Roger J Kerr says a lot of people will be asking whether our 'health first' strategy has delivered the results expected or did we get the balance between health and the economy somewhat skewed?

Summary of key points: -

• New Zealand’s economic contraction far worse than Australia’s
• RBNZ continues to toy with the negative interest rate experiment
• Political and tech stock risk loom for the Kiwi dollar

New Zealand’s economic contraction far worse than Australia’s

How we are performing relative to the Aussies has always been a favourite benchmark for New Zealanders who do not want to see themselves as the poor country cousins to the larger neighbour.

The trans-Tasman rivalries and comparisons are not just confined to the sporting fields, in term of business and economic innovation we always like to get one up on the Ockers as well. The two currency values against the US dollar are also an immediate measure and representation of how the rest of the world see the New Zealand economic performance relative to that of Australia.

The Australian and New Zealand Governments have adopted differing responses to the Covid health emergency and resultant economic shock.

Back in March/April at the height of the economic storm, the Australian Government balanced their advisory body with both health experts and businesspeople to chart a course through the crisis.

Here in New Zealand, Government leaders seemingly shunned the involvement of business folk and relied totally on the health officials for their decisions. The result being that the general public were convinced by the Government that “going early and going hard” with lockdowns to stop the virus would deliver us the best economic result.

The message from Jacinda and Grant was that our economy would recover earlier and stronger than others as the Covid elimination strategy would stand us apart and be to our advantage.

Six months on, the elimination objective has been found to be unrealistic/unworkable and the public mood is shifting because we are not seeing the benefits from the sacrifices the Government asked us to take.

Especially compared to Australia who adopted more targeted lockdowns.

Of course, the NZ Government’s retort to the greater freedoms seen in Australia is that we do not have a Melbourne catastrophe, therefore our response is superior. Slack quarantine control allowing the virus to spread like wildfire in the immigrant communities of Melbourne was unfortunate luck. Perhaps we have had more luck in comparison.

Outside of the Melbourne situation, the Australian economy has benefited from Chinese infrastructure spending, resulting in booming mining prices, cashflows and profits.

The Australian economy contracted by 7% in the June quarter. This Thursday 17th September we get to see how the New Zealand economy compares to that number. It will not be pretty reading with prior GDP forecasts being something of a crapshoot between -10% to -13%.

The more severe lockdowns and foreign tourism being a larger proportion of our economy compared to Australia will explain our inferior result.

Quite rightly, a lot of folk will be asking whether our “health first” strategy has delivered the results expected or did we get the balance between health and the economy somewhat skewed?

Whilst the game of rugby is not everything in life, it does have a disproportionate influence on public attitudes and confidence in New Zealand.

The Aussies stealing away a revenue-generating rugby tournament from us because they are more prepared to accept a balance between risk and reward than the NZ government, will not be going down too well in heartland New Zealand.

Double standards from the bureaucrats around who can come into New Zealand and who cannot, is also adding to the growing disenchantment in business circles in respect to the Government’s handling of the health/economic crisis.

RBNZ continues to toy with the negative interest rate experiment

The contrasts between New Zealand and Australia at this time do not stop at GDP growth and rugby tournaments. The two central banks are at odds with each other in respect to the need for, and likely effectiveness of negative interest rates to stimulate economic recovery.

The RBA has ruled out negative interest rates as ineffective, Adrian Orr at the RBNZ still likes to dangle the carrot to the markets as he sees it as a method to keep the NZ dollar lower than where it would otherwise be.

As Westpac NZ CEO, David McLean adroitly pointed out last week, negative interest rates are likely to cause unintended opposite consequences as deposits are withdrawn from banks (no return) and the banks are unable to lend as much.

In any case, as this column has previously highlighted, corporate New Zealand is not prepared to increase their debt levels no matter what the interest price.

The banks not prepared to lend due to their credit and funding constraints and business borrowers not wanting any further debt until the future is more certain does not add up to negative interest rates achieving the desired stimulation to investment, output expansion and more jobs.

The arguments for the necessity of negative interest rates sometime next year seem to be based on some monetary professors engulfed in a mad experiment or they really believe the NZ economy is headed into a deep dark hole of depression.

My view is that the RBNZ will be forced by the more positive economic evidence to abandon such talk of the need for negative interest rates by December/January and when that happens the Kiwi dollar will receive a boost upwards on its own.

Compared to the AUD, the NZD is currently being artificially and temporarily suppressed by the differing approaches to likely future monetary stimulus tools to be used by the RBA and RBNZ.

The local interest rate markets have started to price-in negative yields in the wholesale forward markets because the banks always believe that the RBNZ’s view on the economic outlook will be accurate. That belief seems misplaced given the RBNZ’s recent poor track-record in forecasting future economic conditions e.g. in August 2019 they sashed the OCR by 0.50% in expectation of a major economic slowdown – they were wrong and by November 2019 and February 2020 they were forced to produce more upbeat assessments of the economy.

Political and tech stock risk loom for the Kiwi dollar

The level of political risk as a negative for the NZ dollar has reduced somewhat with the Green Party shooting themselves in the foot (alongside the National Party with their previous leadership changes) and thus the probability of Labour/Greens coalition government has fallen away.

A clear-cut Labour-only Government after 17 October would be seen by the FX markets as a “status-quo” result and thus neutral for the NZ dollar. Protracted post-election haggling by Labour over policy concessions to form a coalition government with minority parties would be unsettling for the FX markets and likely to send the Kiwi dollar lower.

How the US dollar itself reacts to political outcomes in the US Presidential election will also be fascinating to observe come early November. An unclear result on the night due to vote counting botch-ups between postal and polling booth votes or The Donald refusing to depart the White House would send the US dollar lower. Potential escalating civil unrest in the US would also impact negatively on investment and currency markets.

The short-term prospects for the Kiwi dollar still appear to be on the downside with the GDP contraction hitting the newswire headlines this week and the wild daily volatility up and down in the US technology stocks signalling an end to their bull run. Lower equity markets in the lead up to the US election fit into the view that the NZD/USD rate will move lower over coming week/months before it moves higher on a weaker US dollar in 2021.

*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.