Infometrics' Gareth Kiernan sees enough speed bumps on the horizon to slow economic growth more than the market expects; says it's time for LVRs to be eased

Infometrics warns the “plethora” of risks facing New Zealand increase the chances of the economy growing at a slower than expected rate.

The research company’s chief forecaster Gareth Kiernan points to a range of economic indicators, saying that on their own there isn’t cause for concern, but it’s likely “at least one of these factors will undermine economic growth in coming quarters”.

Gross domestic product grew by 2.7% in the year to June. Treasury, in its May Budget Economic and Fiscal Update, expected this to increase to 3.3% in 2019 and 3.4% in 2020, before dropping to 2.7% in 2021 and 2.5% in 2022.

Kiernan’s forecasts are around 2.5% to 3% in coming years.

"One of the biggest pressures on businesses is declining profitability, with margins being squeezed by factors such as higher transport costs and the increased minimum wage," he says.

“In previous years, strong demand conditions have enabled firms to make up for shrinking margins through increased sales volumes. Slowing growth is now making that strategy less viable, implying businesses need to lift prices to restore their margins.

“However, competitive pressures seem to be limiting the ability of many firms to raise prices, particularly in the retail sector.”

Kiernan recognises that in the year to June the Government’s corporate tax revenue was up 6.2% from the previous year, while GST revenue was up 6.7% and PAYE 7.3%, but he says the pressures are only just coming through so won’t show in the numbers yet.

‘More than political posturing’

He also points to the direction of government policy affecting confidence.

According to ANZ’s latest quarterly business confidence survey, a net 7.8% of businesses surveyed see their own activity improving over the next year. This figure sat above 30% in 2016 and the first half of 2017.

“The fall in employment and investment intentions since August last year is much larger than would normally be expected under a Labour government,” Kiernan says.

“This deterioration is more than political posturing and implies a real reluctance to push ahead with major business decisions.”

While consumer confidence is holding up better than business confidence, at average historic levels, Kiernan says: “Record high petrol prices are cramping households’ discretionary spending, and consumers’ feeling of wellbeing is also being undermined by stagnating house prices.

“Even the labour market, which has performed strongly to date, could start to weaken if business pessimism translates into a lack of employment growth.”

The number of people employed grew by 3.7% in the year to June. At 4.5%, the unemployment rate is very close to the lowest it’s been since 2008.

The final risk Kiernan highlights is global: “Internationally, concerns remain about the potential fall-out from the ongoing trade ructions between the US and China.

“Dairy prices are giving an early indication of what could happen if global economic growth weakens because of the trade war. This week’s downward revision by Fonterra to its forecast milk price will reduce the amount of money flowing through to farmers and into provincial economies.”

LVRs should be eased... next month

Kiernan says if these factors undermine economic growth, the government or Reserve Bank could be forced to respond with more stimulatory fiscal or monetary settings.

If the RBNZ decides it wants to cut interest rates, he maintains it’ll have the evidence it needs to do so by mid next year.

Governor Adrian Orr has indicated he’ll leave the Official Cash Rate at 1.75% into 2020, with the next move being either up or down.

Kiernan believes the RBNZ will also help stimulate the economy via the housing market by easing loan-to-value ratio restrictions in May next year.

If he was in the driver’s seat, he’d ease them next month.

“The LVRs have taken enough heat out of that investor demand [for residential property] and when you couple that with the bright line test being extended out to five years, that’s changed the dynamic of the market a bit from where it was previously,” he says.

The RBNZ, in its latest Financial Stability Report released in May, said the full effect of it easing LVRs in January was still working through, and a policy change wasn’t appropriate for now. It said it would change tack “if housing market risks decline and banks’ lending standards for new mortgage loans are prudent”.

Real Estate Institute of New Zealand figures show the number of houses sold in September was the lowest for a September month since 2011. However prices held up, with the national median still sitting near the record high.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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52 Comments

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So why is the first response alway to suggest that NZ should goose its economy by pumping real estate lending?. At current private debt levels it would be reckless and irresponsible to reduce macroprudential lending limits (LVRs), except perhaps to FHBs with cash deposits.
Why induce unsustainable short-term fake growth?, NZ should be seeking to encourage lending for productive investment, not inducing more wealth transfers from savers to borrowers, from poor to rich, and from young to the old..

I want to add that FHB who are buying brand new properties as well. To boos actual house building for the cheaper end of the housing market.

Growing the economy in a healthy way would involve reducing inequality though. Making it so your consumer base has a good spread of disposable income. The people deciding the course of action for the economy don't like that as much as boosting their assets.

True. If real estate is the mainstay of the economy, we should be focus our efforts on reducing bottlenecks that restrict construction activity to free up more capacity for real growth. More building supply means more direct and indirect jobs, higher wages, better infrastructure and productivity. These could eventually lead to an improved socioeconomic fabric and better living standards.
But the intellectual capacity of our policymakers and "so-called" academics doesn't extend beyond artificially propping up the economy by creating fiercer demand for available stock.

You have to wonder whether they're more interested in propping up their personal investment portfolios as a measure of success, than achieving good long-term outcomes in the wider economy.

Not true, about three years ago Housing Minister Phil Twyford came up with some policy to reduce to major bottlenecks - land supply and infrastructure funding. Labour used these as parts of their campaign and promised to deliver when elected.

But he is now in power and has done neither. All he does now is juice the market with government spending and push the RBNZ to remove LVRs.

It is not that our policymakers lack the "intellectual capacity", it is more a case of them being lying pieces of...

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Good question. why is this economist advocating making houses easier to buy as a means of stimulating the economy? I would be interested in how he thinks this would improve employment, increase the general money go round that economies rely on to function, address the equity gap, and enable the Government to collect tax to fulfil it's obligations to the people of NZ?

He talks about a fall in labour and investment, but makes no mention of investigating taking advantage of the fall out of the trade war between China and the US and the now largely well understood risks of exporting manufacturing to China, and stimulating investment in manufacturing in NZ? With technology today, high levels of productivity could be achieved while creating new jobs to meet export markets and help the country diversify away from over reliance on agricultural products. Playing safe seems to mean doing nothing. And ultimately doing nothing is a slow form of suicide.

In your opinions, what sectors other than primary industries show promise in terms of having competitive advantages (any competitive advantage) over other countries and places?

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Virtually anywhere. what we have learnt over the last thirty or so years, that moving manufacture to places like China, which are not democracies, have a different view to the rule of law from a global perspective and do not respect patents or intellectual property rights, we simply give them our technology which they then use to compete with us. Fonterra has also done this really well across the world (so much for primary industry).

The problems this country faces is providing job opportunities for everyone, not just the well educated. In the 70's 60%+ of the population was employed in "unskilled" jobs. That is work not requiring higher education. Those jobs still paid enough for a single wage earner to sustain a family. Today that cannot happen. Why not? The manufacturing jobs have mostly moved to places like China. Even relatively recently Fisher and Paykel sold it's whiteware division to Haier. F&P were well known for its innovation and quality of products. Now intead of being made in Takapuna, a F&P whteware product is made in China. What happens for the people who usedto work for F&P? Minimum wage part time jobs don't cut it. For the last 30 years the ordinary jobs market has been decimated by globalisation. It will take at least that long to rebuild it, and it will need significant Government support, but it needs to start somewhere, and it must start now.

But Murray, we don't need manufacturing because we have wondrous Services....lord knows what they will service though if we don't actually produce anything.

I think you are right on mate.

Part of the reason so many folks here get bent out of shape over unions and pay claims is because we are now so far removed from having a group/class of people who make stuff - there's no frame of reference except for ferry strikes and cranky boilermakers from the 1970's.

We are now struggling with terms of trade, productivity & wages because our value-add from service industries is so low.

Division of labour means that not everyone needs to do everything for themselves. Instead you become really good at one thing (that is hopefully valued by others) and can exchange your work/service/product for other things you need. This means that humans as a collective are capable of producing far more superior (both in terms of quantity and quality).
It actually is the same with countries, regions etc. Protectionism and localism that protect noncompetitive industries severely undermines the future prospect of a country.

The main issue is that the main specialised advantage of south-east asian countries and China (that has attracted so much manufacturing to them) has been their very cheap labour and slave-master type of work relations. If we had global labour standards that were vigorously implemented, it would have been easier to say if this was a productivity advantage in real terms or simply the ability to exploit poorest people. Another issue is destruction of the environment. Much easier (or at least cheaper) in poor countries. Off course the so call developed economies have all gone through these stages (exploiting labour forces including in some cases actual slavery, total destruction of natural habitats etc).

I am pro globalisation for very obvious reason.But our experience has shown that globalisation require very high labour and environmental standards to help human beings on the global to be really and productively specialised for the benefit of human kind. Unfortunately this is more a dream than anything that can be realistically achieved. The only way this can happen is if the whole democratic countries in the world be united to promote this, but this will never happen.

I agree with globalisation to a point, and i think that is what you are arguing. The problem as you have pointed out, is that it has been used to chase profits, not address equality. In a finite world that cannot grow infinitely, this discussion must be had. But Governments and the rich and powerful are too wrapped in their own interests rather than the greater good of the species, and the environment. Unless this changes we are well and truly screwed.

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Totally disagree. Look at what is going on across the Tasman. Reduce LVRs at your peril.

There is an assumption that, if required, reducing LVRs for property investors will stimulate the market. This is possibly false thinking.
I agree with the comment; "The LVRs have taken enough heat out of that investor demand [for residential property] and when you couple that with the bright line test being extended out to five years, that’s changed the dynamic of the market a bit from where it was previously,"
However also need to add a few other things to bright line test currently affecting the dynamics of the market for property investors. Uncertainty as the market teeters with flat prices, low sales and increasing stocks; perception that housing is overpriced; very low yields (despite very low interest rates); reasonable capital gains unlikely; tougher proposed legislation which is heavily weighted in favour of tenants; compliance costs for increasing demands for healthier homes; medium to longer term outlook for increasing interest rates.
Property investment is not currently attractive and RBNZ mortgage data show that investor activity is low.
The effect of effect of LVRs in cooling the market over the past few years is possibly over-rated.
I am currently out of the property market due to some of the factors identified and the effects of LVRs was not a factor in exiting the market - and LVRs are certainly not a factor regarding me not re-entering the market. Talking to other investors, equally LVRs are not a factor in increasing their portfolios; there will need to be fundamental changes such as considerable increase in yields.
So the importance as to when LVRs should be changed - and their potential effect - is most likely over rated,

Lowering LVR's should be the last thing on the list. What we need is rising wages with stagnant house prices and there is no way a housing boom is going to deliver that. As evidence the last thirty odd years...Any talk by banks or politicians of boosting house prices should be considered economic treason.
Watch out for the COL trying to give tax payer money to FHB in some way to boost the market and buy votes with their big surplus.

The economic growth machine can't afford rising wages as evidenced by the squeeze on margins. How do you get richer if you have to pay people more?

Why nobody sees that there are limits to forever increasing prices/profits/debt/wealth is beyond me. I guess it's apt during Mental Health Awareness week - collective insanity and we don't even see it.

There's just so many more nice things to spend money on these days, why would anybody who controls the money at the top of any organisation want to forgo spending that extra money on the nice to haves?

"Nah nah it's okay, the money will start trickling down once I've paid for the third boat, bach and car".

Economists working long enough in NZ know that NZ's economy has always been stimulated by either more ppl or more cows or both, and so far there has not been a third option.

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You are probably right, and that just goes to show that economists are not the font of all knowledge as they would have us believe, but are rather a flawed, but self-absorbed group of academics who tend to lose sight of reality very quickly when they start espousing their opinions.

I guess a third option would be to start a bloody communist insurgency, institute a socialist command economy that murders tens of millions, then slowly enact capitalist reforms and say you've "lifted the country out of poverty".

That will puff up your GDP, for a while. Especially if you just make up the figures.

Are you an Australian Sav? Your xenophobia and racism is showing. Or do you have some facts to counter Xings opinion or do you just like trolling people?

Everything I mentioned was fact.

Being against communism doesn't make you a racist. Are you a communist, murray86?

No I am not. His comment had nothing to do with Communism, but was merely an observation on economists views of NZ. I to am against Communism, and facism, xenophobia, and racism. More to the point I tend to look past appearances to consider the message. Have you asked him if he is a Communist, or are you just making assumptions? The reality we face as a country is that China is a dominant force in our region, and to take a piece from Sun Tzu, we need to understand them, and their cultural perspectives of the world. To be disrespectful of someone just because of where they are from, or what their culture is, belittles you, not them. I value his input in our discussions. If I disagree with him, or do not understand then I will not hesitate to challenge his perspective. But where he is from is not a point of discussion.

And everything you said was fact? What facts did you present? It looked more like misplaced sarcasm to me.

His entire schtick is to post negative things about New Zealand and other capitalist democracies. While posting off-topic tangents about how great the Communist Party is. I'm fighting fire with fire.

Don't be fooled; he's not a genuine poster offering a genuine Chinese perspective.

There are plenty of other posters with over doses of negativity, and i do not see you deriding their origins. Besides often his criticism of our Government is correct in my view. I have criticised them enough myself. And i do not always agree with the critics of our Government. You are not fighting fire with fire, you are carrying on a personal criticism that attacks the person. I rarely observe you offering facts when you comment on his posts, just personal criticism. Do you not think the relative merits of the Chinese Government versus our democracy, or others will speak for themselves?

Don't waste your time murray86, saving4whocares got all his historical facts from a comic book and believes them religiously.

Yes, i tend to agree Zac. But sometimes it is worthwhile to encourage some to see their own bigotry, and change to actually try to contribute to a discussion in a meaningful way.

I remember you from the last thread. You're so ignorant about this you weren't even aware that China had a civil war.

I suggest reading more, and posting less.

What, read your comic books?
I don't see why it is so hard to believe that Mao could have improved life expectancy through education and more doctors. They were very big on education and public health, unlike their predecessors. It doesn't make one a communist to acknowledge that. Casualties from the civil war and WW2 weren't enough to so drastically influence life expectancy.

You have only made me appreciate our resident CCP commenter more and I'm right wing. A far more worthwhile and interesting commenter.

I don't see why it is so hard to believe that Mao could have improved life expectancy through education and more doctors. They were very big on education and public health, unlike their predecessors.

Big on education? Only the right type of education. Mao and co were also very anti-intellectual, of course.

Mao said he went a step further during a speech to CCP officials in 1958, referring to Qin: “He buried 460 scholars alive; we have buried forty-six thousand scholars alive… You [intellectuals] revile us for being Qin Shi Huangs. You are wrong. We have surpassed Qin Shi Huang a hundredfold.”

https://www.theepochtimes.com/the-biggest-anti-intellectual-movement-in-...

Rick, I never said Mao was an angel, I just said that life expectancy improved and this is a documented fact.

Big on education? Yes. Literacy went from 20% to 65% under Mao.

Also, Mao is definitely one of the greatest figures of the twentieth century whose influence is still strong in China and elsewhere. Underestimating the communists often leads to disaster. It is foolish to mock it and underestimate it. Look at what happened in Vietnam, Korea and Russia during WW2.

NZ is very naive when it comes to understanding China and the Chinese and it is not xenophobic to be wary of their 'friendship'.

https://www.nzedge.com/news/nz-and-australia-ground-zero-for-chinese-inf...

murray86, the CCP is a government party not a race. My wife is Chinese and does not think fondly of the CCP, does that make her a racist?

I can't see anything racist or xenophobic at all in what he said. He was criticisng a horrid regime, not a race.

Here are some facts from international organizations:
1. Number of outbound Chinese visitors increased from 5 million to 135 million from 1996 to 2016.(https://data.worldbank.org/indicator/ST.INT.DPRT?locations=CN)

2. Life expectancy at birth in China is 76.3 yrs in 2016 slightly below 78.7 yrs of the US (https://data.worldbank.org/indicator/SP.DYN.LE00.IN?end=2016&locations=U...)

3. Mortality rate, infant (per 1,000 live births) in China is 8 in 2017 only slightly above 5.7 of the US (https://data.worldbank.org/indicator/SP.DYN.IMRT.IN?locations=US-CN)

4. Poverty headcount ratio at national poverty lines (% of population) in China dropped from 17.2% in 2000 to 3.1% in 2017. (https://data.worldbank.org/indicator/SI.POV.NAHC)

By observing what is going on in India, Philippines, Indonesia, Brazil and etc, I'd say that China would not have achieved what she's done today without CCP and the current political system.

I'd also say that in the next decade or two, there would be dramatic and systematic political changes in the current democracies.

Mark my words here and let's see.

Good progress on the life expectancy and infant mortality, but you should aim higher than the US are achieving. Most Western countries (and other developed countries like Japan, Singapore and South Korea) are in the 80s for life expectancy and in the 2-4 infant deaths/1000 births range. The US does not have a very effective health system on average, despite the costs.

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Lower the LVR's, is that all we've got to run on? When do you stop? When household debt is 150% of GDP? 200%? It's absolute madness. We need less debt tied up in non-productive assets and more in the productive economy.

Shifting to land value tax and reducing income tax and GST would solve this.

So with risk on the horizon, you wouldn't be an idiot to think the economy tanking may also result in property prices tanking. So the solution is to lower LVRs? What will then happen to those holding negative equity?

You may have negative equity but you still have a house to live in. Shelter is pretty much 3rd on the list after the oxygen you breathe and food and water. Home ownership is a long term game, you don't worry about the here and now and whats possibly going to happen its about where your going to be in 25 years time. As long as your in a financial position to keep repaying your Mortgage you don't care.

Well the idea is those presently holding the baby want the standards lowered so they get to pass the expected losses onto to the newly let in so they take the loss instead. Makes perfect sense on an individual basis where you are holding the prospective loss, not so much in terms of a National economy.

Meanwhile US markets look dodgy to say the least.

https://www.youtube.com/watch?v=4ONDIl2fcug

The thought of encouraging FHBs to get in a position of high leverage to purchase property as the market is taking a downward turn seems ludicrous. The asset rich can offload their properties and take the profits from the past 5 years at the expense of the uninformed.

However caveat-emptor applies and for those dumb enough, then perhaps a period of negative equity may provide a good life lesson.

One thing to consider is with the tighter criteria for lending being imposed by the banks at least they should be able to pay their mortgage, they just may not be able to move on for quite some time

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Better open up immigration again wahoo! We should have 30 million people here like they do in Aussie, then we'd be really cranking! Or maybe even the 65 million they have in the UK! Wahoo!

Wait, wait, Japan has 150 million, on islands not much bigger than ours, surely we can do that!

surely all of these countries are super wealthy with everyone driving a Porsche and living in a mansion right? Right?

NO. So why the f**k do we keep importing people thinking it will solve all our problems.

Because they tend to vote, rather reliably, for the Crew wot Let 'em In.

Because they want to come and it is hard to stop them all.

Because every government in NZ has had some sort of vested interest in keeping immigration taps wide open.
The Nats had a clear conflict against cracking down on low-skilled immigration as their buddies made millions from importing cheap workers who are also consumers of low-value goods and services.
Labour needs billions of dollars in tax revenue each year to fund those generous handouts earmarked for its constituents. They need to keep our sweatshops running to rake in all those tax dollars.

because its like sugar, it gives a short high and when you are a Govn you are in a confidence game and nothing much else.

All of those countries are richer than NZ

Actually the opposite, tighten and keep the riskiest players out of the market.

Lowering wages or continuing to keep them stagnant as we have for so long will not help business profits because of the demand deficiency effect and the corresponding lack of investment the lack of sales encourages. The stagnant wages do no help the debt burden for households. Households won't keep going into further debt forever to sustain consumption.
Government should be stepping in and providing the demand injection that the economy needs to boost wages. Instead it runs ever increasing surpluses. Lowering the OCR further won't help much. Pushing on a string. Keynes had it right on this.

Ease LVRs. Is this guy serious?

It's the economic equivalent of:
"Quick we're running out of crack, ship in some more crack to make everything right again."

Lower LVR threshholds.
More credit into houses.
Jack up house prices.
More fake wealth effect.
More FHBs staring down the barrell of negative equity when the day of reckoning, inevitably, arrives.
Who cares about them though, keep the housing ponzi going for as long as possible.

I've got my house on the market now. I'm getting out of this madness.

Lowering LVRs makes sense given our economies dependence on housing. But over the medium to long term we have to introduce worthwhile tax incentives to invest in the stock market and encourage SMEs to take risks. Also bigger tax incentives for KiwiSaver. This will result in a rebalancing if the economy over time, the development of a decent capital base (Aussie Super is a great example) and a better long term outcome with less dependence on overseas capital. NZ Governments seem incapable of considering tax incentives for non housing sector assets but these have a great record overseas.