Finance Minister rejects calls for fiscal stimulus in the face of latest dairy slump; says GDP growth softening to 2.0-2.5%, but says automatic stabilisers of lower OCR and NZ$ is best response for now

Finance Minister rejects calls for fiscal stimulus in the face of latest dairy slump; says GDP growth softening to 2.0-2.5%, but says automatic stabilisers of lower OCR and NZ$ is best response for now
Finance Minister Bill English talking to reporters in Parliament on June 19. Photo by Lynn Grieveson for Hive News.

By Bernard Hickey

Finance Minister Bill English has rejected growing calls for fiscal stimulus to soften the economic blow from the collapse in dairy revenues, saying the Government would rely instead on the automatic stabilisers of a lower Official Cash Rate and a lower New Zealand dollar to support growth.

English told reporters in Parliament that GDP had softened towards the 2.0-2.5% level because of the fall in dairy prices, but had not fallen far enough for the Government to justify any sort of Government spending response. He said Treasury was monitoring the situation and would formulate various scenarios and options as part of its usual policy advice process, but the Government was not actively considering any fresh stimulus at the moment.

ANZ Chief Economist Cameron Bagrie has called in recent weeks on the Government to consider a 'Plan B' to bring forward infrastructure spending and Federated Farmers called on Friday for an acceleration of Government infrastructure spending on roads and irrigation projects in the regions.

Elsewhere, Labour Finance Spokesman Grant Robertson also called for the Government to launch new spending on infrastructure and new housing to stimulate the economy.

The comments came as Westpac Chief Economist Dominick Stephens issued a quarterly forecast that unemployment would rise to 6.5% and that the Reserve Bank would have to cut the OCR by a further 100 basis points to 2%.

English downplayed Stephens' forecast, saying it was just one of many forecasts and was significantly more pessimistic than most. He said there was not a risk of recession.

"There's not much doubt that the economy has softened a bit. The impact of the lower dairy prices and a slowdown in Christchurch. They're softening an outlook that was for 3.0% to 3.5% growth and now looks more like 2.0% to 2.5%," he said.

He said the Government was not looking to change its strategy.

"We think the right adjustments are happening. You've seen a drop in the exchange rate and interest rates falling when everyone expected them to be rising. You're getting the right kind of adjustments that are going to both cushion the negative affects of the industries under pressure, but also provide a bit of a boost for the rest of the export sectors that's going to benefit from a weaker New Zealand dollar," he said.

English said it was "possible unemployment could pick up a bit" because of New Zealand's high labour force participation rate, but that the threshold for low growth requiring stimulus was "quite a bit lower than where we are now."

"There's still plenty of room for further adjustment that would have a more direct impact, and that's around further depreciation of the exchange rate, further drops in interest rates. Given our debt objectives, we'd be reluctant to reach for the fiscal lever rapidly when there's other tools there that can have a more direct affect," he said.

"In a situation where unemployment was heading to 6.5% I think you'd see interest rates and exchange rates responding to that in a way that can have a pretty direct affect on businesses."

"The economy is softening a bit. We're on track around sustainable moderate growth of 2 to 2.5% and there's no particular reason to grab other levers that might create other risks just now."

'Dairy a vigorous, confident industry'

He said the Government had not seen any case for Government support for either dairy farmers or Fonterra.

"The issue isn't whether the dairy industry has come to stop because of low prices. It certainly hasn't. It's a vigorous, confident industry. It's an issue of how they finance this year's cash flow. They've got the banks indicating positive and Fonterra offering interest free conditions, which is more than you could expect if you're a retailer."

English said he had spoken with the banks in the past about their support for dairy farmers and Primary Industries Minister Nathan Guy would be talking to banks over the next couple of weeks "just to see where they're up to

"And the Reserve Bank is communicating with them every week, and the indications are they'll be positively supporting an industry they've got confidence in," he said, adding however that no one knew how long the banks would support the sector, "and anyone who does is going to make a lot of money."

Risk of foreign buyers?

Asked about the risk that foreign buyers would scoop up many farms in forced sales, he said: "People are running contradictory arguments over foreign buyers. A few years ago they were saying there's a lot of foreign buyers because the milk price is very high. Now they're saying there's a lot of foreign buyers because the milk price is very low."

"Foreign buyers looking at this industry will be a bit careful now they realise that prices can be volatile and that it's pretty hard to be profitable except in the long run unless you know what you're doing. I don't think it will change the interests of foreign buyers much," he said.

English said the criteria for foreign buyers under the Overseas Investment Act were already tight with 23 different criteria, and a court decision on Crafar Farms had lifted the bar for approval.

"We're not looking at changing the Act, but we'd expect the Overseas Investment Office to meet all the legal criteria," he said.

English said it was a healthy sign that farm prices had yet to drop back given banks' reluctance to force farm sales.

"Maybe they will, but I don't see any scenario where you would see the banks acting in a way that would put broader industry values at risk," he said.

Globaldairytrade suspension?

English said any decisions on Globaldairytrade (GDT) were for Fonterra, adding however it had been created to create more transparency.

"Everyone was happy when it was going up and they're not happy when it's going down," English said.

"The fundamental problem is not the GDT, albeit there seems to be a vigorous argument about it. It's the perfect storm of excess supply. There seems to be more of it and it looks like it's going to take a bit longer to clear," he said.

Robertson wants stimulus

Robertson said the Government needed to stimulate the economy to avoid a significant downturn turning into a recession, and simply allowing the automatic stabilisers of the OCR and the New Zealand dollar to fall was not enough.

"If the Government does not step in and start to stimulate the economy and get alongside businesses then we will head back to recession," he said.

"We need to invest in infrastructure, we need to get Auckland moving, we need to get a programme like KiwiBuild under way to absorb the labour that's leaving the Canterbury rebuild."

Robertson agreed this could force the budget into deficit, although much of any stimulus spending would be capital expenditure, rather than operating expenditure.

"In the end if the economy grinds to a halt, crowing about the surplus doesn't help," he said.

Robertson said it would be difficult for Fonterra to suspend its GDT auction "and we do need a clear price signal in the dairy market."

(Updated with more comments from English and Robertson)

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37 Comments

Finance Minister Bill English has rejected growing calls for fiscal stimulus to soften the economic blow from the collapse in dairy revenues, saying the Government would rely instead on the automatic stabilisers of a lower Official Cash Rate and a lower New Zealand dollar to support growth.

The US Federal Reserve underwrote that route to financial utopia. The moment the QE plug was pulled and the end of ZIRP threatened the gaping Eurodollar credit hole became evident for all to endure.

The titanic shift in August 2007 cannot be overstated. The Fed (and all its central bank network) continued to do as it had done before, starting in September 2007 with its first very orthodox, quite textbook 50 bps cut in the federal funds rate. From then on, no matter what it did, the financial system remained unaffected and so with it the economy. That has continued, after but a brief and tantalizingly hopeful interlude during the latter months of QE1, uninterrupted to today. QE’s all around the world and still “inflation” is by far (and “unexpectedly”) more zero or less than not and not a recovery in sight anywhere. Read more

"stabilisers of a lower Official Cash Rate and a lower New Zealand dollar to support growth."

Good luck to him with that. I've been poking around the back end of the NZ tertiary education system.
We cannot expect help oir growth from there. The government with their "expertise" has hamstrung them, basically doing a "Fonterra" to our tertiary education sector - it's all financially and policy orientated around pushing out programmed students. ie Bulk Commodity.

Private grow is more critical than ever.

Printing a bunch of cash won't make inflation go up ! (see your attached article). How can it.
"printed cash" goes into banks.

Inflation occurs when; people have higher wages and can bid higher for products. hard production expenses go up from passed on costs (which reduces wages), hard demand outstrips supply which in a supply side economy is seldom.

putting money into banks will not create inflation and definitely not good inflation.
money in banks gets used to buy higher priced stocks, reinvested into investment products, and occasionally loaned at low rate to businesses.

If the business need to inflate (eg extra debt,) it will reduce money available for wages, slowing the economy.
Raise the interest rate and the economy will slow further with cuckoo-nest pressure on wages, feeding that banks interest instead.
the money loaned to companies creates more supply-side product - meaning it is less likely to see inflation from increased demand -especially- as the wages will not have risen. We might possibly grow the economy wider, but not richer - increased supply, which will absorb the money thrown at it, and it will self level in that manner. It can't rise as market-will-bear pricing and personal prioirities of the spenders vs their wages hasn't improved - so new products much come out in the niche of the old. in the old adage "there is only so much [customer] money to go around.

In short increasing bank money (printingh) creates higher price/involvement in financial products, and increases supply side production. It does not increase wealth, it does not decrease poverty, it5 won't create inflation (until things start collapsing), it will create deflation.

Agree,Interest rates should be raised to kill off the unproductive sectors of the economy, not support bad investments.

o^O

The trouble being with such a policy is how does one differentiate between the productive and unproductive assets, once the herd panics and stampedes for the exits?

It's more complex than that

A lot of overseas (investment) money is pouring into New Zealand - regardless of interest rates - but we have no idea where it is going and what it is doing

You are right, we can't control the bad investments wih monetary policy, while we are letting in foreign money (borrowed at lower rates). All we are doing by lowering our own rates is letting our own people join in the ponzi.

Totally true, Usary laws should be reinstated. :) stop those unproductive types... :p

T12, ye make a very good point and succinctly too. There are other reasons for interests rates to rise (like reflecting risk) but lots of virtually free money sloshing around breeds idiotic ventures like paying $40 for bits of Zero.
Regs. EP
Ps. And horrid houses in Auckland

Bill English is right , in the early stages of a downturn its best to just let the market take its course .

We can worry about taking stimulants later

Bill English says the Government was not actively considering any fresh stimulus at the moment

What was the stale stimulus? I've forgotten

the 2015 budget provided plenty of stimulus..especially for the unproductive and indolent..

Can you be more specific?

Tax relief to foreign companies doing R&D and "investment" in New Zealand.

C'mon Bernard - who are these nameless faceless people calling for stimulus?

Can you name them?

Finance Minister Bill English has rejected growing calls for fiscal stimulus to soften the economic blow from the collapse in dairy revenues

I named them in the article. ANZ, Federated Farmers and the Opposition.

If fontera is not strategically broken up and 20 something Tatua's allowed to flourish, we are likely going to see a government nationalisation on a scale that puts the SCF scandal in the shade.

no one knew how long the banks would support the sector, "and anyone who does is going to make a lot of money."

In other words, "Prepare your bets, folks, there's a fortune to be made in correctly timing when TSHTF".

Charming.

there are more opportunities to gain wealth in times of depression than when things are swell..
for those who saved for a "rainy day" look outside ..it just started drizzling

'Buy when there's Blood in the Streets' is an investment mantra of yore - or perhaps given our context 'MilkSolids in the Furrows'...

Can't "buy low" if there is no low. Which is why Key is being ingenious when he says landlords want house prices to keep rising - if there is -only- a Bull market, there is no market (and a lot of share investors found the hard truth to that - you can only win by ceasing to play).

Nah, it's an insiders game these days, my friend. In fact, has been for quite some time;

Joe Kennedy, Sr., patriarch of the Camelot clan, built up a tidy sum in the 1920s with a hearty amount of speculation, peppered with insider trading and market manipulation.

Unlike many other of his ilk who helped to create the unstable markets that brought about the financial calamities of the '30s however, Kennedy knew when to get out.

Out of the stock market, Old Joe invested his money in real estate, liquor, and movie studios, generating gaudy profits and cementing his family's place in the highest financial echelon of American society.

"Foreign buyers looking at this industry will be a bit careful now they realise that prices can be volatile and that it's pretty profitable except in the long run unless you know what you're doing. I don't think it will change the interests of foreign buyers much," he said.
One dollar Bill sounds a bit confused, blathering incoherent statements in absence of a clear answer. People tend to start babbling once their ideology is forced to face reality, and he certainly doing a lot of that today.

It's not foreigners who 'now realise that prices can be volatile'. Anyone who understands the least thing about commodities knows that prices can be volatile.

It's the New Zealand government, Fonterra, the banks, the rural economists, etc, who are apparently with difficulty waking up to this realisation.

And why is this volatility? It's because commodities producers have little or no influence over price. Supply and demand entirely fix commodity prices. Commodities producers are leaves in the wind.

How often does this have to be hammered home to New Zealand policy makers? If it needs spelling out any further, when you focus the fortunes of a nation on commodities, you leave the well-being of the economy to cycles as neutral as the weather.

It is, again, astonishing that the policies of successive Governments should be so attached to commodities when Government ministers and commodities outfits like Fonterra plainly understand so little about them.

Fair comment, wasn't it just a few months ago that Bill and John and Gerry and Co were telling us we needed to get into mining. Big time. Haven't heard jack about that cunning plan recently, or exports up to, what was it, 40% GDP.
Our high and volatile dollar has killed off our wonderful boatbuilding industry (among others) and that is a direct result of our commodity addiction and excessive overseas borrowing. Any more bright ideas Bill?

I think it is our fault. If we only had the foresight to quadruple the pay of the government, Fonterra, the banks, the rural economists, I am sure we would have gotten better governance! The minds of our overlords must not function so well when they can't afford to buy food.and have to worry about scraping up enough money to pay the power bill. Gosh, if only they did not have to choose between paying their kids school fees or going to the doctor, we would g surely get a better outcome. They have a tough life

Skudiv

I wouldn't blame Bill for that. I missed out a word in my transcription. My apologies.

Here's the full quote with the missing words bolded.

 

"Foreign buyers looking at this industry will be a bit careful now they realise that prices can be volatile and that it's pretty hard to be profitable, except in the long run, unless you know what you're doing. I don't think it will change the interests of foreign buyers much."

He is saying it's hard to be profitable in the short run, but is profitable in the long run if you know the industry.

cheers

Bernard

Except in "the long run" (is this the proverbial "end of the day" that JonQuey keeps referring to?), every thing that "eventually becomes profitable" will be owned by foreign hedge funds. Dam, we dropped the ball

The government have called the dairy downturn a commodity cycle, but i disagree. I think it has more to do with low world interest rates creating huge distortions in the market. Even a few days ago banks were quoted as telling farmers to" keep up production we'll just lend you more money". The dairy market is an example of a liquidity bubble pop.
The government also bet on dairy because it created employment for bureaucrats and support industries.
here's an interview with Alan greenspan talking about interest rates and the US economy http://www.bloomberg.com/news/videos/2015-08-10/alan-greenspan-sees-pend...

You should listen to Rod Oram
http://www.radionz.co.nz/national/programmes/ninetonoon/audio/201765993/...

I'm inclined to agree with him - speculators loaded up massive stockpiles of product and then stopped cold - but, as he says - nobody really knows - or isn't saying - more information is needed

I am positive foreign banks unwittingly financed rehypothecated product thus facilitating multiple layer domestic Chinese finance for unrelated endeavours, much as was revealed with copper. This is not the first time I have made this claim on this site.

and I have agreed with you on that very point on each occasion

Plenty of stimulus already provided. Just because ya'll chucked it into property don't mean the govt. should have to intervene. Let "the market" sort it out.

Bill English looks like an ostrich who has taken his head out of the sand. Just as competent as when he was leader of the party I see.

Its okay - National will save us all - that's why we voted them back in - they have always acted in the best interests of NZ. John Key is the man!

Come on NZ - WAKE UP

I would hate to see tax payer money going towards farmers - especially those with on paper 10s of millions of dollars of assets. In a lot of cases they have rolled the dice and instead of spending good time money on the environmental costs of their endeavors, just bought the neighboring farm. The government turned a blind eye to the deteriorating conditions of our lakes and rivers, even shouting down comment from our scientists. http://www.listener.co.nz/commentary/john-keys-unhappy-week-at-the-bbc/
Farms will have to be sold and it will be interesting how National handle that and also how they enforce environmental rules when the owners could be from Northern parts? Will there be rules for Kiwis and weaker rules for others?
The death by a thousand deep slashes that the Chinese economy is actually reporting seems to suggest that the blip in milk prices will not be a short term event. A similar effect is probably that which was felt by NZ when Britain joined the EEC. AKL will continue chugging along happily selling houses to the Chinese for a while but at some point the declining importance of dairy that National keep reporting as less and less will affect us all, not just the rural dairy community and neighboring towns.

Buying the neighbours farm is frequently an unfortunate fact of life for farmers.

A farmer can only expand their core business by expanding land (or massive expensive to run infrastructure and then land). Farms tend to have very slow sale cycles, and for family farms that might mean _generations_ before the property comes up again.
Imagine that in your career, if you wanted to get a career progress you had to buy your neighbours dwelling, if it comes up for sale are you going to put in a bid? Knowing that the new owners might be 7 years because the next opportunity?

that's what happens with farms. and annoyingly enough most farmers don't sell out when times are great. (ie when you have money). They sell out because of health, family, or they don't like the longer picture.

I don't want to see tax money going to farmers either.... but I don't want to see NZ tax payer money going to large foreign companies R&D either... hell I can't even work out why Palmerston North ratepayers bought three 3d printers for the PN library. But that's what happens when you give politicians the public purse - they buy friends and damage the small market.

However, Fonterra isn't using public money, its using private debt. And I'd rather see Fonterra spend 4% funding a huge private borrowing to pay 50c to many farmers (ie 2c worth of payout) - than see individual farmers paying overdraft rates to do the same.