David Hargreaves thinks the Government will need to make a fast start to 2016 in the face of an uncommonly large number of economic variables

David Hargreaves thinks the Government will need to make a fast start to 2016 in the face of an uncommonly large number of economic variables

By David Hargreaves

While any New Year promises mystery and intrigue,  2016 appears to be coming armed with more potential plot twists than an Agatha Christie whodunnit.

Probably the biggest riddle contained within all this is: Who killed inflation? Or is inflation, as the Reserve Bank believes, not dead, but just in hiding? We'll get some sort of answer in the next 12 months. And the answer will of course be absolutely crucial in what happens with interest rates, both for borrowers and savers, what happens to the profitability of businesses, what happens to wages and what happens to employment. And so on. But the sense of uncertainty is palpable.

I find something richly ironic in the bemoaning about an absence of inflation. I'm always reminded at this time of year of my first school holiday job working in a supermarket. I spent most of my time changing the prices on stock - something that was essential to accommodate the 15% inflation rate!

The idea then that we would one day be WANTING inflation would have been beyond absurd, if anybody had even entertained such a notion.

But that's where we find ourselves heading into next year. The Reserve Bank thinks there will be a revival of inflation here in 2016. I've previously stated my views on that so won't go back over the issue in detail, other than to reiterate that I think the RBNZ is going to be disappointed.

Whatever happens, however, it seems clearer by the day that the focus on inflation as the be-all-and-end-all of monetary policy is now no longer the way to go. We've had it here since 1989. It worked. Now it doesn't appear to work.

So, my big wish for the coming year is for the Government to get closely engaged in a thorough overhaul of how monetary policy actually works. I don't pretend to have the answer. Nor do I think it will be easy. But that's why we need the debate.

Earlier this year I suggested that it might be a good idea to have a rework of the 1989 Reserve Bank legislation. I'm now more convinced than ever that this needs seriously looking at.

Aside from the question of whether a strictly inflation-targeted monetary policy is still the way to go, there's also the developing tension between the Reserve Bank's role on the one hand of managing monetary policy and on the other managing financial stability. The two roles are getting in each other's way and whether they need splitting perhaps (although do we really need another government entity?) is something that should be seriously considered.

I also think that while an independent RBNZ is crucial, it needs to be given a clearer steer by the Government as to where its responsibilities begin and end. In that respect I think the Government needs to be cautious about the increasing development and use of macro-prudential tools. The more of these we have then so the more the potential unintended consequences - particularly in the housing market. 

You can certainly make an argument that the introduction of 'speed limits' on high loan to value lending pushed first home buyers to the back of the queue and brought investors forward. So, then of course we've seen the moves against Auckland investors, followed by said Auckland investors casting their nets elsewhere in the country. As sure as night follows day this will likely see the RBNZ clamp down on investors in the rest of the country as well, probably I would suggest before the middle of 2016.

But it appears increasingly that as one 'problem solver' is introduced then so it actually causes another problem. The Government can't be leaving this stuff just in the hands of the RBNZ.

Another key area that the Government needs to get its hands dirty with in 2016 is migration. The massive surge we are seeing in net migration was at least in part caused by the Government's 2013 decision to relax the employment rules for foreign students. The table below shows that student arrivals have close to doubled in the two years since then.

*The 2015 figures are for the 11 months to November. All other figures are December years.

The other point that I think is raised by these figures is why exactly have we seen 35,000 people given work visas in the first 11 months of this year when the unemployment rate is 6%? In 2007 the unemployment rate was just 3.5%. And yet that year there were just 21,000 such visas issued. In 2007 there was a net migration gain of just 5000 - versus the 60-odd thousand we've seen this year.

Ultimately I don't think such rates of migration will prove to have been a good thing. At the very least it can't be good for the undersupplied Auckland housing market that around 30,000 new people have settled there from overseas this year.

Rather than waiting for the usual outflow of Kiwis to resume (and there's no sign yet), the Government should be pro-active and cut back on inbound migration next year. Then when and if an outflow of Kiwis does resume, then so the policy settings can be looked at again.

As we go into 2016 I think we have a lot to be grateful for in terms of the overall condition of our economy relative to those elsewhere. But given the huge number of economic variables here and overseas, a heck of a lot could go wrong, quickly. I hope the Government gets back early from the summer hols and is completely switched on straight away. Big decisions - structural decisions - may need to be made.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

38 Comments

Comment Filter

Highlight new comments in the last hr(s).

Typo fourth to last paragraph ?
Why have 35,000 people been given work visas in the first 11 months of this year when the employment rate is 6%? ????

Thank you. Corrected.

Yeah right.
Who are you going to put in charge of a rework of the RBNZ act?
Joyce, Smith, Bennett or Double Dipton?
But wait, Key is our financial genius.

Earlier this year I suggested that it might be a good idea to have a rework of the 1989 Reserve Bank legislation. I'm now more convinced than ever that this needs seriously looking at.

New Zealand First have been banging on about that since 2008, so you're a bit late to the party;

http://nzfirst.org.nz/what-we-stand-for/reserve-bank-act-overhaul

Needs much more than a rework of the the reserve bank act. We are seeing the decaying stages of economics and money and fiddling with laws aint gonna fix a thing.

What is required is a complete rethink of our belief in economic growth, wealth as measured in money and possessions. It is time to discover what it really means to be a human being. Economics was a means of control over the masses based on fear of the unknown. Religion was a means of control over the masses based on fear of the unknown. Politics is a means of control over the masses based on fear of the unknown.

Human beings make up a small part of our population I fear.

I fear you are correct.

While I agree with your remedy Meh....the people are not ready......if they were ready we would see a decline in numbers reliant on various State functions......and even if we had this decline the State would ensure that new Fears were being rolled out which is what is happening with Climate Change and ISIS.....Control by non-violent methods requires a high degree of fear.....and there are plenty of people around who get a thrill out of control.....but if you can add a degree of violence into any equation (ISIS Terror) a population becomes like warm putty molding into place.

People need to fear not taking control of themselves.....and then they might discover what it really means to be a human being.

I agree they are not ready. The process now - the decay in so many aspects of society/civilization - is a necessary process.

The media are the relatively new instruments for controlling your thoughts expectations behaviour and wallet; neva forget

Not sure it needs revising, a) The bank can act already its just dogmatic. b) A Govn can act already, they decline to.

Agree that 35,000 work visas seems excessive in this environment. but not sure inflation is hiding? My rent has moved higher this year, power bill, water , phone , rates , council compliance , building costs and materials, insurance... In fact the only thing that has not risen is my wage, oh and ACC costs.

As we go into 2016 I think we have a lot to be grateful for in terms of the overall condition of our economy relative to those elsewhere.

Except that "our" economy is not "ours" and those who own us won't give any pause for thought during the mayhem of retreat.

Yep, witness the BRICS for that outcome.

a bit delphic, retreat from what/where and by whom or what??

" Who killed inflation?" energy, or expensive stuff, ie peak oil

Confusing and inconsistent

Everyone is calling for the Reserve Bank Act to be overhauled

While nobody calls for the Immigration Act to be overhauled

Uncontrolled immigration is causing unwanted economic and SOCIAL upheavals - the solutions to which are outside the scope of the Reserve Bank

Those calling for an overhaul - tell me - what changes would you make - and to what end

Split it along the lines of the Australian model

APRA look after the banks
http://www.apra.gov.au/
RBA looks after the economy
http://www.rba.gov.au/

I suggested that here 2 years ago - and got shot down in flames

and that will achieve what?

The RBA, RBNZ etc are staffed with a "certain" type of mind set, so for me splitting the duty up makes no difference.

Who killed inflation? Or is inflation, as the Reserve Bank believes, not dead, but just in hiding?
Yes when you have people spending 50% of their income on housing and growing but in the basket this only makes up a small amount of measure, then its time to readjust what the weightings are of what is measured to determine inflation

I agree, I'm always surprised by the weightings they use in the CPI. The CPI weighting given to 'Housing and household utilities' is 24%. Interestingly, the average weekly housing costs were $295.40 in June 2015 according to Statistics NZ.

So we can then assume $295 SHOULD be 24% of after-tax earnings for New Zealand households (in order to accurately reflect the CPI weighting). If this is truly the case then the average household in NZ earns ~$1230 per week after tax (for this weighting to be correct). Somehow I doubt there are many households in NZ making this kind of money. Feel free to correct me if I am wrong as this is a quick back of the envelope calculation.

http://www.stats.govt.nz/browse_for_stats/people_and_communities/Househo...

If this is the case, why aren't the media or more people calling out Statistics NZ for using a BS CPI calculation?

This is about $83,600 per household assuming employed and 3% Kiwisaver. This is probably a wrong assumption as this is household income from all sources including capital gains, dividends, net rent etc. Would be interested in the difference in figures of wages vs income is anyone can source them.

First a good command of English second a demonstrable intent to integrate and not ghettoise and finally a 10 year family probation during which any crime committed by any family member punishable by a jail sentence will automatically and without appeal revoke the whole families entitlement to stay in NZ - may seem harsh but would encourage family responsibilities.

Agree 100% - NZ needs to toughen up

24 January 2012
You're in the right vicinity. Birds of a feather ... Problem is this fat-cat has just done the rotten-apple spoiling the whole barrel for a few others. Have just been advised the Vito "Don" Corleone family were looking for a quiet place to come to, somewhere they could bring their legitimised billions, somewhere without a CGT, but things look a bit uncomfortable at the moment. They will check again in a couple of years.
http://www.interest.co.nz/opinion/57575/opinion-bernard-hickey-argues-ki...

20 March 2012
Warned twice in the last year the Corleone Family were seriously investigating moving their operations to to NZ because the (lax) regulatory environment was SO conducive to their needs. Last post advised the Kimble Dotcom fiasco caused them to postpone the move until the heat died down. Now this. Bugger.
http://www.interest.co.nz/news/58455/city-savings-bank-bank-small-b-sets...

Pluto, many here have outed Stats, RBNZ et al for cooking the books to suit Govt's free money for favourites policies. Journos tend to be wilfully blind.

Lies, Damn Lies, Statistics ?

Yes SmoKey, Disraeli I believe. He, without cabinet consent, paid millions Sterling to purchase the Suez Canal for Britain - I've often wondered if England ever got the dosh back after the Gypos nationalized it in 1956 (the US stopping the war of recovery). There was an international conference later: anyone know if the Poms got paid?

Chinese shoe manufacturers are, for example, moving factories from China to Ethiopia these days as 500 USD monthly wages for factory workers in China are now seen as uncompetitive. Ethiopian wages are 50 USD per month.

Also, calculation of inflation does not take into account quality. Clothes, household items etc may be cheaper these days but they also break a lot sooner so that cost over time can actually end up higher.

Two black holes for inflation, plus some more.

What I do not understand is why the absence of inflation is seen as a negative. Relative price stability is one of the few stabilities around these days. I prefer that to high inflation conditions eg in Zimbabwe, Argentina or Brazil.

In any way, I agree with non-decorated commentators that bringing in tens of thousands of migrants willing to undercut wages is depressing wage growth which in turn contributes to low nominal inflation.

Yes PP. Ref. yr para 4, That's what I keep banging on about: s.8 RBA Act 1989 actually stipulates "maintaining stability ....of prices" as the " primary function of the (Reserve) bank". The inflation targets of s. 9 only exist to achieve s.8. All (wilfully?) lost sight of since 2003.

The media have a role to play here in ensuring that the system has honesty and integrity.....I end up thinking we are better off without all the regulators as they stuff up all the time and there are no consequences for them......Wellington is full of incompetence.

Yr right NAE, about both Wellington and Governments; I worked there, in the public service, for a few years after the '87 Crash. I saw it up close and dirty. Post 1990, watched in horror as the Nats slowly, starting with the culling of Ruth, began their journey to crony-socialism - now perfected to an art form.

Some goods might not last as long but there are others that last much longer than they used to. I remember the days of cars breaking down a number of times a year, having the TV repaired every few years, computers only lasted a couple of years before they were unusably slow, etc.

Kustler's outlook,

http://kunstler.com/clusterfuck-nation/christmas-present/

"What remains is for these (FED) ghosts to helplessly watch over the awesome workout, which has obviously been underway for quite a while in the crash of commodity prices (and whole national economies — e.g. Brazil, Canada, Australia), the janky regions of the bond markets, the related death of the shale oil industry, and the imploding hedge fund scene."

Here's an interesting snapshot of how good little NZ is seen from the other side of the world - we can and should be far more choosy about who gets to live here: http://www.bbc.com/capital/story/20150922-is-this-the-best-place-in-the-...
AND here's one BIG example of our folly: http://www.bbc.com/news/world-asia-35166113

Peak milk... "The decline in fuel costs over the past year returned gasoline prices to their rightful place: cheaper than a gallon of milk."

"An oil barrel measures 5.6 cubic ft., and Smith’s Gardentown sells a cubic foot of topsoil for $4.99. That calculates to $27.94 for the amount of soil needed to fill an oil barrel. At $34.20 a barrel, oil would still appear to be more expensive than dirt, but, according to DeMeers, producers only collect on about 80 percent of a barrel’s sale price once severance taxes and royalty payments are made."

http://blogs.wsj.com/economics/2015/12/21/gas-is-so-cheap-you-could-drin...
http://eaglefordtexas.com/news/id/162514/oil-getting-cheaper-dirt/