (or an increase in its deficit) with China in the period in which it occurs. This net amount is equal to the purchase price, less the amount financed within Australia, plus or minus other capital flows between the two countries set off by the purchase – for example it would increase if Chinese ownership of the Kidman estate causes other Chinese entities to increase their investments in China."
Michael Pettis seems to be one of the very, very, few who understand the Balance of Payments. It is so simple and yet so elusive. I guess it is because double entry bookkeeping is totally counterintuitive, but immensely powerful once you get it. I am beginning to see how it works.
The point is the Balance of Payments is an accounting identity, it balances because it must; but, and this is a giant, really big BUT, it carries no information about causation. If one entry goes up, another must come down. The cause could be either item, or both, or a third item. Yet, people assume that if one thing goes down, eg savings, it must be because exports went down, not because foreign investment into New Zealand went up.
All of New Zealand's transition to a Rentier Economy is explained in that article. Michael Reddell is half right - it is largely because of inward migration, but it's the flow of capital they bring with them that causes the trouble, not the people themselves.
Absolutely, (refugees vs wealthy immigrants would create an interesting topic of debate)
I encourage everyone to read Roger''s link plus the comments that follow Pettis's essay, takes a bit of concentration in parts to follow. The rest of Pettis's blog has several week s of careful reading with his other articles.
Last week the parliamentarians started discussing immigration. This is the Hansard report
http://www.parliament.nz/en-nz/pb/debates/debates/51HansD_20160525_0000…
This "seems" to be entirely due to the current NZherald crusade
The news-media have become so timid since when .. but .. you can believe it must be serious .. and right in your face if the Herald is prepared to lift its skirt and sally forth on the matter
A trawl through the archives of NBR would reveal an un-natural silence
Positivelywallstreet- Well worth the read; thanks for that!
Got to love Dr Yangs counter...
"Dr JIAN YANG (National): As a Chinese person, I have to say I was simply astonished by the author of the bill. Obviously, he still believes his Chinese-sounding names approach is more scientific than the data collected by Land Information New Zealand. From that initial data, published by Land Information New Zealand, only 3 percent of New Zealand’s property transactions were made by people from overseas—by non-resident buyers. But Mr Twyford believes that this is not scientific enough—that his Chinese-sounding names approach is more scientific and that, according to that approach, about 40 percent of Auckland properties were bought by people from China. That is astonishing. So we have this data. Although it is initial data, still we believe it is more scientific and more reliable than what he believes.
So this is Labour’s problem: either it is unable to see the real causes of various issues or it is basically too lazy to find the real causes of various issues. In the housing area, it believes that the Chinese-sounding name approach would be the solution and, largely, this is because of its intention to play some political game. Of course it failed. This bill is just a continuation of this Chinese-sounding name approach. There is no need for it, based on what we have received from Land Information New Zealand. It is the wrong approach, basically.
We believe that the real issue here is housing supply, so increasing supply and reducing the cost of construction is the way to go forward. How do we do that? Actually, this housing issue has been an issue for many years. Under Labour it was an issue, but because the issue was too great and too hard to resolve, Labour basically left it alone.
The National Government has been trying to address the issue head-on. We have initiated a wide range of programmes trying to increase the supply and to reduce the cost. One programme is to try to free up more land faster. For that reason we have established 202 special housing areas. In these areas, central government and local government work together to fast track housing development. Talking to developers in these areas you will find that they are full of praise for this kind of programme, although more work needs to be done.
Also, interestingly, that member recently proposed that we should abolish the super-city boundary. That is an interesting change of mind, and we believe that this is more rational than the Chinese-sounding name approach. We believe that this is the right direction, so we would like to work with Labour in trying to move forward the reforms of the Resource Management Act (RMA). So this second-phase RMA reform will be, hopefully, moving forward. In this second phase we would like to prioritise housing affordability, so we look forward to Labour’s support for the second phase of the RMA reforms. Also, much of the building costs have to do with paperwork and efficient council work, so it is important for us to make sure that RMA reforms will increase efficiency of council work.
Finally, I would say that the National Government has been working very hard to make sure that our New Zealand families are able to afford houses, because homeownership is important to our families, to our communities, and also to each New Zealander. So we have been working very hard, and I have to say that this Government has been achieving a lot in providing housing supply and also in reducing the cost. Thank you."
All talk and no action. Most of the rules in the fire safety portion of the NZ Building Code were implemented by National and have dramatically increased compliance costs leading to less construction. It is National's fault that costs are higher and obtaining a building consent is far more difficult than what it should be.
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