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Capacity constraints in the New Zealand economy would hinder any future fiscal stimulus plans according to S&P Global Ratings

Capacity constraints in the New Zealand economy would hinder any future fiscal stimulus plans according to S&P Global Ratings
Auckland's City Rail Link (CRL) is the biggest transport infrastructure project in New Zealand history and is expected to be completed in 2024.

S&P Global Ratings’ Martin Foo says attempting to use fiscal stimulus to boost the New Zealand economy would be hampered by capacity constraints in key sectors like the construction industry and limit its impact on growth.

Foo is S&P’s Melbourne based associate director of sovereign and international public finance ratings and was speaking at its New Zealand Credit Outlook 2019 event on Wednesday. He says New Zealand’s economy remains strong despite global headwinds and the ongoing US-China trade war.

“We see the New Zealand economy as having strong fundamentals,” Foo says.

He says with GDP tracking at 2.5%, a low debt to GDP ratio, a flexible exchange rate and strong institutions, things are still looking pretty good. Foo says the economy’s biggest weaknesses are our ongoing current deficit and our reliance on commodity based exports.

Global headwinds and fiscal stimulus

But with the Reserve Bank of New Zealand (RBNZ) last month cutting the OCR to a record low of 1% and talk of further cuts on the horizon the media is awash with pundits talking about potential alternatives as the RBNZ runs out of options. Something Foo is more than aware of.  

He says there have been a number of commentators recently calling for increased Government fiscal stimulus to boost the economy, but he says Finance Minister Grant Robertson has so far pushed back against such demands.

“So we’re not sure if that’s something we’re going to see in the mid-term,” Foo says.

Capacity constraints

And there are a number of reasons for that, including the ability of businesses in the construction sector to meet the increased demand.

“Broadly speaking we do see significant capacity constraints across New Zealand. We saw it in 2018 when the Government actually struggled to get money out the door. If you look at the budget outcomes, the amount of capital spent and actually delivered, against what they actually budgeted for, it was significantly less and that actually helped the [Government’s] budget position."

Foo says S&P Global Ratings generally expects the Crown to under deliver on its projected capital spending and factors such limitations into its forecasting.

“If you look at what is happening around the country, some examples like what is happening with KiwiBuild, or with the slow progress in rolling out the Provincial Growth Fund, it does suggest that it is actually quite difficult.

“But I think if the Government were to look at fiscal stimulus [for infrastructure spending] you would hope that they were starting look at some projects right now and they’ve got a list in the bottom draw somewhere of projects that are shovel ready. And that are probably smaller in scale and that they can get out the door quickly. But I think it will be a challenge.”

Thoughts shared by S&P Global Ratings senior director of infrastructure ratings Richard Timbs who says the issue facing the New Zealand Government is actually being able to deliver the projects.

“Well I think the story here is similar to what it is in Australia. There probably isn’t a lot of capacity in the construction industry to do a lot more.”

Global outlook

S&P Global Ratings’ latest sovereign outlook update on New Zealand was in January where it was given a positive outlook, up from stable. It also reaffirmed its "AA/A-1+" and "AA+/A-1+" foreign and locally-denominated credit ratings for New Zealand’s sovereign (Government) debt.

An S&P Global Ratings outlook assesses the potential direction of a long-term credit rating over the intermediate term (typically six months to two years). In determining a rating outlook, consideration is given to any changes in economic and/or fundamental business conditions.

Foo he says what has changed since the last update in January is the weakening global outlook driven by the US-China trade war. He says this is reflected in weakening data for manufacturing and exports around the world.

“We see the number one global risk is the US-China trade tensions and we don’t see any resolution to that anytime soon.”

In the face of these headwinds the Reserve Bank of New Zealand last month cut the OCR by 50bps. While around the world in recent months there has been cuts by the Reserve Bank of Australia and the US Federal Reserve, along with further easing in Europe.

S&P Global's US Business Cycle Barometer was released this month and says there is now a 30% to 35% chance of recession happening in the US during the next 12 months. This was up from 25% to 30% in the previous quarter. But despite the report's findings S&P Global Ratings’ global chief economist Paul Gruenwald said there was still grounds for optimism. He said last month that the fundamentals of the world’s major economies were still sound despite the fact the United States-China trade war is continuing to fuel international uncertainty.


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The government could reduce building constraints by carrying out their unfulfilled promise to open up land for construction. However they were elected on 2 long years ago and it is extremely unlikely they will. So instead they shall slash interest rates and make it easier for people to borrow more money. This will expand the economy by inflating asset prices.

Worked for National.

It is a sad state of affairs but any central government policy which reduces house prices (by increasing the supply or any form of CGT or LVT) would be the death of that governments re-election chances.

The housing / residential investment property as a pathway to wealth in this country has caused many to have a vested interest (including many property spruikers who comment on this site), its become an embedded part of the culture of New Zealand no matter how toxic it is. It no longer matters to this group that the current status quo is significantly detrimental to country, economy and future generations, they have theirs so don't give a shit about anyone else, also worth mentioning at that this group forms the largest voting block in NZ. There are a number of ways to address this (including the option of opening up land for construction that you mentioned) but all of which are politically unpalatable due to this vested interest.

Well put. So realistically the only way the issue will be 'resolved' is through a market crash.

This is exactly the reason why the government can't concede on its immigration numbers, as we need the labour force to be able to do the work..

BUT as long as the new entrants are in the construction sector

Not a single construction trade or profession features on the top 10 occupations to which work and resident visas were given out in the last 3 years combined.

We keep bringing more people that fit into the demand side of housing rather than those who can help alleviate supply constraints.

Where did you get that breakup from?

Technicians and trade workers are the highest category

Cooks and chefs are also considered trade workers.
ICT support workers are classified as technicians.

Maybe go through the effort of reading up on the published figures before posting comments.

Ok, I got the overall category wrong.

Pragmatist, has provided the breakup.

So why don't you focus on the detail rather than preaching to others

Having had a scroll thru the occupation stats, i'm not sure its quite as bad as you make out. Building trades and related workers are scattered through several different occupation names, but if you add them up there are quite a few that are in the building related occupations.

398 Painting trade workers, 295 Plumbers, 65 Plumbers assistants, 785 Metal fabricators, 450 Mechanical Engineers, 310 Mechanical Engineering Technicians, 177 Excavator Operators, 414 Earthmoving Plant operators, 625 Electricians, 367 Construction Project Managers, 343 Concreters and another 80 Concreting related occupations, 2662 Carpenters, 560 Builders Labourers, 427 Building and Engineering technicians.. Just shy of 8000 in that lot, and there are more that I could pull out as construction related.

Certainly agree that we could put a line through a pretty good chunk of the 2670 Retail supervisors & 1686 Retail Managers, and 1527 Cafe Managers, and 4127 Chefs..

Thanks for that link, that's what I noticed too..

We need all the help we can get in building those houses

and its still hard to find a good mechanic in Jaffa town

The overall immigration volume could be drastically reduced while still increasing the number coming in for construction. Instead, we prop up otherwise non-viable hospitality businesses with cheap, easily exploitable labour. Recall the last year of National, I think it was, only a hand full of entrants were related to construction.

When the current construction boom crashes it will free up a lot of labour. But failing that all the retail managers can just sell shit to each other, and all the baristas can make each other coffee, problem solved.

I suspect the real headwind in any form of construction project would be the relocation of the workforce, and any such locations affect on the real estate prices from where they moved from. Some dislocation coming either way.

There's a clear relocation to Wellington, question is from where.. we know that Auckland is suffering a net loss from regional migration...

Well I doubt it is Auckland to Wellington. Aucklanders are too stupid to know a good city, hence why they are moving out.

I guess one up side of having a huge labour force here on work visas is if there is a downturn they can depart when their visas expires, thus removing excess labour. In the past during downturns, Ozzie picked up our excess labour but now that road has been made more difficult (due to successive governments loose immigration policies provoking a backlash from Australia) less are likely to head there and rather stay here to collect the dole - or do the fruit picking, cow milking, liquor selling etc that is currently done by what is often essentially indentured labour.

The curious aspect about our stimulus attempts is that its all aimed at construction, which in the NZ context is a ridiculously inefficient sector to prop up with our tax dollars and it is already constrained so leave it be. I think we should be doing a lot more with helicopter money and debt relief. Hell, if you can give a millionaire 66 year old super annuation why can't you give a student their loan balance wiped or someone with fines a clean start too? It all puts money into peoples pockets and helps the economy.

Cue Boomer outrage over that comment!

It's like Monty Python's Four Yorkshiremen Sketch.

You just set off the boomer sirens

When you have capacity constraints for Government spending (I don't think all options have been explored) then you use other options. Debt write off or just putting money in people's accounts (the same as Australia) with instructions to pay off debt or spend it. People will find ways to spend money that they have, and eliminating debt puts the population in a better position going forward.

There are plenty of tools available. ZIRP and NIRP need to be avoided at all costs.

"Strong fundamentals and institutions"
Like? A government insurer that lies to earthquake victims and gives bill to taxpayers.
Draghi is saying we need more fiscal stimulus. The guy says it's not possible.
NZ does not have "strong fundamentals". It is a FIRE economy and depends on ever increasing debt, the pace of increase of which is stalling, hence the daft rates we are being offered.
Deflation first, then large inflation coming.

WE DO NOT NEED FISCAL STIMULUS in the event of a downturn.......... we all know you cannot get a tradie in to even change a light fitting .

Instead we need to harness and use our natural (or self created) competitive advantages as a growth mechanism and diversify

We could give tax breaks to IT development companies to set up shop here , and bring theier skilled staff to work here ............its been done in Ireland and Silicon Valley

We could establish Auckland as a stable well- regulated Financial Centre ............ think Sydney , Hong Kong , Singapore , Geneva , Frankfurt ............... These are all well known as Forex centres , Banking centres and investment house bases for pensions and Mutual fund managers ............

We have done it for the movie industry ............ so what is holing us back ?

We have a highly skilled well educated population , a robust legal framework , independant judiciary , strong Reserve bank , we are the least corrupt business environment on the planet , we speak English we have fibre to the door , soon to have 5G , we are conveniently positioned for times zones in Europe and the US . We have a reliable source of electricity , and plenty of water , more food than we can eat .........

We are as about as neutral as Switzerland , and so far away from conflict zones that no one can even get here if they wanted to .

Its time to diversify away from being a low -wage economy ............ milking cows , cutting trees and working as chefs and waiters for our tourism sector is not a long term career prospect .

"Its time to diversify away from being a low -wage economy ............ milking cows , cutting trees and working as chefs and waiters for our tourism sector is not a long term career prospect ." I agree.

"We could establish Auckland as a stable well- regulated Financial Centre ..s Forex centres , Banking centres and investment house bases for pensions and Mutual fund managers "
Yeah, nah. How bout we do things high tech and productive, improve the lives of everybody rather than arbitrage. We need some financial services, but i'd rather build an economy on improving peoples lives.
More RocketLab, Less Goldman-Sachs.

Capacity constraints but no inflation - please explain?