US growth slows quickly, especially business investment; Chinese profits fall, investment under pressure; big rise in household debt; Aussie houses selling faster; UST 10yr yield at 2.07%; oil unchanged & gold up; NZ$1 = 66.4 USc; TWI-5 = 71.6

US growth slows quickly, especially business investment; Chinese profits fall, investment under pressure; big rise in household debt; Aussie houses selling faster; UST 10yr yield at 2.07%; oil unchanged & gold up; NZ$1 = 66.4 USc; TWI-5 = 71.6

Subscribe to our daily podcast here.

Here's our summary of key events overnight that affect New Zealand, with news investment levels are falling in some of the largest economies in the world.

But first, the US economy grew +2.1% in the second quarter of 2019, far slower than the +3.1% growth rate in the first quarter. But is was better than analysts were expecting (+1.8%). Still, this is the second slowest rate of expansion for the Americans since the end of 2016 and validates IMF and World Bank forecasts that this giant economic engine is slowing. Holding the rate up was strong consumer spending. However, other economic activity was as weak, or weaker, than preliminary estimates forecast. That includes exports, and especially investment, which is something serious to watch.

Staying in the US, new data shows that their home ownership rate at 64.1% just isn't improving. They have a unique inhibitor in their student debt levels. They had a rate touching 70% just prior to the GFC but it has atrophied since. The equivalent New Zealand home ownership rate is 62.3%.

In Washington, the US President has come down on the side of the tax-dodging US tech giants, threatening to tariff French wine if the French go ahead with their digital services tax. President Macron then signed the French law.

But the influence of US policy moves, especially sanctions, are being increasingly discounted. China for example is still buying Iranian oil despite those American sanctions.

Meanwhile, Chinese industrial profits are falling. Demand is falling. And that will mean new investment will be under pressure. It has an uncanny similarity to the sharp investment slowdown in those latest US GDP results.

And ordinary people in China are no longer feeling lucky. It turns out China's lottery sales fell -40% year-on-year in May.

In Western countries - and New Zealand is no exception - it is common to publicly fret about high household debt levels. But these levels have been stable or declining in many. New Zealand for example has had broadly stable overall debt levels since 2007. In 2007 household debt was about 73% of GDP; by 2018 it was still 'only' 75%. In the US it has fallen from 98% to 78%. But in developing countries, especially China, it is rising toward Western levels. China's household debt load over the same time-frame has gone from 18% to 55%. Thailand has gone from 45% to 72%. Malaysia from 50% to 66%. And South Korea from 72% to 98%. While many of these are still lower than countries like New Zealand, it is the rapid growth to new high levels that may leave them with a more severe hangover because they don't have a flexible exchange rate. Pegged rates require rapid use of reserves to maintain stability in the short-term. As the international economy cools and new investment pulls back, these new higher household debt levels will get serious risk scrutiny.

In Australia, weekend house auction clearance rates are up. In Sydney they came in at 73% (compared with 49% in the same weekend in 2018). In Melbourne it is 74% (compared with 53% last year).

The UST 10yr yield is now at 2.07% and a +2 bps rise over the week. Their 2-10 curve is slightly flatter for the week, now at +21 bps and their negative 1-5 curve is at -14 bps. The Aussie Govt 10yr is at 1.23%, down -13 bps for the week. The China Govt 10yr is up +1 bp for the week to 3.18%, while the NZ Govt 10 yr is now at 1.54%, a -6 bps fall on the same basis.

Gold is now at US$1,418/oz which is a -US$4 slip for the week even if it was up slightly in final trading from the prior day.

US oil prices are little-changed today. They are now just over US$56/bbl. The Brent benchmark is also little changed at just over US$63.

The Kiwi dollar starts the new week softer at 66.4 USc which is actually more than -1c lower than this time last week. On the cross rates we are firm at just over 96.1 AUc. Against the euro we are down to 59.6 euro cents. That eases the TWI-5 back to just on 71.6 which is nearly -100 bps lower than a week ago.

Bitcoin opens at US$9,534 and that is down nearly -10% for the week. The bitcoin rate is charted in the exchange rate set below.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

Daily exchange rates

Select chart tabs »

The 'US$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
Loading...
USD 
NZD
End of day UTC
Source: CoinDesk

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

37 Comments

Comment Filter

Highlight new comments in the last hr(s).

Ip made the argument, that really should be uncontentious, that on current policies and institutions, the People’s Republic of China is unlikely ever to catch up – in productivity or per capita income terms – with the advanced countries, whether in Europe, east Asia, or North America.

An unfortunate statistic which fails to show the share of income actually received by individuals within different social cohorts. Forbes magazine headlines such as The 3 Richest Americans Hold More Wealth Than Bottom 50% Of The Country, Study Finds expose the 'Damned Lies' part of the saying "There are three kinds of lies: lies, damned lies, and statistics."

It may be worth considering the context of this in terms of energy consumption, non-renewable that is. Could productivity per capita suddenly decline in its absence? Rather than China having to catch up, the world may come back to match them. But how would China cope in the same scenario?

10
up
12
up

Seeing more and more articles from around the world about NZ property and none are positive.

Feels like Ireland pre-crash.

Yes. And they are very objective with no vested interest.
Now, who would you put more stock in, them or the vested interest spruikers here?

Not 1st places to be proud of!!!!

The houeshold debt to GDP doesnt look too bad but I wonder if alot of that debt is owed by a small % (for example 70% of the debt is owed by 40% of households) ??? Does anyone have that type of data?

I recently saw a survey where around 15% of NZs mortgage holders were struggling to pay their mortgage payments

RBNZ had this to say:

The proportion of risky borrowers in the household and dairy sectors appears relatively high. Around two-thirds of households have no mortgage debt, but nearly 40 percent of new mortgage loans are to borrowers with DTI ratios above five. In the dairy sector, 35 percent of debt is to highly indebted farms, defined as farms with more than $35 of debt per kilogram of milk solids produced annually. However, less than 5 percent of loans to the commercial property sector are to particularly risky borrowers, suggesting debt is fairly evenly distributed across the sector. Link-page 7 (13 of 48) PDF

Moreover, the households with mortgages DTI(disposable) ratio increased marginally to a record high of ~320 percent at the end of 2018 (figure 2.3). Link-page 8 (14 of 48) PDF

Nice! thank you

RBNZ Nov 2018 stability report states:

When compared to other countries, New Zealand’s household sector
carries a high level of debt relative to its income. Debt in the sector is
concentrated within certain types of borrowers.
The most indebted households are typically those with mortgages.
These households tend to have higher-than-average incomes, but
have far higher levels of debt. Their debt-to-disposable income ratio,
at 325 percent on average, is near its historical high. Debt is further
concentrated among those households with investment properties,
those who have had less time to pay down debt, and those who have
purchased in regions with relatively high house prices, such as Auckland
(figure 2.1).
The most vulnerable borrowers have debts that are large relative to both
their incomes and the value of their assets. Only 1 percent of the value
of new mortgages is to borrowers with both DTI ratios above six and
LVRs above 80 percent (figure 2.2), but over a third of borrowers look
vulnerable on at least one of these metrics.

So a third considered vulnerable, that is quite high,

thanks for the info

Apparently scratching their heads in utter confusion like all other central banks, and asking"wHy Is ThErE nO iNfLaTiOn?"

Similar story across much of the West: housing costs up, fuel costs up, medical costs up, education costs up, wages flat; while central bankers wonder why discretionary spending is falling!

Easy! everyone is skint and debt loaded!

There's the trend here somewhere. "The greater the degree of government involvement in the provision of a good or service the greater the price increases over time, e.g., hospital and medical costs, college tuition, and childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices.

Price indexes for selected goods and services, January 1998 to June 2019
https://www.aei.org/publication/animated-chart-of-the-day-price-indexes-...

That's a rather shallow interpretation, given countries with social healthcare spend far less per person and as a percentage of GDP on healthcare and at far more financially accessible levels for the people of said countries. It also misses the fact that much of the problem in the USA is due to the effects of regulatory capture, i.e. the disproportionate influence of companies via their "donations" to congress people. Hardly government of the people, by the people and for the people.

College tuition again...an exploitative intergenerational set-up driven by the turning of colleges into for-profit industry based on easily accessible non-dischargeable debt.

Not shallow at all, quite robust in fact, when you compare government medicine to private out of pocket plastic surgery prices which haven't even kept up with inflation. "The unweighted average price increase between 1998 and 2018 for the 19 cosmetic procedures displayed above was 34.3%, which is far below the 54% increase in consumer prices in general over the last 20 years. ...none of the 19 cosmetic procedures in the table above have increased in price by anywhere close to the 110% increase in the price of medical care services or the 202% increase in hospital services since 1998."
https://www.aei.org/publication/what-economic-lessons-about-health-care-...

Err the keyword there is "cosmetic" an obvious cherry pick, such procedures are elective so they must price to what people can afford, unlike care that relates to your actual health.

Quite unnerving, I saw DFA reference that too over the weekend.

Interesting bit of protectionist mud slinging between the big bullies:
Depending on the nature of the wine and its alcohol content, at the US border imported wine is dutiable at a rate of 5.3 cents to 12.7 cents per 750 ml bottle, according to the US International Trade Commission. Bubbly is taxed a higher rate of about 14.9 cents a bottle.

On the other hand, according to the Wine Institute, a trade body promoting American exports, US wine entering Europe faces duties ranging from 11 to 29 cents per bottle depending on alcohol content.

https://www.france24.com/en/20181114-fact-check-does-france-put-steep-ta...

Student debt to GDP United States 1.52 trillion , 7.5 percent GDP . New Zealand , Student debt 16 billion , 5.5 percent GDP.

Student debt acknowledged to be a handbrake on home ownership in the USA. I wonder what sort of similar effect we might have in NZ.

The US GDP aggregate for corporate bottom lines is now thought to be a whole lot less especially over the last year and a half...

Valuations are way, way out of line except in comparison to the dot-coms – precisely because like the late nineties there has been no profit growth. Investors have been betting, and continue to bet, that the economy eventually booms. The E part of PE, the thinking goes, will rise to meet the exceedingly high level of P at some point.

Share prices rebounding from the landmine are staking everything on rate cuts to be the answer – even the initial bet on QE3 and QE4 hasn’t panned out. These vulnerabilities are a lot deeper than 25, 50, or even 75 bps on fed funds. Link

11
up

For the early part of New Zealand's history , well until March 2009, when outstanding mortgage debt was in the region of 160 Billion, New Zealand had put 1,055,900 households into owner occupied housing. In the following decade, until March 2019 ,with the net addition of a further 160 Billion in mortgage debt, we have only added a net 42800 owner occupiers , about 4280 a year.

To think, NZ's governments used to expend effort to make home ownership more accessible.

I wonder what the property portfolios of MPs were back then.....

According to this article, South Korea is a developing nation but NZ is developed. Right!

Our GDP per capita is 40% larger than theirs. Perceptions are funny things, aren't they?

GDP per capita isn't a development metric. Qatar has the 6th highest GDP per capita in the world with Ireland at number 4. I don't think either of these countries is more "developed" than Netherlands and Sweden at number 12 and 15 respectively.
We lag behind SK in terms of % of STEM qualifications, R&D expenditure as a % of GDP, tertiary educational attainment, infrastructure investment per capita and export complexity. I believe your income difference perception won't last for more than another half a decade.

FYI, when looking at GDP per capita, Purchasing Power Parity (PPP) is a much better metric than nominal, where SK is ranked higher than NZ. Every US$ you earn in SK goes much further than in NZ.

Into concern to "fretting" about debt levels remember people make money and gain power by peddling fear.

There is a lot of money in fear - insurance is creaming the runaway global warming fad.
"Helping to boost reinsurance returns on equity (RoE), insured catastrophe losses have fallen to their lowest level seen since 2006 in the first-half of this year, according to broker Aon.

Only $20 billion of insured losses were sustained by the public and private insurance and reinsurance market during the first-half of 2019, meaning that all major regions are now well below average, in terms of half-year cat losses, Aon said."
https://www.artemis.bm/wp-content/uploads/2019/07/first-half-catastrophe...
https://www.artemis.bm/news/insured-catastrophe-losses-in-h1-2019-lowest...

Yes, but in NZ most of that peddling of fear has been to try and convince people to load up on debt and jump into the housing market. Fear of missing out on tax free capital gains, fear of rising rents (etc etc). When Banks are making 5 billion a year in after-tax profits, and around half of household wealth is locked up in housing, I suspect there has been far more money made spreading these fears than anything you describe.

I'd be interested in hearing your concrete examples of how people are making money by spreading fear of debt levels.

How to save for a baby boomers house. "Bugha Dominates The 'Fortnite' World Cup Solos To Take Victory Royale And $3 Million"
https://www.forbes.com/sites/davidthier/2019/07/28/bugha-dominates-the-f...

From nanny Herald this morning ...

"The number of super-rich earners on the New Zealand taxman's radar has skyrocketed in the past five years with 350 people now worth more than $50 million — some of whom are in a fight over more than $85 million in disputed tax."

If only 350 people in the whole country are worth 50mm bucks then it stands to reason that Auckland property has a LONG LONG way to fall.

Those Chinese lottery stats are fascinating, perhaps suggesting things are a lot worse than the authorities let on?

Maybe its because 2018 had an '8' in it and 2019 doesn't?

Good point, lots of Chinese believe in that superstitious nonsense. We need to see 2017 to gauge whether there was a huge spike in 2018 due to superstition.