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National, The Economy, and coming Speed Wobbles – March Update

23 March 2014 2 comments

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The Nationalmobile

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On 1 March, in a previous blogpost, I raised the following issues;

1. The Reserve Bank has indicated that  it will begin to increase the OCR (Official Cash Rate) this year. Most economists  are expecting the OCR to rise a quarter of a percentage point on March 13.

Confirmed. True to it’s word and as clearly signalled, on 13 March the Reserve Bank  raised the Official Cash Rate (OCR) from 2.5% to 2.75%.

2. An increase in the OCR will inevitably flow through to mortgage rates, increasing repayments.  As mortgaged home owners pay more in repayments, this will impact on discretionary spending; reducing consumer activity, and flow through to lower business turn-over.

Confirmed. The ANZ Bank  has already  announced it will increase its floating and flexible home loan rates .25 percentage points to 5.99% on 17 March. Expect other banks to follow suit. Other bank rate rises will be signalled here.

This will inevitably dampen consumer spending and reduce economic activity.

3. An increase in the OCR will inevitably also mean a higher dollar, as currency speculators rush to buy the Kiwi. Whilst this may be good for importers – it is not so good for exporters.

Confirmed, as the NZ Herald reported;

The New Zealand dollar jumped to a five-month high after the Reserve Bank raised the benchmark interest rate as expected and signalled further hikes are on the way.

The kiwi rose as high as 85.26 US cents, from 84.73 cents immediately before the Reserve Bank’s 9am statement. The local currency recently traded at 85.20 cents.”

And in another Herald story,

By raising rates, the Reserve Bank aims to tame both inflationary pressures and house price increases but also runs the risk of elevating an exchange rate it already considers too high, making exports less competitive.”

For a nation that bases it’s economy on exporting, a rising Kiwi Dollar will bring inevitable problems of higher debt and greater trade imbalance. It means we are not paying our way in the world and inevitably there will be a “Crunch Day” of tragi-Greek proportions.

On that day, the public will blame politicians.

Politicians will blame each other.

And the Left will shake it’s head in exasperation – it’s admonitions that this was all predictable as a natural consequence of unconstrained consumerism coupled with rampant capitalism –  lost in the shrill clamour of pointless blame-gaming.

As BERL economist, Ganesh Nana, said on The Nation on 15 March, we’ve been down this road before and not learned a single lesson  from these experiences.

4. As economic activity and consumer demand falls, expect businesses not to hire more staff and for fresh  redundancies to add to the unemployment rate. Unemployment will either stay steady later this year, or even increase.

On-going…

5. As interest rates rise, in tandem with the Reserve Bank’s policy on restricting low-home deposits, expect home ownership to fall even further. This will increase demand for rentals, which, in turn will push up rents. Higher rents will also dampen consumer spending.

Confirmed. The Reserve Bank  has reported that there has “been some moderation in the housing market. Restrictions on high loan-to-value ratio mortgage lending are starting to ease pressure, and rising interest rates will have a further moderating influence...”

Expect home ownership levels to fall even further as interest rates rise further; rents increase (thereby making it harder for low income families to save); and mortgagee sales to rise as well.

Interestingly, when in Opposition, National Party leader, John Key lambasted the Labour Government for a high OCR leading to high interest rates. In a desk-thumping speech, on 29 January 2008, he railed,

Why, after eight years of Labour, are we paying the second-highest interest rates in the developed world?

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Why can’t our hardworking kids afford to buy their own house?…

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Mortgage rates are rocketing upwards…

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We know Kiwis are suffocating under the burden of rising mortgage payments and interest rates…”

It seems that Mr Key should now begin to be answering his own questions.

6. As the global economy picks up and demand for oil increases, expect petrol prices to increase. This will have a flow-through effect within our local economy; higher fuel prices will lead to higher prices for consumer goods and services. This, in turn, will force the Reserve Bank to ratchet up interest rates (the OCR) even further.

Whilst fuel prices remained steady during the worst of the GFC, they have begun edging upward again as the global economy improves and demand for energy grows.

Our high Kiwi Dollar will mitigate the worst of rising crude-oil prices – but only temporarily. Once other Central Banks begin to rise their OCRs, expect the value of the Kiwi Dollar to fall as speculators sell the Kiwi in preference to harder currencies.

This will be good for exporters.

But will be a negative impact on imports – such as oil. Prices will rise as the Kiwi Dollar falls. Count on it.

7. As businesses face ongoing pressures (described above), there will be continuing  pressure to dampen down wage increases (except for a minority of job skills, in the Christchurch area). For many businesses, the choice they offer their staff will be stark; pay rise or redundancies?

Data suggests that wages are not keeping pace with GDP Growth;

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Wages

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NZ average hourly wages 2012 - 2014

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GDP

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NZ GDP Growth Rate 2012 - 2014

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8. Expect one or more credit rating agencies (Fitch, Moodies, Standard and Poors) to put New Zealand on a negative credit watch.

On-going…

9. According to a recent (21 February) Roy Morgan poll, 42%  of respondents still considered the economy their main priority of concern. 21% considered social issues as their main concern.This should serve as a stark warning to National that people will “vote with their hip wallets or purses” and if a significant number of voters believe that they are not benefitting from any supposed economic recovery, they will be grumpy voters that walk into the ballot booth.

There is no reason to think otherwise on this issue. Voters who are spending more on mortgage or rent are less inclined to be happy consumers.Especially as mortgage rates are expected to rise even further, according to Bernard Hickey’s assessment of Governor Graeme Wheeler’s statement,

Wheeler said in early December he expected to raise the OCR by 2.25% by early 2016, which would lift variable mortgage rates to around 8% by then. The bank forecast interest rate rises of around 1% this year and a similar amount next year.”

Home owners paying 7% to 8% on their mortgage will not be happy-chappies and chapettes. They will be grumpy. The 2009 and 2010 tax cuts will be a dim memory and any attempt by Key to remind voters of those cuts will not be warmly received. Especially as any minute gain for workers was more than swallowed up by the rise in GST, ACC, government user-pays charges, and now their mortgages and rents.

If only a small percentage of grumpy voters change their voting away from National (or stay home) – that will mean a critical drop in support for a right-wing bloc. One or two percentage points is all that is required to change the government.

10. National has predicated its reputation as a “prudent fiscal manager”  on returning the government’s books to surplus by 2014/15. As Bill English stated  just late last year,

We remain on track to surplus in 2014/15, although it will still be a challenge to actually reach surplus in that financial year.”

[…]

On top of which is the $61 billion dollar Elephant in the room; the government debt racked up by National since taking office in 2008. As Brian Fallow wrote in the Herald in 2011,

The concern about government debt is not so much about its level, but the pace at which it is increasing. In June 2008 net government debt was $10 billion, or 5.6 per cent of GDP, and gross debt $31 billon, or 17.2 per cent of GDP.”

A lower tax-take, reported by Treasury on 11 March puts serious doubt on National’s ability to return to “remain on track to surplus in 2014/15″;

  • Total unconsolidated tax receipts for the seven months ended January 2014,  $143 million (0.4%) below the 2013 Half Year Economic and Fiscal Update (2013 HYEFU) forecast…
  • Total unconsolidated tax revenue for the seven months ended January 2014,  $459 million (1.1%) below the 2013 Half Year Economic and Fiscal Update (2013 HYEFU) forecast…
  • GST $250 million below forecast,
  • Net individuals’ taxes $191 million below forecast,
  • Customs and excise duties $156 million below forecast

The March Treasury report follows from a February report showing a similar “smaller than forecast tax take across the board“,

The Crown’s operating balance before gains and losses (obegal) was a deficit of $1.79 billion in the six months ended December 31, $380 million wider than forecast in its Dec. 17 half-year economic and fiscal update, and down from a shortfall of $3.19 billion a year earlier. Core tax revenue was $602 million below forecast at $29.18 billion.

[…]

The smaller tax take was across the board, with GST 2.3 per cent below forecast at $7.5 billion, source deductions for personal income tax 1.2 per cent below forecast at $11.71 billion, and total corporate tax 4.9 per cent below expectations at $3.56 billion.

As I wrote on 1 March, should National fail in that single-minded obsession, the public will not take kindly to any excuses from Key, English, et al. Not when tax payer’s money has been sprayed around with largesse by way of corporate welfarism. Throwing millions at Rio Tinto, Warner Bros, China Southern Airlines, Canterbury Finance, etc, will be hard to justify when National has to borrow further to balance the books.

Any economic “recovery” is fragile; dependent on overseas factors; and will bring new problems. Little wonder that Key brought the election date forward by two months. Mortgage rates by the end of the year will be nudging 7%.

Not much of a Christmas present for New Zealanders.

As such, Labour must begin to attack Key’s government in this area. This will be a grand opportunity for the Left to finally drive a stake through the “heart” of National’s undeserved reputation as  being a “responsible economic manager”.

National remains utterly vulnerable during this year’s election.

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References

Interest.co.nz:  Bernard Hickey looks at what the Reserve Bank’s OCR decision means for mortgage rates and house prices

Radio NZ: Reserve Bank warns of more interest rate rises

Interest.co.nz: Mortgages

NZ Herald: Dollar jumps on OCR hike + video

NZ Herald: New Zealand raises interest rate to 2.75 percent

Reserve Bank: Reserve Bank raises OCR to 2.75 percent

John Key: SPEECH: 2008: A Fresh Start for New Zealand

Interest.co.nz: Oil and Petrol

tradingeconomics.com: Wages

tradingeconomics.com: GDP

Roy Morgan: Economic Issues down but still easily the most important problems facing New Zealand (42%) and facing the World (36%) according to New Zealanders

NBR: Govt sees wider deficit in 2014 on ACC levy cut, lower SOE profits

Fairfax media: Public debt climbs by $27m a day

NZ Herald: Govt debt – it’s the trend that’s the worry

NZ Treasury: Tax Outturn Data

NZ Herald: Govt deficit bigger than expected as tax trickles in

Previous related blogposts

TV3 Polling and some crystal-ball gazing

National, The Economy, and coming Speed Wobbles

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https://fmacskasy.files.wordpress.com/2014/02/the-cost-of-living1.jpg

Above image acknowledgment: Francis Owen

This blogpost was first published on The Daily Blog on 16 March 2014.

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National, The Economy, and coming Speed Wobbles

1 March 2014 4 comments

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The Nationalmobile

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For a while, the news seemed dire for the Left, and impressively positive for National;

  • A recent Fairfax Media-Ipsos poll put National on 49.4%  versus  31.8% and 10% respectively for  Labour and the Greens.
  • The latest Roy Morgan Poll had National at 48%, compared to 30% and 12% for Labour and the Greens respectively.
  • Annual average economic growth  was 2.6% to September 2013.
  • The Household Labour Force Survey for the December 2013 Quarter showed a drop in unemployment, from 6.2% to 6%.
  • Dairy prices (and thusly export reciepts) continued to rise.
  • The trade deficit continued to slowly improve.
  • And there was just enough ambiguity around recent child poverty statistics to allow National, and its drooling sycophants,  to claim that it was no longer a  growing problem (it was simply a constant problem).

However, is everything as it really seems? Is the news all rosy and are we rushing head-first toward the “promised land“, the much heralded, Neo-liberal Nirvana?

Or, are dark clouds beginning to appear on the horizon?

New Zealand’s economic recovery is predicated mostly on the Christchurch re-build, and piggy-backing on the global economic situation picking up. As Treasury reported in 2012;

The Canterbury rebuild is expected to be a significant driver of economic growth over the next five to ten years. The timing and speed of the rebuild is uncertain, in part due to ongoing aftershocks, but the New Zealand Treasury expects it to commence around mid-to-late 2012.

As predicted,  the ASB/Main Report Regional Economic Scoreboard recently revealed that Canterbury had over-taken Auckland as the country’s main center for economic growth.

Meanwhile, the same report outlines that Auckland’s “growth” is predicated on rising house prices. Economic “growth” based on property speculation is not growth – it is a bubble waiting to burst.

The other causal factor for our recovery is international. The IMF reported only last month;

Global activity strengthened during the second half of 2013, as anticipated in the October 2013 World Economic Outlook (WEO). Activity is expected to improve further in 2014–15, largely on account of recovery in the advanced economies. Global growth is now projected to be slightly higher in 2014, at around 3.7 percent, rising to 3.9 percent in 2015, a broadly unchanged outlook from the October 2013 WEO. But downward revisions to growth forecasts in some economies highlight continued fragilities, and downside risks remain...

Being  mostly an exporter of commodities (meat, dairy products, unprocessed timber, etc), New Zealand cannot but help ride the wave of an upturn in the global economy as increasing economic activity creates a demand for our products.

Any economic recovery, as such, has little to do with the incumbent government – just as the incumbent governments in 2008 and 2009 had little to do with the  GFC and resulting recession (though National’s tax cuts in 2009 and 2010 were irresponsible in the extreme, reliant as they were on heavy borrowings from overseas). We are simply “riding the economic wave”.

As the global up-turn generates growth in New Zealand’s economy, paradoxically that leaves us vulnerable to new, negative, economic factors;

1. The Reserve Bank has indicated that  it will begin to increase the OCR (Official Cash Rate) this year.

Most economists  are expecting the OCR to rise a quarter of a percentage point on March 13. As Bernard Hickey reported in Interest.co.nz;

Wheeler said in early December he expected to raise the OCR by 2.25% by early 2016, which would lift variable mortgage rates to around 8% by then. The bank forecast interest rate rises of around 1% this year and a similar amount next year.

2. An increase in the OCR will inevitably flow through to mortgage rates, increasing repayments.

As mortgaged home owners pay more in repayments, this will impact on discretionary spending; reducing consumer activity, and flow through to lower business turn-over.

Even the fear-threat of higher mortgage interest rates may already be pushing home owners to lock-in fixed mortgages. Kiwibank for example, currently has a Fixed Five year rate at 6.9%. ANZ has a five year rate at 7.2%. Expect these rates to rise after March.

If home owners are already fixing their mortgages at these higher rates, this may explain the fall in consumer confidence, as the Herald wrote on 20 February,

New Zealand consumer confidence fell from its highest level in seven years this month, while remaining elevated, amid a pickup in inflation expectations and the prospect of interest rate increases.

It may also explain, in part, this curious anomaly which recently featured in the news cycle,

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Govt deficit bigger than expected as tax trickles in

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The Herald report goes on to state,

The smaller tax take was across the board, with GST 2.3 per cent below forecast at $7.5 billion, source deductions for personal income tax 1.2 per cent below forecast at $11.71 billion, and total corporate tax 4.9 per cent below expectations at $3.56 billion.

Treasury officials said some of the lower GST take was due to earthquake related refunds, and that the shortfall in Pay As You Earn might be short-lived. The corporate tax take shortfall was smaller than in the previous month…

  • A drop in GST would be utterly predictable if consumer spending was falling.
  • Personal income tax would be falling if employers were cutting back on part-time work available. Which indeed seems to be the case, according to the latest Household Labour Force Survey (HLFS) Poll on unemployment,

Over the year, the total number of under-employed people increased by 27,200 to 122,600. As a result, the under-employment rate increased 1.0 percentage points to 5.3 percent.

Less wages equals less spent in the economy and less PAYE and GST collected by the government.

  • This would also account for the drop in corporate tax take falling by  4.9%.

The effect of the Reserve Bank’s decision to begin raising interest rates will be to dampen economic activity and consumer demand. This will be bad news for National.

3. An increase in the OCR will inevitably also mean a higher dollar, as currency speculators rush to buy the Kiwi. Whilst this may be good for importers – it is not so good for exporters. If we cannot pay our way in the world through exports, that will worsen our Balance of Trade; in turn risking our international credit rating; which in turn can  impact negatively on the cost of borrowing from off-shore (the lower our credit-rating, the higher interest we pay to borrow, as we are considered a higher lending risk).

This, too, will affect what we pay for our mortgages and capital for business investment.

4. As economic activity and consumer demand falls, expect businesses not to hire more staff and for fresh  redundancies to add to the unemployment rate. Unemployment will either stay steady later this year, or even increase.

Less people employed or a reduction on work hours for part-time employees will also result in a lower tax take.

5. As interest rates rise, in tandem with the Reserve Bank’s policy on restricting low-home deposits, expect home ownership to fall even further. This will increase demand for rentals, which, in turn will push up rents. Higher rents will also dampen consumer spending.

6. As the global economy picks up and demand for oil increases, expect petrol prices to increase. This will have a flow-through effect within our local economy; higher fuel prices will lead to higher prices for consumer goods and services. This, in turn, will force the Reserve Bank to ratchet up interest rates (the OCR) even further.

7. As businesses face ongoing pressures (described above), there will be continuing  pressure to dampen down wage increases (except for a minority of job skills, in the Christchurch area). For many businesses, the choice they offer their staff will be stark; pay rise or redundancies?

8. Expect one or more credit rating agencies (Fitch, Moodies, Standard and Poors) to put New Zealand on a negative credit watch.

9. According to a recent (21 February) Roy Morgan poll, 42%  of respondents still considered the economy their main priority of concern. 21% considered social issues as their main concern.This should serve as a stark warning to National that people will “vote with their hip wallets or purses” and if a significant number of voters believe that they are not benefitting from any supposed economic recovery, they will be grumpy voters that walk into the ballot booth.

Interestingly, the “Economy” category also included the social issue of “Poverty / The gap between the rich and the poor”.  16% believed that “Poverty / The gap between the rich and the poor”was a major factor within the economic situation – a significant sub-set of the 42%.

Add that 16% to the 21% considering social issues to be the number one priority, and we see the number of respondents in this category increasing to 37%. That is core Labour/Green/Mana territory.

10. National has predicated its reputation as a “prudent fiscal manager”  on returning the government’s books to surplus by 2014/15. As Bill English stated just late last year,

“We remain on track to surplus in 2014/15, although it will still be a challenge to actually reach surplus in that financial year.”

Should National fail in that single-minded obsession, the public will not take kindly to any excuses from Key, English, et al. Not when tax payer’s money has been sprayed around with largesse by way of corporate welfarism. Throwing millions at Rio Tinto, Warner Bros, China Southern Airlines, Canterbury Finance, etc, will be hard to justify when National has to borrow further to balance the books.

On top of which is the $61 billion dollar Elephant in the room; the government debt racked up by National since taking office in 2008. As Brian Fallow wrote in the Herald in 2011,

The concern about government debt is not so much about its level, but the pace at which it is increasing. In June 2008 net government debt was $10 billion, or 5.6 per cent of GDP, and gross debt $31 billon, or 17.2 per cent of GDP.

Since 2008, New Zealand’s sovereign debt has increased six-fold – made worse in part by two ill-conceived and ultimately unaffordable tax cuts.  Those tax cuts were, in essence, electoral bribes made by John Key to win the 2008 general election. (Labour’s paying down of massive debts it had inherited from National in the 1990s, plus posting nine consecutive surpluses, had come around to bite Cullen on his bum. Taxpayers were demanding “a slice the action” by way of tax cuts.)

That debt will eventually have to be repaid. Especially if, as some believe, another global financial shock is possible – even inevitable. With a $60 billion dollar debt hanging over our heads, we are not well-placed to weather another global economic shock. In fact, coupled with private debt, New Zealand is badly exposed in this area (as the OECD stated, in the quote below).

So the “good news” currently hitting the headlines is not so “good” after all, and many of the positive indicators have a nasty ‘sting in the tail’. As the OECD  recently reported,

The New Zealand economy is beginning to gain some momentum, with post‑earthquake reconstruction, business investment and household spending gathering pace.Risks to growth remain, however, stemming from high private debt levels, weak foreign demand, large external imbalances, volatile terms of trade, a severe drought and an exchange rate that appears overvalued. The main structural challenge will be to create the conditions that encourage resources to shift towards more sustainable sources of prosperity. Incomes per head are well below the OECD average, and productivity growth has been sluggish for a long time. Lifting living standards sustainably and equitably will require structural reforms to improve productivity performance and the quality of human capital.

As the election campaign heats up, expect the following;

  1. Greater media scrutiny on National’s track record,
  2. The public to become more disenchanted with Key’s governance as economic indicators worsen and impact on their wallets and purses,
  3. National (and its sycophantic supporters) continue to blame welfare beneficiaries; the previous Labour government; the GFC and resulting recession; and other “external factors” for their lack-lustre performance,
  4. Key and various business  figures to become more strident in their attacks on Labour and the Greens,
  5. A dirty election campaign , including a well-known extremist right-wing blogger releasing personal information on political opponants, which will backfire badly on National,
  6. National to fall in the polls; NZ First will cross the 5% threshold; and Labour/Greens/Mana to form the next government, with Peters either sitting on the cross benches, or taking on a ministerial portfolio outside Cabinet.

So it’s not the Left that should be worried.

National is on shakier ground than many realise.

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References

Fairfax Media: National on wave of optimism – poll

Roy Morgan: National (48%) increases lead over Labour/ Greens (42%) – biggest lead for National since July 2013

NZ Herald: Economic growth hits 4-year high

Statistics NZ: Household Labour Force Survey: December 2013 quarter

Fairfax Media: Dairy prices squash trade deficit

NZ Herald: NZ’s trade deficit remains despite better terms

Fairfax Media: Inequality: Is it growing or not?

NZ Treasury: Recent Economic Performance and Outlook

Fairfax media: Canterbury overtakes Auckland in economic survey

IMF: World Economic Outlook (WEO) Update

Reserve Bank:  Price stability promotes a sustainable expansion

Interest.co.nz:  Bernard Hickey looks at what the Reserve Bank’s OCR decision means for mortgage rates and house prices

NZ Herald: Consumer confidence slips as rates increase looms

NZ Herald:  Govt deficit bigger than expected as tax trickles in

Statistics NZ:  Unemployment December 2013 Quarter

Roy Morgan: Economic Issues down but still easily the most important problems facing New Zealand (42%) and facing the World (36%) according to New Zealanders

NBR:  Govt sees wider deficit in 2014 on ACC levy cut, lower SOE profits

Fairfax media:  Public debt climbs by $27m a day

NZ Herald: Govt debt – it’s the trend that’s the worry

NZ Herald: Cullen – Tax cuts but strict conditions

OECD: Economic Survey of New Zealand 2013

Previous related blogposts

TV3 Polling and some crystal-ball gazing

Other blogposts

The Daily Blog: Latest Roy Morgan Poll shows the Labour funk

The Daily Blog: Canaries In A Coal Mine: Has The Daily Blog Poll anticipated Labour’s Collapse?

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The Cost of Living

Above image acknowledgment: Francis Owen

This blogpost was first published on The Daily Blog on 23 February 2014.

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