By Paul Glass*
With our currency effectively at parity with the Australian dollar and house prices booming everything must be great in the “Rockstar” NZ economy, right?
I’m not so sure. Let’s look at the economic growth that was achieved in 2014.
Headline real GDP growth was a very impressive 3.5%. However, population growth was 1.6% so per capita GDP growth was only about 1.8%. Commodity prices, and in particular, dairy had a big run up in 2014 resulting in a positive impact of around NZ$5.0 billion to nominal GDP. Working out the contribution to real GDP growth is difficult, but if we assume about half of this fed through directly into GDP then that accounts for about 0.9% of growth.
Likewise the Christchurch rebuild got into full swing and probably added a further 0.6%. So real GDP growth per capita, excluding the one off effects of surging commodity prices and the Christchurch rebuild, was about 0.3%. Not quite so flash. The big problem is that the quality of our GDP growth has been low.
Ultimately GDP growth per capita is a much better measure of increased prosperity than simple GDP growth as it adjusts for the growth in our population. New citizens’ place demands on our social and physical infrastructure and the costs of those demands needs to be met from the overall economic pie.
Given that the media, and most economists, tend to focus on overall GDP growth it’s no wonder that politicians are on hooked on the drug that is immigration. It’s an easy way to boost perceived GDP growth even if it occurs at a significant cost to our infrastructure. Those costs tend to be more hidden in the short term – upward pressure on housing, demand for social services including hospitals and schools and further congestion on a motorway and transport system in the main centres that’s already reached breaking point.
Given we are a small open economy we need to be smart about what we do. The world is finely balanced at the moment – global growth is tepid, China’s growth in particular is slowing rapidly and that may cause serious problems. Government debt levels globally are at record highs, Europe is a mess and Australia is facing real economic challenges with unemployment possibly rising to 7% by year end.
I sense that as a nation we lack a plan and there is a real absence of leadership at both a local and a national level. We need to ask what sort of economy do we want and how do we achieve it?
Let’s look at a number of areas where our policy settings may be sub optimal.
Firstly immigration - in spite of our unemployment rate trending up to 5.7% at the end of last year, and well above pre GFC levels, record numbers of migrants are coming in with the net annual inflow doubling to 54,700 in the year ended February 2015.
Immigrants bring new ideas, connections and an entrepreneurial spirit to the county to its longer run benefit. But is it sensible to allow in record numbers given the pressure on housing and infrastructure? Our focus tends to be on simple GDP growth, but should we be more focused on per capita or lifestyle measures? Are we valuing our citizenship and lifestyle highly enough or are we selling it too cheap? Should we be training our own people more effectively to fill vacancies?
Secondly, our interest rate settings. Over 20 central banks, including the ECB, have cut rates so far this year. But NZ has amongst the highest real interest rates in the developed world and an economy that may slow quickly from this point. Headline inflation is effectively zero. Our interest rates have artificially pushed up our exchange rate which is damaging the productive part of the economy.
Last year’s increases in the OCR rate were a mistake and would probably be being reversed now if not for the exuberant Auckland housing market. Apart from sensible steps to aid a more efficient supply side housing response, plus targeted immigration and limiting ownership to NZ residents, we should also limit the amount of bank debt available.
The big four banks are very heavily leveraged to one of the most overvalued assets on the planet – Australasian housing. As we saw in the GFC, banks are effectively tax payer guaranteed. The average return on equity amongst the big four is currently around 16% which is remarkable given the risk free rate is around 3%.
It’s a technical area but the amount of regulatory capital held against residential mortgages should be increased substantially, not just tinkered with around the edges as is currently happening. This would limit the amount of debt available for mortgages.
Thirdly, infrastructure – NZ in general, and Auckland in particular, desperately need massive expenditure on infrastructure. This demand happily coincides with a time when global long term interest rates are at all time historic lows and the world is awash with investors keen to fund long term infrastructure projects.
Yet our progress in bringing in private sector investment to help fund these infrastructure needs remains poor.
It is instructive to look across the ditch. Australia has attracted around $65 billion in public-private partnership infrastructure funding since 2012 while New Zealand has attracted only $1.5 billion, over half of which was for the Transmission Gully roading project in Wellington.
Australia has also used the high asset price environment to realise excellent value for taxpayers and ratepayers by releasing equity (though not control) in State assets such as ports.
We know there is a wall of capital willing to invest in New Zealand, we need to broaden our funding models and provide investor ready information and vehicles to make this happen.
I firmly believe we live in the best small country in the world, but we need to start thinking smarter about the type of country we want going forward.
*Paul Glass is executive chairman of Devon Funds Management.