By David Hargreaves
It's probably fitting, though purely coincidental, that as we reach the mid-point of 2015 (already!) so the economy suddenly appears to be at something of a crossroads.
The bullish enthusiasm of the last year and a half is giving way to a more measured dose of realism, particularly after the first quarter GDP figures came in much lower than expected.
If we were to compare the economy to something - say for sake of argument, a rockstar - the questions would now be revolving around whether our economy is just going through its "difficult second album" phase or whether we've embarked on the one-world-tour-too-many phase to be followed by "exhaustion" and a stint in a special rehabilitation facility.
At the moment the economists are giving the economy the benefit of the doubt and still see good prospects ahead, but they are trimming forecasts. The team at the country's largest bank ANZ, who deserve kudos for being on the money with interest rate picks (though ASB should get a big chocolate fish too for going out on a limb with a bang-on pick of just 0.2% GDP growth in the first quarter) are now picking 2-2.5% GDP growth this calendar year, down from a previous pick of 3.1% - which was also what the Reserve Bank was picking.
That would still be good. But remember, the economy is continuing to get a very big kick from the very artificial situation that is the Christchurch rebuild, while the historical GDP figures, which saw us record 3.2% growth in the March 2015 year, were boosted by very high dairy prices. More on dairy in a minute.
It is interesting to briefly observe how the economy has been viewed in the past 18 months through the eyes of those following it most closely.
The New Zealand Institute of Economic Research tracks the evolution of forecasts with its quarterly Consensus Forecasts, taking the averages of key economists, including all the big banks, plus the RBNZ and Treasury.
If we look back at the June 2014 forecasts, the consensus view was that GDP in the March 2015 year would grow by 3.8% (actual figure 3.2%). So, that was a bit on the high side. The thing that will be tested is the picks for the next few years. As of the latest (June 2015) forecasts, the consensus GDP growth figure for the March 2016 year is 2.8%, moderating to 2.7% in March 2017 and 2.4% in March 2018. Looking back over the past 18 months, the longer term view of GDP growth has actually strengthened - but it has to be stressed that the June consensus figure were collated before the March GDP figures were released.
It's fair to say, therefore, that the next lot of forecasts will get something of a trim.
The biggest change to economic forecasts in the past year-and-a-half has come in the predictions of interest rates. A year ago our economists were on average picking a 90-day bill rate (a proxy for the Reserve Bank's Official Cash Rate) of 5% by March 2017. The economists were also picking inflation above the RBNZ's explicit target of 2% by the same time.
Of course, what's happened subsequently is that the inflation genie has vanished - for now - and the RBNZ, courtesy mostly of the very sharp fall in global dairy prices, has been forced to start unwinding the four interest rate hikes it undertook last year. Right now it is looking more likely that prevailing interest rates in March 2017 could be a whole two percentage points lower than was expected 12 months ago. But of course given how much expectations have changed in the past 12 months who knows.
It's probably galling to have to admit it, but so much of the optimism about the NZ economy in the past year-and-a-half has been based on China buying up our commodities at inflated prices and on us rebuilding our second largest city, which we have been forced to do, and which is a one-off boost.
In that sense our economic growth has been based on nothing more stable than the rapid growth Australia saw in the earlier 2000s when it was simply digging up big parts of its country and flogging those to China, at inflated prices.
Australia's now suffering a hangover from that and I do wonder if we aren't heading for something a bit similar.
Much will depend on dairy prices. Right now the economists are picking a modest lift in global prices during the course of this year - and with the outlook for future years looking better.
My concern is that I'm not sure the extent to which future price predictions do, and can truly, take into account future levels of supply. That's the problem with an out-and-out commodity. It's priced according to supply and demand.
I don't claim expertise (at all!) on dairy production, but I would imagine it is not something that can be turned around quickly. If global supply has been ramped up to an inappropriately high level because lots of other countries have seen little old New Zealand wheeling gold milk powder all the way to the bank, then it might take a while for the over-supply to be reversed. And what happens here in the meantime?
It's reasonably easy to forget when swapping Parnell and Herne Bay houses at ever-increasing values that so much of the 'real' New Zealand economy depends on how much money the farmers have got kicking around in their wallets.
The fact is, if there isn't the hoped-for recovery in dairy prices during the course of this year then, with the impact of the Christchurch rebuild gradually weakening,so our economic growth figures could fairly quickly lose vigour. I genuinely hope I'm wrong, but my gut feeling is that two years out from now we'll be looking at next to no economic growth. And remember, any stagnation of our economy is likely to pretty quickly turn around the current (stimulatory for the economy) immigration influx, particularly if Australia starts to recover and regain its lustre as a place for Kiwis to flock to.
I base my thoughts on the economy on a gut-feeling belief that there won't be a significant lift in global dairy prices over the next two years. Look, really I hope I'm wrong.
But right or wrong, it is in any case worth reflecting on how narrowly focused our economy actually remains. Unfortunately, there's no sign from any of our current politicians that they have any genuinely innovative ideas. As a country we really do need some sort of collective vision of what New Zealand wants to be as an economy and how to get there.
Our rockstar needs that second album to be a killer. But if we just keep trotting out world tours with the same old material, well...
32 Comments
Title for the second album to see us right? "Wellington - The Big One"
Let's remember that Treasury estimated back in 2010(?) that the Christchurch earthquake could knock as much as 6% off GDP ( that was when they were forecasting $20 billion costs. Today we expect it to be closer to double that). But the rebuild would add back 2% p.a. Unless we replace the Christchurch disaster with another one we know is coming at some stage, then with Ireland ( and others in Europe) now free to compete against our dairy for China business, what else is there for us? A lower standard of living? Certainly. Lower wages? Most probably. Higher interest rates? Quite likely, as we have to go cap-in-hand to the markets for funding to keep us alive. "Gut feeling" David? Probably right too!
(NB: This is what Treasury was expecting back then: Unemployment rate (2011) 6.5 (2012) 5.8 (2013) 5.2 4.9 (2015) 4.7% (2016) 4.7 . Not all that close really!)
So seven years of Key/English "see no evil, hear no evil and do nothing to frighten the horses" is likely to end just where?
Day-to-day fix ups will have to end sometime and these two will not be the ones to trust, based on their combined actions to date.
Armageddon?
This issue is not just caused by the current Government, but the last Labour one too. Just about any Government is reluctant to "bite the hand that feeds it" and between elections, it is big business and corporations. The voting public only get to bite once every three years and are notoriously short on memory and brain cells at election time.
FYI, the dairy production _can_ be ramped up quickly, and dropped even faster.... if the investment has been made previously for such things. On a national scale it's a big tricker because grains and Palm Kernels and other co-product inputs can to be sourced _in_addition_, not just from refactoring existing supply lines.
Otherwise it's more a cause of flow through the hose. The farm is run at a certain point which should relate to it's more efficient return based on cost of inputs (feed, labour, fert, fuel, equipment, upgrades, med term interest rates). If payout goes up then it becomes more effective to general more expensive units of production (kg MS & meat). This is achieved by adding more feed to existing stock (buying more expensive higher energy density feed, or processing & carrying more marginal and marginally profitable feedstock) AND investing into capital equipment to use the feed. then it is just a matter of not culling so many animals or culling later. This "opens the tap"...but it is expensive. Especially in putting in the equipment and upskilling the workforce - but that is generally a one of cost. Having low interest that is below the total yield cost _always_ works in favour.
The next step is reducing that process. the infrastructure needs to have low leverage so it doesn't burden the slower years, and ideally feed needs to be low term (like pit silages, good for over ten years) or on a Just-in-time inventory system. but the latter is vulnerable to spot pricing and seasonal influence (availability) and stopping supply can cause supplier difficulties. thus volatility is an issue (and thus if Fonterra can manage a stable GMP this would help NZ farming nationwide). To reverse the process we just take excess animals and covert them to meat stores. Ideal the government will keep electrical costs low, and encourage storage facilities, to even out both prices and volatillity in this market too. the best price always goes to the supplier who can choose when they want to enter and exit the market.
farmers have cut back on palm kernel and biscuit meal big time. at the moment is down 50% on last year and still dropping. it is also effecting a lot of businesses involved in the importing and distribution.
the less farmers have to spend effects a large percentage of our GDP and in turn the governments tax take.
don't forget the shares,
as a money man collared us the other day, how can you go through a boom and have company shares at below the IPO price?
https://www.nzx.com/markets/NZZX :$4.90
Quite simple for anyone with their eyes open actually. As i have written here before, Fonterra and other dairy companies have been selling our dairying technology over seas to our potential competitors for at least the last 15 years, and we are surprised thouse competitors are finally coming on line to compete with us on the world market??!!! Any one who paid top dollar for a dairy farm or converting one to, that relied on a payout over $4.50 (first acheived in 2008) was nothing short of a fool. When anyone buys a business they should carry out due diligence and to believe the payout will remain high is tantamount to believing the customers will keep coming if no marketing is done. Any bank who espoused ssuch an approach should be held accountable because it is in total denial of market realities over time.
The Australian analogy is apt. Turns out when the commodity bubble is said and done it was all just funneled into the mother of all housing bubbles and that the income boost was used to increase leverage.
Australia at least has a much higher starting point in terms of wealth and income, and much more diversification of household assets (even if many non-housing assets are ultimately linked to housing through equities, savings, etc).
New Zealand is unfortunately 'all in' on housing with barely anything left in the cupboard to sell.
Nah, watch out next time you are in Aussie: Australia Post is now using Mercedes vans ... thats also where the coal and ore money went :-)
The 7 fat and lean years ... NZ once again proved without leadership and vision and squandered the milk powder and education-cum-immigration money on a ridiculous real estate bubble that is ultimately killing off our live-and-let-live way of life, instead of investment in future industries.
Yet: show me a country in the "West" that has done a lot better. Switzerland maybe, which is the only democracy in the world, and small sections of the US that has all but monopolized the global software industry. The rest? AUS as much of a basket case as we are. The EU, pissing its time and money in the wind on places like Greece while inviting an asylum seeker invasion. Russia, going backwards economically.
The really depressing message is that NZ is still doing relatively well compared to "Western" peers. That is how badly the West has done itself in.
I am trying not to be stupid, but what is the basis for economists (guessers) to predict a higher dairy price? Do we expect others to stop supplying? China and other countries we have sold our knowledge to will produce more too. Or is it just a case of, going forward by looking in the rear mirror? It was higher before therefore it must be higher again.
Same basis as their judgment on interest rates. Rates were 8% so they must return there. According to their predictions NZ is supposed to be sitting on an OCR of 4.5 currently moving to 5. Just a little blip at the moment but soon, very soon, we will return the upward trajectory...
No country is an island, in a globalised economy - the notion that NZ could stay an outlier for years was always a false hope.
Our isolation from the GFC and fallout was in our favour for a while, but NZers have been paying the price of very high interest rates (relative to the global environment), and households are still conservative. The general economy, wage growth, GDP per capita, are all struggling alongside capped government spending. The RBNZ is now having to do the heavy lifting for this frozen government and start loosening monetary policy before the economy overcools.
"but NZers have been paying the price of very high interest rates (relative to the global environment),"
Nice myth, but the actual truth is, with NZ maintaining about the same funding spread over the benchmark US Fed funds rate, NZ is paying no more now in global terms than it has ever has since the comparable OCR was introduced 16 years ago.
Context maybe? If you look at countries such as Japan, USA and china they have had very low interest rates in comparison to NZ. So NZ businesses have being paying too much interest to on borrowing capital to invest compared to other countries businesses, plus many other countries give tax breaks, I dont think NZ does at all. Then finally NZ seems to pay over the odds for capital equipment due to lack of competition as the vendors control the importation and price gouge. Meanwhile ppl have invested in housing as its perceived as safer, easier and giving a better return who can blame them. So really Id suggest the OCR as a single tool to control housing leaving real business suffer has been a huge mistake.
Of note if we adjust present immigration of around 58K per annum to the long term average, we would have to remove 0.9 to 1.0% from GDP. As the quoted figure is GDP adjusted for CPI, not inflation adjusted per capita GDP. I suspect that National realises that without high immigration we will be in recession within 12mths and will keep the gates open, hoping for a 4th term.
It really is depressing that our elected officials end up with such short term thinking. The long term effects of high immigration will bite NZ in the future with congested roads, schools, hospitals and the courts.
It is also depressing that voter turnout is so poor in NZ. The trend has been heading in one direction since the 80's. If you don't vote and you have problem with the ruling party the joke is on you.
Should voting be compulsory as in OZ? Does National resist this because the non voter is not a natural conservative?
Given the state of Labour a 4th term looks quite probable. I almost voted NZF last election as I didnt want Labour & Greens without some check on them like WP. Even though I think he's a bit of an as**ole the left are left enough to be even bigger worry if un-checked.
Went to a talk yesterday where the presenter reckoned that Nelson/Tasman was the fastest growing region over the last five years as measured by GDP. Why? Population growth, ie housing exports.
We have three main drivers, dairy, Christchurch, and "exporting" housing. Wages are declining rapidly if you measure in US dollars, down 22% in the last year.
New Zealand's fear of absolutely everything forever dooms this country to a subsistence existence.
NZ will continue to trap itself within an unproductive economy that is based almost entirely on the buying and selling of houses. The Fear of Failure culture will deter people from investing in business and industry. Kiwis will go on believing themselves to be successful and fulfilled if they own a house or three. The economic bar will continue to remain as low as standards and expectations.
Why is anybody flabbergasted to find that our 'rockstar' economy was largely built on high dairy prices and the Christchurch rebuild? I would have thought that that was as obvious as the proverbial dog's ......
I have no connection to farming,but when there is a demand for a commodity product,then basic economics would suggest that other suppliers will appear.
For as long as NZ's economy remains over reliant on primary products,then we are bound to see this pattern repeating itself.until we spend a great deal more on R&D-think F&P Healthcare-we will never achieve sustainable economic momentum.
Only the media, government, economists, and fonterra were believing they had a rock star economy. They are the ones in the headlines, so they're hardly going to use those headlines to apologise to the rest of us for what the rest of us already knew.... It might cause us to doubt the truth of politicians, economists, and the media.......
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