News and Opinion, sponsored by RaboPlus

By Bernard Hickey

I spoke this morning at a business breakfast hosted by finance, accounting and IT  recruitment firm Robert Half about the Global Financial Crisis. I’ve compiled 30 charts which I think tell the story of how we got into this mess and how we might get out of it, although not necessarily unscathed. (Updated to include more detail for those not there)

My view is that the forces of de-leveraging that are building both here and globally could see us effectively repay NZ$45 billion of debt (25% of GDP) over the next 7-10 years. That’s what previous de-leveraging episodes after credit booms have delivered. Given we can expect low growth, higher interest rates and low inflation over that period, this means a lot more saving and significantly less spending growth. That will be tough for retailers and those that depend on credit fueled investment in property for their income.

My longer term view is that New Zealand businesses face a battle retaining skilled stuff unless we have a real debate about economic reform and the need to reverse (or at least stop) a massive intergenerational transfer of wealth. With current policies (including the pension age stuck at 65, National Super at 66% of the average wage, publicly funded healthcare and tax-free capital gains on property), there is a risk the working generations (20-60) will be paying income taxes of above 50% and GST of above 25% by 2030 to pay for the pension and healthcare costs of the retiring boomers.

Those in their 20s now face heavily indebted futures based on the decisions of their forbears to spend now and transfer the debt generated by that spending to the next generations. A workforce that will have little disposable income (after taxes) and options to flee (to Australia in particular) will have to be motivated very carefully.

There is a risk, given the above, of an exodus of our skilled workers that leaves a hollowed out economy filled with retirees, landlords, farmers, migrants and beneficiaries that clock up big budget deficits and an unsustainable debt. That’s without reform of our taxation system and our productivity performance to lift our growth rates and incomes.

That’s why I’m trying to get a bit of a debate going. Your views?

Your view? I welcome your views and comments below

By Bernard Hickey

New Zealanders don’t know how lucky we are that our economy is joined at the hip to the lucky country. Also luckily for us, our creditors aren’t too worried about just how lucky we are rather than how virtuous we are. They’re just going to lend us the NZ$240 million a week we’re asking for without asking too many questions and just assume we’re a suburb of Australia, which is a province of China.

It’s worth pointing out our luck again after the last week’s news from Australia, which appears to powering a new confidence (or complacency) at the top of New Zealand’s policy making tree.

Listening to Reserve Bank Governor Alan Bollard and Finance Bill English in recent weeks has been like listening to someone explain how they got away with the economic policy makers’ version of selling a slightly dodgy old campervan to a foreign tourist for more than it was worth. They hope the tourist will get around the South Island without any trouble, but they’re not absolutely sure the head gasket won’t blow somewhere on Arthur’s Pass.

Bill English talked this week about having to convince 28 year old bond traders in New York to buy our government bonds. All they wanted to know, he said, was how closely connected to Australia we were.

“All I have to tell them is we’re hooked in to Australia, which is hooked into China,” English told a business audience in Auckland with a wry and almost embarrased smile. Bollard has also pointed to the same foreign investor confidence, saying our connections to China via Australia are positive for our image on international markets.

O so lucky

Let’s look first at just how lucky the lucky country has become.

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Bernard Hickey slams John Key’s tax reforms on TVNZ’s Breakfast. For more reaction see today’s Top 10 at 10.

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Bernard Hickey delivers a Housing Report in association with BNZ, including news that the number of home sale listings on realestate.co.nz and trademe.co.nz has spiked in recent weeks. This is similar to the spike seen through late 2008 as the housing market went into a downturn and home sellers tried to sell at the peak.

The numbers of houses listed for rent has also moved sharply in recent weeks, falling much faster than it did through early 2009. A fall is usual at this time of year, but this seems sharper, possibly as some landlords put their houses up for sale, sensing house prices have peaked.

Meanwhile, the number of mortgagee listings has also risen sharply, reversing a 3-6 month down trend as banks and receivers for finance companies get tougher now the worst of the recession is over and they work through their backlogs of delinquent loans. All these factors are likely to keep the pressure on for lower or flatter prices through 2010.

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Bernard Hickey details the key news over the weekend in 90 seconds at 9am, including news Reserve Bank Governor Alan Bollard has told TVNZ it’s unrealistic for New Zealand to think it can match Australia’s incomes and we should be content with the crumbs that fall off Australia’s table. Australia’s mineral wealth gives it some natural advantages we can’t match, Bollard said.

He also said the New Zealand economy remained fragile and the housing market was spongy, meaning rates would stay on hold until the middle of the year, in line with previous statements.

Meanwhile, the Australian Government announced it would remove its wholesale deposit guarantee for banks from end of March, the Sydney Morning Herald reported. Bill English told NZPA that New Zealand was also considering lifting the wholesale guarantee.

The Dow wobbled late on Friday after weak US jobs figures.

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Bernard Hickey delivers an economic weather report in association with the BNZ on surprisingly weak labour force figures that showed the unemployment rate rose to 7.3% from 6.5%. This was much higher than the 6.8% economists had expected and higher than 6.6% the Reserve Bank had expected.

Economists pointed out however that a large reason for the rise was the rise in the workforce and a slight rise in the participation rate. Employment also fell, but only by 0.1% and in line with expectations.

Economists also said the results reinforced expectations that the Reserve Bank would be able to hold the Official Cash Rate at a record low 2.5% until the middle of 2010. Wholesale interest rates fell slightly after the surprise result and the New Zealand dollar fell. But fixed mortgage rates and term deposit rates are unlikely to fall in tandem, given banks face higher costs to gather term deposits and funds on international money markets.
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