By Gareth Vaughan
He made headlines in January for saying the New Zealand economy would be the rockstar economy of 2014. And now Paul Bloxham, HSBC's chief economist for Australia and New Zealand, is at it again.
Bloxham told interest.co.nz in a Double Shot interview the New Zealand economy was more likely to be a rockstar with staying power than a one hit wonder, but the Reserve Bank needs to increase the Official Cash Rate (OCR) to prevent the rockstar getting addicted to cheap credit. The Sydney-based Bloxham also said we need to get used to a "structurally stronger" New Zealand dollar, but shouldn't be too worried about our current account deficit.
Asked to what extent he ascribes this rockstar status to good things in the New Zealand economy, and to what extent it's due to poor performance by other economies, Bloxham said it was a combination of both.
"OECD economies are still struggling after the GFC (global financial crisis), particularly the advanced world, and New Zealand is picking up pace. So it is a combination. If you look across the range of OECD economies, the developed world economies, we think New Zealand will be up in the top four performers across the OECD economies this year. And that's why we've been calling it the rockstar economy of 2014," Bloxham said.
Canterbury rebuild investment almost as significant as Aussie mining investment
He sees three key factors driving the New Zealand economy. The first is the post-earthquake Canterbury rebuild, which is "enormous."
"The RBNZ's own estimates suggest that it's going to be 20% of GDP. If you compare that to the size of the mining investment boom in Australia, it's a similar sort of size. If you add up all the mining investment that has happened in the last eight years in Australia, it adds up to about 26% of GDP. So we're talking about a rebuild story that's almost as big as the mining investment boom, which has been a huge story for Australia. So you can say New Zealand is at the beginning of this whereas Australia is, of course, at the end of their mining investment boom," Bloxham said.
The second big factor is dairy prices. In HSBC's report 'New Zealand in 2014, firing on all cylinders', Bloxham and his colleagues make the point that dairy prices rose 50% in 2013. Alongside rising meat and forestry prices, this pushed the country's terms of trade - the value of New Zealand's exports relative to that of its imports - to a 40 year high.
China is the key market for dairy products. Since 2008 the share of New Zealand dairy exports going to China has surged to 36% from just 4%. And on the other side of the coin, New Zealand accounts for 60% of China's dairy product imports.
"Dairy prices are at very high levels and that's supporting rural incomes. the terms of trade's at its highest level in 40 years, and we think those trends are going to be sustained. We think the demand for dairy products and meat products is going to be sustained as middle class incomes rise in China. That story has a lot of support and is going to persist in our view," Bloxham said.
Housing boom spreads
The third factor is low interest rates. Aside from the period between June 2010 and March 2011, the OCR has been at a record low of 2.50% since April 2009. Bloxham points out this has supported the housing market.
"You have a housing boom and it's not just happening in housing any more. You're seeing that pick up in house prices is flowing through to consumer confidence, it's flowing through to quite strong growth in retail sales. And you'd expect to see more of a pick up in consumption soon," Bloxham said.
Nonetheless Bloxham notes managing a rockstar isn't easy.
"You wouldn't want your rockstar economy to become addicted to low interest rates," he said. "Interest rates will need to rise fairly soon and we've got in mind that they (the OCR) will rise by 100 basis points this year, and another 100 basis points in 2015."
Asked what sort of impact OCR rises of this magnitude might have on the economy, Bloxham said they would help slow down the housing sector where, according to Quotable Value, the average residential property value rose 9.6% nationally in the year to January and 14.5% in Auckland.
"It will help to slow down the housing sector, it will help to contain some of those pressures that are building within the domestic economy. Of course one of the other things that it will do it will probably provide continued support for the New Zealand dollar, and that's one of the things that has really worried the RBNZ. In our view it has probably worried the RBNZ a bit too much in the scheme of things," said Bloxham.
"A high New Zealand dollar at the moment reflects the fact that the economy is doing well, that it's doing better than others, that it is looking as though it's going to be an outperformer when you look into 2014. And we think that New Zealand dollar is going to stay high. We think it's just something that you have to get used to. That the New Zealand dollar is probably going to stay structurally higher than it has been in the past as a consequence of the outperformance of the New Zealand economy."
Surpassing parity with the Aussie dollar?
In fact HSBC sees the Kiwi dollar reaching US87 cents by the end of 2014, and suggests it may "surpass" parity with the Australian dollar.
"It's our central case that as the RBNZ starts to lift interest rates and the economy continues to show signs of strong growth, the New Zealand dollar will appreciate a bit further from here. And at the same time, we're a bit more down beat on the Australian economy. Things have slowed down a bit, mining investment is going to peak and is going to start to fall into 2014. So we have in mind that the Aussie dollar might actually come down a bit," said Bloxham.
"The combination of those two factors means, of course, that we think the New Zealand dollar may get to Aussie dollar parity sometime later this year. We think that might happen. In fact it's our central case. And indeed that would be the first time in 40 years that the New Zealand dollar got through Aussie dollar parity."
'Current account deficit apparent not for reasons you should get too worried about'
New Zealand's current account deficit doesn't get a mention in the HSBC report. And Bloxham said he doesn't necessarily see it as a big issue.
"The reason why you've got a large current account deficit is partly because investment is running well ahead of saving," Bloxham said. "So you've got quite a bit of investment going on, a ramp up going on in Canterbury and investment in the economy more broadly, and you don't have enough savings to provide all that investment."
"So I think the current account deficit is apparent not for reasons you should get too worried about. But saying that it is worth keeping in mind that New Zealand's saving rate overall is not that high. So it should be a priority of policy makers to find ways to encourage an increase in saving within the economy."
"The Government itself is doing some of that. We know the Government is headed toward budget surplus, and they look on track to achieve their objective of getting there fairly soon. So that's helping to fix up the saving situation. But I think you still need to see more private sector saving within the New Zealand economy. So in the medium term that current account deficit is sustainable, and also potentially a bit smaller than it is right now," Bloxham said.
"But overall I don't see it as necessarily a big issue because largely it reflects that investment is running ahead of saving, you just haven't got enough saving to do all the investment you want to do."
The current account deficit was NZ$8.8 billion for the year to September 2013, equivalent to 4.1% of Gross Domestic Product.
'Auckland housing market not a bubble yet'
In terms of the Auckland housing market Bloxham said he doesn't see a bubble, - yet.
"At the moment you could justify what's going on in the housing market largely on the grounds of fundamentals. Supply is weak, you haven't been building a lot of houses here in Auckland in recent years, demand is fairly strong for a number of reasons including a pick up in inward migration. So strong demand, weak supply drives up prices. And then combine that with the fact interest rates are very low and have been for quite some time."
"I like to think that it's going to be a sustained story, that it's going to be more like Mick Jagger than Justin Bieber. I like to think that's the way it's going to play out," he said.
"The reason why I think that's the case is because you've got some fairly good fundamentals. And taking the broadest view of those fundamentals is to say New Zealand has got very strong ties to the Asian economies and those ties are growing, and the Asian economy is growing much faster than the western world. And of course they've got a long way to catch up yet."
"It's still the case that the bulk of the population in China is poor and living in the countryside and needs to move to the cities. And as that happens, as that process continues, as GDP per capita rises, that will mean that there will be shifts in diet, shifts in the sorts of services that are consumed. And I think New Zealand, and Australia as well, are right on the door step of this story (with) very strong ties to the countries that are going to grow most quickly," said Bloxham.
"So taking advantage of those things is, of course, a challenge and policy makers need to keep that in mind. There are going to be continual challenges as the economy changes structure to take advantage of the emergence of Asia. But I think those strong ties to Asia do mean that you should be fairly optimistic about the outlook for New Zealand.
Risks in China
In terms of China HSBC expects its economy to expand by about 7.4% this year, although Bloxham acknowledges risks.
"Chinese policymakers are very focused on issues within their shadow banking system. They're well aware that their shadow banking system has expanded more rapidly than they're comfortable with. And they're looking for ways to try and tighten up financial conditions outside of the banking sector in the shadow banking system, and see more of that credit brought back onto the balance sheet of the banks."
*ANZ chief economist Cameron Bagrie also used the rockstar label for the New Zealand economy last year.