By Bernard Hickey
It's amazing what you can promise when you forecast strong growth.
If you went to your bank manager and promised your salary would increase 10% next year there's a good chance they would lend you more money. The bank manager would probably ask for proof, but a letter from employer would do the trick.
This is exactly what John Key and Bill English will do this Thursday when they release the 2011 budget. They will forecast strong economic (GDP) growth and explain to our ratings agencies and creditors that this growth means our debt to GDP ratio over the next couple of years will stay relatively low at below 30%, even though debt is growing at a record rate.
As long as the denominator (GDP) is growing almost as fast as the numerator (debt) then that ratio will stay under control. These growth forecasts will in effect be the letter from the employer to show bank manager's representative, which in our case is Standard and Poor's. New Zealand will probably avoid a downgrade in our credit rating because the budget's economic growth figures for the next three to four years will look extraordinarily strong.
They will argue the Christchurch earthquake rebuild and an historic boom in commodity prices will power GDP growth to over 4% over the next couple of years.
This all seems sensible until you look at the track record of these forecasts in the last three years since the global financial crisis. Every economic forecast by the Treasury under-estimated the impact of an epic change in the way New Zealanders think about debt and spending since the crisis. In May 2008 Treasury forecast growth rates for the next three years of 1.5%, 2.3% and 3.2%. Instead we got -1.1%, -0.4% and -0.1%.
The inaccuracy of these forecasts isn't just Treasury's doing. All the economic forecasters have missed out on a structural shift.
New Zealanders have stopped borrowing overseas to pump money through the housing market into consumer spending, which makes up almost 70% of the economy. It has been stalled for three years and there is no indication it is picking up quickly. New Zealand households have got the message, even if the government hasn't, that they can't live beyond their means.
Lending growth has stalled and the banks are increasingly desperate in their efforts to encourage households to borrow. This time it is different. An extremely influential book titled 'This time is different: Eight centuries of financial folly" written by US economists Kenneth Rogoff and Carmen Reinhart demonstrates that heavily indebted economies almost always grow much more slowly after a financial crisis and that this slowdown can last 7 to 10 years. A process of de-leveraging after a credit-fueled boom in asset prices drags down on economic growth, particularly when financial crises continue to reverberate through the system.
New Zealand is not unique in this, which helps explain why every economic forecast by Treasury since May 2008 has overestimated actual growth by between 2% to 3%. John Key and Bill English will argue that somehow growth in the next three years will be different. Rogoff and Reinhart's work indicates growth will continue to be at least 1-2% below 'normal' for another three to five years as we deleverage. We have a long way to go. Household debt to disposable income is still above 150% and will have to drop down to something closer to 100% before we return to 'normal'.
Meanwhile, our government keeps borrowing as if growth is continuing normally. Luckly for us our bank manager's representative, Standard and Poor's, will simply rely on these forecasts and not ask for a letter from our employer. The banks themselves, global credit markets, may not be so relaxed in years to come as growth continually disappoints.
That's why we should all take this Thursday's growth forecasts and John Key's smiling confidence with a grain of salt.
This time is different.
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35 Comments
This rime it is indeed different.
That they are not telling the truth, is not up for debate - I could take them down single-handed.
This is a physical world, globalised now, and we've been in a state of reduced resource-per-head since 1980. All (bar the 'fiscal hub') of their strategies involve exporting of resources.
To?
Everyone else with the same game-plan. If resources represent wealth-getting ability - and they neither advocate nor defend a de-coupling - then growth is a goner, because even if a country has untapped reserves, the payment has to come from ones which (on average) don't.
The question is: Who are they telling porkies to? Us, or themselves?
Do they genuilely believe that which can be disproved in 5 minutes (growth-based economics) or are they actually just perpetuating the myth, while they allow sponging up the remaining resources (energy in particular) by those they rub shoulders with?
bet on growth.........hahahahaha what clowns.
JK? or BE said we should be seeing 6% growth right now but we are seeing none, hello so they are way off then, nothing has changed. Back in 2008 Treasury's worst guestimate was better than my likely and guess what they were too optimistic, the realists were closer....and I think they / I have been closer in the last three years.....still floating on my mortgage, why? because the global economy is stuffed and its staying there....hello 4k saved...
So now like all the other failures (eg UK Govn) they are betting on growth to fix things....hello your policies didnt achieve 1% growth let alone 6% any reason to think it will now? no.....about all I can say is Labour are no better....they are all betting/gambling with our futures.....when in fact just like going to the Doctor early you get milder treatment and more effective outcomes....but no...small tax increases? no...so in a few years its hefty tax increases....do a bit now and we will easily avoid becoming the Greece of the South Pacific.....of course voters dont want this bad news...anyone party who says its tough and taxes have to go up a small amount say 3% is toast...especially if the other bunch of liars promise not it doesnt.....
regards
Lack of decent NZjobs.
As a nation skill and education of the wider population transferred into the economy delivering and exporting high quality products is the key for success. Here in New Zealand high quality products are imported (infrastructure needs) and the wider population are on low wages, selling houses to each other, filling up warehouse shelves and skilled/ knowledgeable youngsters export them selves.
Without adding new, solid segments to our economy - increased, sustainable production preferable research/ manufacturing the situation is getting worse and the falling of our standard of living or worse is imminent.
Culture change.
Current and past NZgovernments failed to give incentives for the development of a solid production/ high tech manufacturing industry, which is vital for societies. Infrastructure needs such as energy, transport and telecommunication are planned, manufactured, installed and maintained not by NZcompanies/ workforce, but by foreign companies making billions from NZtaxpayers, while the majority of Kiwis are working in low wage servicing jobs, often surrounded by a consumer environment.
The mismanagement of our economy is not only draining our people, but also our wallets.
I am off to Oz I think, this country is screwed. Everyone is just going on about increasing taxes, not lowering spending. National realise this but the average IQ of NZers is such they wuill be in denial about this. I can earn around AUD140K PA as a package, my wife is a nurse so she can get a job easily enough. Also need to tell Maori to get stuffed on treaty money, they lost white man won to rephrase Cullen.
Quite frankly Aussie Labor are right of Key's National.
Labour/Greens will lower NZ even faster. Likes of BH, AT think they are the answer, must have been a dumb question, they will promote more unaffordable policies like WFF, IFSL we will have to pay for later.
Will keep house in Greenhithe, Auckland however as it is a top area I could not afford in Australia as insurance if we come back to NZ. Heaps of people will want to rent it out.
It's funny how he can praise National, condemn Labour and spruik for the property bubble even as he admits that the country's economy is rapidly heading down the gurgler to the point that flight to Australia is the best option!
His idols have turned a record surplus into a record deficit, yet they remain his idols.
Party fanboy deity-worshippers who believe politics is a team sport are the reason government in NZ will never rise above the level of a touch rugby match played by drunken retards.
Look at their fiscal situation before you jump, all dependent on increased demand from China for commodities, don't think that source of frustration will be much different to this country as it plays out.
If 140K aussie is a step up, as suggested, then it sounds like you doing nicely in Auckland.
140k in a large australian city an't enough for a decent living and to get ahead, same can be said for the mining areas unless you live basic or single.
A good friend with similar frustration left for the UK around 2001, aleast he can laugh about the futilitiy of his move now :-)
Growth? Growth in oil dependency just as we go down the other side of Hubberts curve. This will knock exports for six. We are 18 months from a major oil crisis. The world can survive without milk and cheese. These are luxury items here in Asia.
Dairy farmers deep in debthttp://www.stuff.co.nz/business/5005469/Dairy-farmers-deep-in-debt
OK amend that to "possibly within 18 months" The shortfall in supply may not neccessarilly mean an elevated oil price if the world economy collapses as well - we won't be able to afford oil even if it is "cheaper"
I don't think any of us here take any pleasure in anticipating this, we just hope people visiting this website take precautions to ensure their family and friends' survival.
The endless economic expansion and growth mantra ignores reality. An economic model based on strengthening and improving what we already have makes more sense to me, but how it would play out I can only guess. No political party is prepared for this and none will dare announce to voters that it's game over. They'll let the "market" sort it out.
National Geographic on peak coal.
Mining the Truth on Coal Supplies A view that the world’s leading electricity fuel—and major contributor to climate change—is running out
http://news.nationalgeographic.com/news/2010/09/100908-energy-peak-coal/
Grow our way out?
"If we are right," Patzek's study said, "major restructuring and shrinking of the global economy will follow."
Hey.... JK we is stuffed
The study itself
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V2S-50338NC-…
I see that Strauss-Kahn, head of the IMF has had to put off a scheduled visit to NZ due to pressing issues in the USA.
http://www.nypost.com/p/news/local/imf_boss_strauss_kahn_arrested_in_Kbd7uAi594vbej3oORXfcJ
Interesting! "...the period of birth explosion is marked from 1933 to 1962, not BabyBoomers, 1946 to 1964. This group is determining the economic fortunes of this and every other western country as they travel through their predictable spending pattern. Peak spending occurs at 47/48 years, so the glory days can be marked clearly as 1979 to 2009 – the next 10 years marks a contraction as X Gen come through (introduction of contraception in the early 60′s sent the birth index backwards 1962 to 1974). WE HAVE A MINIMUM 10 YEAR PERIOD OF CONTRACTION IN FRONT OF US. Its a long way to the bottom in a contraction – no one wants to buy when it is cheaper tomorrow....The army of 'ever increasing numbers' is marching now, and will march quicker once this contraction bites; selling (of property) will intensify. I would suggest that there is a serious back log of sales about to come through as people born in 1933 are now almost 80 years of age and leaving it too late …"
and this from Andrewj on Chris M.
"Next, if we start in January 1970 and ask the question, "How long before that debt doubled and then doubled again?" we find that debt has doubled five times in four decades (blue triangles).
Then if we perform an exponential curve fit (blue line), we find a nearly perfect fit with an R2 of 0.99 when we round up. That means that debt has been growing in a nearly perfect exponential fashion through the 1970's, the 1980's, the 1990's and the 2000's. In order for the 2010 decade to mirror, match, or in any way resemble the prior four decades, credit market debt will need to double again from $52 trillion to $104 trillion.
Finally, note that the most serious departure between the idealized exponential curve fit and the data occurred beginning in 2008 -- and it has not yet even remotely begun to return to its former trajectory."
"Our entire system of money, and by extension our sense of entitlement and expectations of future growth, were formed in response to and are utterly dependent on exponential credit growth. "
Then energy availability will drop and its price go up.....
So it all adds up to deflation...and depression....or if you want we are all f***ked....
regards
To all those leaving for Australia, just remember that immigrants will take your place here as they see New Zealand as having better opportunities versus where they have come from. So don't worry your place will be taken and believe me they will be grateful for it.
Debt to GDP is the wrong metric ...
This implies we can cure all with building more prisons and fixing leaky homes - both of which expand GDP.
We have to return our current account to surplus - end of story !
Current policy settings with a record TWI make this impossible.
Without even a trade surplus despite record terms of trade we are by definition borrowing to pay the interest on our ever expanding foreign debt.
This used to be called insolvent.
Now priced next to Portugal and Greece by the bond market - when the reef fish turn - and turn they will - we will receive a wake up call like we have not seen.
This is all going to end in much sadness.
There is now no way out - JK is just buying time with totally unrealistic growth forecasts and prayer.
"This week's Budget will place new restrictions on student loans, including:
* Barring students over 55 - who borrow $25 million a year - from borrowing for living costs. That could save about $10 million a year.
* Tightening borrowing restrictions for pilot trainees, who borrow $30 million a year, 60 per cent of which is written off.
* New restrictions on borrowers who already owe money from previous studies.
* These and other moves are expected to improve the recovery rate on student loans from 43c in the dollar to 47c.
* Based on current annual lending, that could save more than $60 million a year." herald
Notice something missing here....it's only a small point....escaped Joyce completely.....through one earhole and out the other and didn't touch a thing....!
Nothing to be done to reduce the cost of the training...not a friggin thing....you would think that Joyce would at least mention the insane cost of training but no...not a peep.
Why not?
Kunst, how exactly would you have the Government "support NZ companies, the NZ workforce with decent jobs"? Bearing in mind that every cent the Government spends has to be either borrowed or taken from a taxpayer, thus encouraging those capable of earning good salaries - the educated and skilled - to look elsewhere for employment?
FYI from a reader via email:
Thankyou for your always astute advice and analysis of financial forecasts plus the many inaccuracies evident in economic theory in recent years by Treasury and others, and some of the reasons for this. I am not - obviously - an economist, but appreciate the clear way you explain your practical economic analysis in easily digestible form. We need more advisers like you. You make so much sense and I look forward to all your comments. MaryFYI from a reader via email:
Hi Bernard,
I enjoyed your piece today.
Despite being rather critical of the parochial rubbish I see in the Herald these days, I also thought Brian Fallow’s article on the position of the NZ economy in the Herald Business Supplement of 13 May 2011 was excellent.
I agree with the thrust of what you said, and the fact that we will see populist politics in this budget from a government that wants to win the next election. But frankly, I agree with Don Brash’s criticism of this national government and John Key in particular. Populism is a poor substitute for effective government in times like these.
I blog as “Energy Investor” and have come to believe over many years of full-time study and research that the shortage of energy will prevent future global economic growth out to 2018 at any rate. That does not mean that some countries will not grow, but in general those without access to energy will stagnate. We may be OK for electricity but oil for us will be a disaster.
The question of whether peak oil is real or not has been solved with the Peakies triumphant over the opposition. The IEA admitted the peak year for conventional oil was 2006 (in their September WEO) and my own calculation from all reports showed peak month was July 2008 with 74.8 million bbls per day of output. By mid next year the demand for oil will be constrained by supply and it is this reason why oil prices will continue upwards (despite ready availability now). I have watched with alarm over several years as the Chinese have bought long term supply arrangements for oil to the preclusion of our open market access. They have done this in different ways in different countries – Russia, Iran, Venezuela, Saudi Arabia, some African countries and Kazakhstan by loans – some by continuing to sign long term supply contracts at USD100/bbl when the global market price dropped to sub USD40/bbl. For us, we will need to solve the question of how we get our goods to market by 2015.
So the question of borrowing in expectation of growth when real growth will be impossible, just seems like a disaster waiting to happen. Perhaps if our politicians or energy planners wanted to learn anything, they would read Vladimir Putin’s doctoral thesis and watch the way he is putting theory into practice L
My investment research is not all doom and gloom and I do support a number of high tech businesses in Australia and North America that have genuine potential in the alternative energy/energy storage arena. Even so, I regret the period from 2012 to 2018 will be bad for the global economy and really bad for us.
Kind regards
John
FYI from a reader via email:
Couldnt agree more with your article. Its frustrating how often forecasts (from govt or analysts) are still interpreted as the likely outcome, when time & time again they can prove to be horribly wrong. When I read that the govt was going to take on more debt to re-build Christchurch I sent the below email to John Key. For the record, I prefer Key to other recent leaders, and think most of his policies a step in the right direction. However, the idea that debt is the only solution for struggling countries has become an institutionalised belief for most Western countries. Hi John, I'm a MBA student in Sydney and formerly from Christchurch (B Com from Canterbury like yourself). After watching the devastation on the news, I began to think how this tragedy could be turned into an opportunity. I have long thought that NZ has to do something radical in order to become a more prosperous and competitive country. One way could be to offer zero tax rates for companies (local or overseas) who would need to build infrastructure and employ local skilled workers in order to operate. As they became profitable they would pay more tax etc. Such a system is used successfully by similar small nations and I'm sure your well aware of this.In a normal climate this of course would be met with opposition from other parties/New Zealanders. However, the events in Canterbury since last September have left all of New Zealand in a very bad situation. Perhaps it would be an option to trial such an idea in Christchurch, where new infrastructure and jobs are going to be vital to ensure New Zealand does not slip back into recession. Such a proposal would not be an instant solution to what is a serious problem. More debt will obviously be required in the short-term to get the recovery started. But at least it is an alternative to simply paying for the rebuild with more debt and ultimately higher taxes, and offers Christchurch and New Zealand the chance to become more competitive in the long-run. I hope you get the chance to read this, any thoughts would be much appreciated. Regards
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