Is RBNZ ignoring deflation bogey?

Written By: Guest post - Date published: 6:52 am, January 29th, 2016 - 71 comments
Categories: Economy, farming, Financial markets, housing - Tags: dairy, deflation, fonterra, global financial crisis, graeme wheeler, inflation, property bubble, rbnz, reserve bank

By Simon Louisson

Is Reserve Bank Governor Graeme Wheeler so concerned about the bogey of Auckland’s housing bubble that he is underestimating an equally nasty bogey – deflation?

With annual inflation at 0.1 percent, it seems the scourge of inflation that dogged New Zealand for decades has been licked, but the danger of what NZ Herald economic editor Brian Fallow called “inflation’s ugly sister” – deflation – is threatening.

At the start of the Global Financial Crisis in 2008, Fallow quoted economics Nobel laureate, Paul Krugman, as saying it is deflation, not inflation that was the greatest concern for the world economy.

Deflation is an extended period of falls in the general level of prices. It occurs when demand is so weak for so long that firms keep cutting their prices to attract buyers. If it becomes embedded in expectations, people put off buying things in the belief they will be cheaper later in what becomes a vicious circle.

Japan experienced deflation in its “lost decade” of the 1990s (that extended into the 2000s), when its property bubble burst, causing GDP to shrink 19 percent, banks to collapse and real wages to fall.

Deflation can lead to depression as it did in the 1930s when a trend developed simultaneously in large parts of the world economy.

New Zealand’s consumer price inflation rate in 2015 was 0.1 percent and, contrary to what most people imagine, food prices fell 1.3 percent last year. The inflation rate has now been below the 0-3 percent target the RBNZ has been mandated to keep, for over a year.

And it is set to go negative next quarter due to a sharp fall in oil and petrol prices with consequent second-round effects – Air New Zealand already signalling a steep fall in air fares.

World oil prices are going down for the same reason dairy prices are – over supply and slack demand mainly spurred by China’s economic slowdown.

It is ironic that minutes before Wheeler today decided to leave the Official Cash Rate unchanged in his six weekly review, Fonterra announced it had cut its farmgate milk price forecast for the 2015/6 season to $4.15/kg of milksolids from a previous forecast of $4.60 in response to weak international prices.

Federated Farmers dairy director Andrew Hoggard commented that most farmers are in the red at any price below $5 and ,while one year was survivable, 2015/16 will be the second year and “the outlook was not that flash”, so a third year of losses was likely.

Had Wheeler been aware of Fonterra’s decision, he may have been more inclined to take out a little more “insurance” and cut today rather than wait until mid-March by which time the cow might have bolted.
Wheeler’s worry is debt – both dairy farmers’ debt and those exposed to that industry (a fair chunk of the economy), and the property market debt.

If he cuts interest rates, the exchange rate will likely drop and that will help farmers and other exporters, but it will also encourage Aucklanders to jump deeper into an already over-inflated property market that is already well out of kilter to household incomes.

The Auckland property market has in the last couple of months shown a few speed wobbles, classic signs that a bubble is about to burst.

In November, Wheeler warned a sharp “correction” in Auckland’s housing market could threaten New Zealand’s financial stability and the risk was growing because prices were increasingly stretched relative to household incomes. “A correction could be triggered by a range of demand-side factors, such as a deterioration in labour incomes, an unexpected rise in mortgage rates, a reversal in migration flows, or a sudden reduction in investor appetite.”

He reiterated today that house price inflation in Auckland remains a financial stability risk

Fonterra’s latest price forecast downgrade may be just such a trigger that results in a lot of dairy industry incomes being cut that may flow through to investors getting cold feet.

New Zealand’s banks are highly exposed to Auckland’s property market, hence Wheeler’s worries about cutting rates further and pouring petrol on that market.

But by not cutting rates and encouraging the inflation rate to fall into negative territory, Wheeler may have an uglier problem to deal with, because once people hold off buying today what may be cheaper tomorrow, the economy could slide into a deflation tail-spin that will be very difficult to pull out from.

Unlike Europe and the US, where interest rates have been near zero for over five years (despite the US Fed’s 0.25 percent hike last month) the RBNZ still has some stimulus it can lend the economy with its cash rate at 2.5 percent.

There is no question it is a devilishly delicate path Wheeler has to tread, especially as curbs to the Auckland property market will undercut spending that flows from the “wealth effect” of inflated property prices.

However, he needs to cut now while simultaneously introducing new measures to curb investment in the Auckland property market, such as household income lending ratios or regional property lending limits for banks.

He must act while there is still life in the economy because if he leaves it too late, cutting the cash rate will have little effect. Deflation will certainly cure the problem of the property bubble, but that cure will be at a terrible cost.

71 comments on “Is RBNZ ignoring deflation bogey? ”

Comments are now closed

Tautuhi 1

29 January 2016 at 7:15 am

Don’t worry there will be plenty of Offshore Buyers lining up to buy the farms, how come we go from a “Rockstar Economy” to this situation in two years.

Obviously the “Rockstar Economy” had fragile foundations like much of Christchurch, NZ should be called the “Bullshit Economy”?
- lprent 1.1
  
  29 January 2016 at 7:26 am
  
  …how come we go from a “Rockstar Economy” to this situation in two years.
  
  Relying on selling a commodity like dairy (or beef or wood or wool or oil or iron or…) into a global market is inherently both lazy and dangerous. It doesn’t provide a stable income and doesn’t provide much direct employment.
  
  However that was the path that National chose to go down after they came back into office. They cut almost all of the effective assistance for R&D and bootstrap international marketing in the manufacturing and tech sectors. Slashed entry points to the education system that allow upskilling (trying to be adult student these days is hard).
  
  They concentrated on allowing a massive expansion of the rural sector in dairy – at the cost of tourism (who really wants to look at filthy green and depleted waterways).
  
  There never was a “rockstar” economy in the long term. It was a short-term profit take done at the expense of long-term growth of more viable long-term export sectors.
  - northshoredoc 1.1.1
    
    29 January 2016 at 7:55 am
    
    “they concentrated on allowing a massive expansion of the rural sector in dairy – at the cost of tourism (who really wants to look at filthy green and depleted waterways).”
    
    I thought tourism numbers and income was up ?
    - lprent 1.1.1.1
      
      29 January 2016 at 10:24 am
      
      Yes on volumes. Less so on income. But think on how much better it’d be if we weren’t trashing waterways. But basically tourism isn’t a sustainable industry because it is far too dependent on commodity oil prices, and the arrival figures show this.
      
      Over the last 10 years international visitor arrivals has increased from 2.41million in 2006 to 3.09 million in 2015 (using YTD November figures) – primarily because the cost of fuel decreased. The majority of that increase has happened in the last 3 years.
      
      http://www.stats.govt.nz/browse_for_stats/population/Migration/international-visitor-arrivals-nov-15.aspx
      
      However, it also means that the nett increase of 28% took 10 years to happen.
      
      If I look at the period 2001-2010 for the June YTD (because that is what I can see easily) we see growth from 1.88 million to 2.50 million, a nett 32% increase.
      
      http://www.stats.govt.nz/browse_for_stats/population/Migration/international-visitor-arrivals-june-10.aspx (and that is bearing in mind that 2000 had a 10% increase outside my arbitrary cutoff).
      
      If I look back further I will see even faster increases in growth with most of the faster growth coming when airfares get cheaper due to drops in the price of fuel. Effectively tourism is just as dependent on a commodity price (oil derived kerosene) as farming is. Not exactly an industry to base a future on.
      
      About the best thing that it has over farming is that it employs more people.
      - Nick Nack 1.1.1.1.1
        
        29 January 2016 at 11:38 am
        
        As you will see from http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=10y, apart from one period in 2008, oil prices rose steadily between 2006 and 2015. The rapid drop in oil prices only began in July 2015. This data suggests Tourism has proven to be remarkably immune to the increase in oil prices. The other trend that Tourism seems to have bucked is the exchange rate. On July 1st 2006 (using your dates above), the USD/NZD cross was .6164 (http://www.oanda.com/currency/historical-rates/). The cross rate reached as high as .80 in March 2008, and by 30 June 2010 (again using your dates) the cross rate was .6921, some 12% above the 2006 level. A higher exchange rate naturally works against NZ as a tourist destination, yet by your own data tourism grew during the period. The other pertinent point is that this growth occurred during a GFC, so the industry has also shown to be somewhat recession proof.
        
        In the year to March 2014, Tourism contributed 15.3% to NZ’s exports, 7.1% of GDP and employed 4.7% of NZ’s total employment. (http://www.stats.govt.nz/browse_for_stats/industry_sectors/Tourism/TourismSatelliteAccount_MRYeMar14.aspx). This would seem to be precisely the sort of industry we should be basing our future on.
        
        lprent 1.1.1.1.1.1
        
        29 January 2016 at 2:56 pm
        
        Tourism tends to react to shocks. Once the effect of the shock stabilises then you get a resurgence.
        
        But that isn’t the point. Over a 10 year time frame, the tech industries grew massively faster than tourism and has been much more shock proof.
        
        Dairy went up like a rocket up and down.
        
        Which one should a government invest effort into?
        
        Nick Nack …
        
        29 January 2016 at 4:27 pm
        
        Your point was that tourism is dependent on commodity prices – that is patently untrue. Your post didn’t mention tech industries, it was a hit job on tourism. An ill advised one, in my opinion.
        
        lprent …
        
        29 January 2016 at 6:43 pm
        
        FFS: Read the whole thread rather than being a stupid dickhead defending your patch. Not to mention being VERY selective about the time periods (I went from 2001-2015 – why did you pick 2006-2015?), using raw oil prices (WTF? use avionic kerosene prices) and ignoring what the conversation was about. That wasn’t my point. That is the point that you are trying to invent.
        
        My comment was that the government were completely stupid to target a commodity driven area like farming, making a side comment about its unfavourable impact on tourism.
        
        When responded to with the rise of tourism, I pointed out the extent that was affected by external commodity issues and pointed to the slowed growth rate in two overlapping decade periods. I was pointing out that it was a relatively slow growth industry and pointing to one major factor affecting that. It’d be easy enough to show the correlations with avonic kero prices, but I really can’t be bothered doing the analysis anyway – since that is your argument not mine.
        
        Now if you want to know why I was pointing to that, then you should look at the growth periods…. Ummmm here we go – looking backwards for two decades to 1995. From the PDF versions from stats. Look at the seasonally adjusted figures.
        
        http://www.stats.govt.nz/~/media/Statistics/Browse%20for%20stats/ExternalMigration/previous-releases/external-migration-dec05-hotp.pdf
        
        http://www.stats.govt.nz/~/media/Statistics/Browse%20for%20stats/IntTravelAndMigration/HOTPNov15/IntTravelAndMigrationNov15HOTP.pdf
        
        My point is that it has taken 20 years to double visitor numbers.
        
        As a side issue, the overall pattern is that when avonic kerosene prices rise, then visitor numbers go into a considerable stasis afterwards. When the kerosene prices drop we get faster rises for a while afterwards. When kero prices are stable after a price hike, we get a static pattern for a number of years followed by gradual rises. When markets open for new customers because of cross rate currency changes (who cares about a single currency cross rate), we get a rise a few years later.
        
        So back to my main point
        
        Now the tech sector has no easy views in stats because Stats still don’t really measure it (best look at the MBIE sectors report http://www.mbie.govt.nz/info-services/business/business-growth-agenda/sectors-reports-series/published-report ) but as the NZ Tech association blurb (ie hitech manufacturing, ICT, and biologics) says…. http://www.nztech.org.nz/what-we-do/business-growth-exports/
        
        The tech sector accounts for 7% of GDP, more than 124,000 jobs and growth of 16.5% pa.
        
        The export growth part of that is even faster growth because that is where we sell it. People catering to the local market are heavily market constrained because the market is so teeny, whereas there is no real limit offshore. In the last 20 years I haven’t worked for a company that doesn’t sell at least 90% of their product offshore.
        
        I’d point out that those jobs are MUCH better paid than those in tourism. That the doubling of income in constant dollars has been happening in about 5-8 years for the last 20 years that I have been in the tech export industries either with code + services or code + devices. The only things that constrain it is the lack of startup assistance and the lack of available trained skills. In the former case we are heavily reliant on the government to provide the environment that startup companies develop in. In the latter we are reliant on the government for resourcing education and assisting immigration to cover the shortfalls.
        
        Which is why most of the places I have worked in over the last 20 years are mainly staffed by immigrants, because National underfunded effective training in the 1990s, and resumed doing so in 2009.
        
        So getting back to the original point. If you were looking as a government to invest in?
        
        1. Dairy, farming and forestry which largely produce commodity raw materials with minimal processing for export, vast income and margin swings, and virtually no employment. The obvious exception here is vintners but thye do a *lot* of processing to get their high and consistent returns
        
        2. Tourism with lots of poorly paid employment requiring little training, low marginal returns, slow growth, and a largely mature industry.
        
        3. Tech with lots of highly paid employment requiring lots of training that the government can assist in, high marginal returns, and high growth.
        
        Because National tends to attract the thicker members of the business community, they prefer the first, reluctantly do the second, and try to pretend that the third doesn’t exist because it comes largely from Auckland and Christchurch – where the Labour & Green voters dominate.
        
        AmaKiwi …
        
        29 January 2016 at 7:25 pm
        
        lprent
        
        That is a very thorough and well-documented reply.
        
        But any voter with a reasonable IQ should readily be able to figure out what you have documented.
        
        That’s what really pisses me off about National (aside from their corruption and arrogance.) It’s all so bloody obvious. Technology and value added makes money. Ag and tourism are high risk and fleeting.
        
        lprent …
        
        30 January 2016 at 1:13 pm
        
        We do need to support tourism and farming. But not in the way it is being done now.
        
        Both tourism and farming have local resource constraints. They use particular types of land and locations.
        
        Farming’s resource constraints are pretty damn obvious whenever you get near a waterway, especially in the plains areas. Trickles of filthy water where there once were picturesque streams.
        
        If you go near those picture perfect tourist locations in summer, you certainly notice it. While locations like hobbiton can be developed they quickly get overwhelmed….
        
        Basically support for farming and tourism should concentrate on getting more margin from the resources. That requires R&D and upskilling – something that National have been effectively scaling back.
        
        Instead they seem to concentrate on how to use more resources, by getting more low margin tourists and shipping more of the same old commodity products. Their biggest thing in the last 7 years seems to have been trying to push down tariff barriers via the bloody TPPA.
        
        Tech is a whole different ball game. The main local constraint is the lack of locals skilled to operate in the fields (ie why we use so many immigrants), housing, and the support for startups. These don’t use much resource. They just require forward planning.
        
        There are few barriers for tech selling into markets and it is something that we do well in cities and towns. It works side-by-side with our resource intensive industries.
        
        Draco T Bastard …
        
        30 January 2016 at 1:58 pm
        
        That requires R&D and upskilling – something that National have been effectively scaling back.
        
        National refuses to spend money on investment and so they’ll just keep trying to do more with the same technology. It’s why, despite IC being developed back in the 1960s, we can’t produce them here despite the fact that we have all the resources to do so. We just haven’t built the infrastructure to do so and for that we, like the US, needed the government to front up and build it.
        
        Thing is, Labour isn’t any better in that they too hope that private investors will do it instead.
        
        It’s why our government decided to court foreign investment when what we needed, and still need, is direct government action.
        
        Nick Nack …
        
        29 January 2016 at 7:37 pm
        
        “why did you pick 2006-2015?”
        
        I quote from your post “Over the last 10 years international visitor arrivals has increased from 2.41million in 2006 to 3.09 million in 2015 (using YTD November figures) ”
        
        “My comment was that the government were completely stupid to target a commodity driven area like farming, making a side comment about its unfavourable impact on tourism.”
        
        The post I was responding to was timed at 29 January 2016 at 10:24 am. It is about tourism.
        
        “I pointed out the extent that was affected by external commodity issues and pointed to the slowed growth rate in two overlapping decade periods. ”
        
        No, you said “Effectively tourism is just as dependent on a commodity price (oil derived kerosene) as farming is.” That is patently untrue. Tourism has ridden out rising and declining oil prices, as my post shows.
        
        “So getting back to the original point. If you were looking as a government to invest in?”
        
        Revisit the post I was responding to. It was about Tourism. You’re trying to spin your comments as being a comparison between tourism and high tech industries, which it never was.
        
        lprent …
        
        29 January 2016 at 7:57 pm
        
        I quote from your post
        
        So you just ignored the other decade that was linked to and referenced? How supremely stupid of you. Why did you think that I put it in there for? Decoration of a xmas tree? You should read the comment rather than vaguely scanning it.
        
        The post I was responding to
        
        There is reason that we have threaded comments. It is to make it apparent that there is a conversation. So by your rules, I presume you broke into my conversation with someone else where I was replying to a point that they had raised on a much wider question, and thought what? That I’d put that point up there for a terminal fuckwit like yourself.
        
        Please read the conversation before you whip your dick out and start massaging it like a caged mink in heat. You don’t make the rules around here. If you can’t behave like a rational person who reads the thread, then why should we treat you as anything apart from a mindless dickhead?
        
        Nick Nack …
        
        29 January 2016 at 9:09 pm
        
        “So you just ignored the other decade that was linked to and referenced? ”
        
        No, I referenced the one you DID refer to.
        
        “So by your rules, I presume you broke into my conversation with someone else where I was replying to a point that they had raised on a much wider question, and thought what? ”
        
        Let’s be very clear here. Your “conversation” was, at that point, a single response to northshoredoc’s post of 29 January 2016 at 7:55 am. Your response said nothing about tech industries. Nothing. My response (29 January 2016 at 11:38 am) to you was very clearly to your comment about tourism. Only then did you introduce comment about tech industries.
        
        “You don’t make the rules around here. ”
        
        Now your just being a bully. I didn’t start out to have an argument, just to provide some counter argument to your comment about tourism. You’ve escalated this, and are just looking silly.
        
        Ad …
        
        29 January 2016 at 8:32 pm
        
        Great work there LPrent
    - Graeme 1.1.1.2
      
      29 January 2016 at 3:11 pm
      
      Tourism is only on the up because our dollar has retreated to USD 0.65 from above 0.80
      
      We are smacked from both sides by a high dollar, we are too expensive for international visitors, and overseas destinations are cheaper for New Zealanders.
      - Nick Nack 1.1.1.2.1
        
        29 January 2016 at 5:14 pm
        
        As I demonstrated above, tourism has been ‘on the up’ at times when the NZ$ was also ‘on the up’. Tourism has shown to be remarkably resilient to a range of outside influences, and is a significant contributor to our national income.
        
        Macro 1.1.1.2.1.1
        
        29 January 2016 at 7:22 pm
        
        Well you can shove your tourism right up where the sun doesn’t shine as far as I’m concerned. I live in a town that is plagued by tourists. A few is ok – but when the population of the region swells from 30,000 to over 120,000 in the height of summer the pressure on infrastucture is immense. And who gets to pay for this? Not the tourist – or the operator – no the rate payer.
        
        Nick Nack …
        
        29 January 2016 at 7:40 pm
        
        That’s hardly an argument. So you’re inconvenienced by an industry that cntriibutes 15.3% to NZ’s exports, 7.1% of GDP and employed 4.7% of NZ’s total employment. (http://www.stats.govt.nz/browse_for_stats/industry_sectors/Tourism/TourismSatellite).
        
        Macro …
        
        29 January 2016 at 8:44 pm
        
        You forgot one major item!
        
        And doesn’t contribute to the well being of the community it dumps its external costs upon
        
        So tell me Nick – how does 15.3% of exports, 7.1% of GDP, and 4.7% of NZ’s total employment trickle down to me?
        
        And you haven’t answered the criticism of the increased cost to ratepayers who have to provide all the extra facilities for 90,000 extra persons.
        
        For example:
        People need water to wash and drink and cook. Water catchment and reticulation alone is a huge cost. Have you thought about that?
        Sewage disposal?
        
        Nick Nack …
        
        29 January 2016 at 9:42 pm
        
        Tourists pay 2.5bn in GST every year (http://www.tianz.org.nz/main/key-tourism-statistics/).
        
        295,908 people are directly and indirectly employed in tourism, all paying taxes.
        
        Good enough for you?
        
        Macro …
        
        29 January 2016 at 10:06 pm
        
        No.
        
        GST goes into the consolidated fund it does not go to the local communities who have to provide services for them.
        
        Tourist operators rely on the provision of water and sewage and local roads paid for by local communities, and give nothing in return.
        
        Nick Nack …
        
        30 January 2016 at 12:24 pm
        
        “GST goes into the consolidated fund…”
        
        …which is then used to provide services across the entire country, including those communities.
        
        “Tourist operators rely on the provision of water and sewage and local roads paid for by local communities, and give nothing in return.”
        
        You mean they don’t pay rates? They don’t employ people? They don’t invest in infrastructure?
        
        Molly …
        
        30 January 2016 at 8:40 am
        
        I remember visiting Greece while on my OE, many years ago, and going to places that I hated because they were completely run for tourists with shops, restaurants etc. It was like visiting someone’s nightmarish idea of what a country is.
        
        Since then, I have always thought that you build a country for residents, tourists will come if the country has the scenery and the locals are happy.
        
        Macro …
        
        30 January 2016 at 11:46 am
        
        Yes. That is an important point. Take the Eiffel tower in Paris for instance. The thing was built as a tourist attraction and continues to be to this day. Millions flock to it every year. It has to be carefully managed and that’s great. Work, money coming in, etc, But is it France?
        Then, on the other hand, take the Parthenon in Greece – never built as a tourist attraction, but again millions flock to see it. So many that it’s very existence is under threat.
        More is not always better.
        But that is the basic assumption of Nick. Why else would he quote % age of growth and tax from tourists to us?
        Just as more and more dairying is not the answer, neither is more and more tourists. More tourists bring more pressure on fragile environments, and more need for infrastructure. It’s not the silver bullet.
        
        AmaKiwi 1.1.1.2.1.2
        
        29 January 2016 at 7:28 pm
        
        Nick Nack
        
        Everyone in tourism for the past 100 years will tell you when the economy catches a cold, tourism has pneumonia.
        
        On the other hand, a bad economy is great for starting wars. I don’t like war, but in war tons of money gets poured into military technologies, some of which are NZ based.
        
        Nick Nack …
        
        29 January 2016 at 7:38 pm
        
        Tourism appears to have withstood the GFC quite nicely AK.
        
        Graeme …
        
        29 January 2016 at 8:11 pm
        
        I think you are looking at statistics you don’t understand, rather than trying to make a living out of tourism.
        
        Volume means nothing if in country yield low, or in some cases almost nil.
        
        Where’s the investment in accomodation in the last 6 years? It’s only being thought about now that yield has improved, due to a lower dollar, that accomodation investment is being proposed.
        
        Unfortunately it’ll be just in time for the next crash, so we go through the low yield bullshit all over again.
        
        We’ve been in the game for 40 years and it can be a very frustrating one at times. Has had it’s rewards too.
        
        Nick Nack …
        
        29 January 2016 at 9:35 pm
        
        I’m not looking at volume, I’m looking at the financial contribution tourism is making to our country. Tourism has survived periods of high and low relative exchange rates, as my earlier post shows, revealing a remarkably resilient sector. I’m glad you’ve stuck with the industry though. I don’t have any vested interest, but I do admire how resilient the industry has been.
        
        Graeme …
        
        29 January 2016 at 10:39 pm
        
        Yes, tourism is resilient, and contributes to our economy in an increasing amount, but over long, multi-cyclic time frames. Just like agriculture. But we’re in an environment now where everyone’s looking for the next boom to jump on. We’ve just had a huge one in dairy and having one in property. Both are looking like they will end in tears. Now tourism’s being touted as the lifeblood of the economy.
        
        Is this our “rock star” economy, one unsustainable, over exploited, boom after another. Fortunately most of the carnage from the dairy collapse will be offshore, (the offshore finance and capital flooding in pushed our dollar up) but a property correction is going to hurt here.
        
        Which rabbit are the government going to pull out of the hat to kick this one down the road? Tourism’s not going to sustain it, no-one’s got any money to spend on holidays.
        
        Nick Nack …
        
        30 January 2016 at 12:19 pm
        
        “Now tourism’s being touted as the lifeblood of the economy.”
        
        No, it isn’t. It is being ‘touted’ as one of many elements that contribute to our economic wellbeing.
        
        “…one unsustainable, over exploited, boom after another.”
        
        Well that doesn’t apply to tourism. Tourism, as I have repeatedly shown, has survived significant changes in oil prices and in the exchange rate. It is remarkably resilient.
        
        AmaKiwi …
        
        29 January 2016 at 9:18 pm
        
        Nick Nack
        
        Pure fantasy. Globally tourism is struggling. It always does in a bad economy.
        
        Travel for tourism is a discretionary expenditure. Why would people who are struggling to pay their mortgage and can’t replace their worn out car take an overseas holiday to NZ? Explain that.
        
        Nick Nack …
        
        29 January 2016 at 9:37 pm
        
        http://www.tianz.org.nz/main/key-tourism-statistics/
        
        AmaKiwi …
        
        29 January 2016 at 10:00 pm
        
        The question is, “Is technology a more substantial basis for our economy than tourism?”
        
        Your link is useless. It says nothing pertinent to the discussion.
        
        Troll somewhere else.
        
        Graeme …
        
        29 January 2016 at 10:56 pm
        
        Yeah, TIA (Tourist Industry Association) trying to make the industry look good so someone will pour lots of money in to save their arse.
        
        Trouble is, that’s about the best you’ll find. Real, meaningful statistics on the industry are hard to find, probably because they often don’t look good. Media reporting is only reprinted press releases, never any analysis. Bloody pitiful for an industry that contributes 17 -20% of our foreign exchange.
        
        Nick Nack …
        
        30 January 2016 at 12:26 pm
        
        “The question is, “Is technology a more substantial basis for our economy than tourism?””
        
        No, that wasn’t the question. The question was – is tourism sustainable?
        
        lprent []
        
        30 January 2016 at 1:19 pm
        
        And there you go trying to redefine the question. I wasn’t looking at tourism I was looking at tech and farming.
        
        But basically tourism is constrained by having to have the resource to accommodate tourists curing a short season. We currently have about 3 million arrivals annually, most arriving in a summer season. This approaches the population of the country and has interesting hiden costs effects on parts of the economy. And they congregate around a limited number of points of interest.
        
        So no. Tourism is not sustainable if it is just operated by ramping up visitor numbers
        
        Nick Nack …
        
        30 January 2016 at 12:27 pm
        
        “Real, meaningful statistics on the industry are hard to find, probably because they often don’t look good. ”
        
        Real statistics are actually very easy to find on the tourist industry.
        
        Start here http://www.stats.govt.nz/browse_for_stats/industry_sectors/Tourism.aspx
        
        Nick Nack …
        
        30 January 2016 at 2:11 pm
        
        “Tourism is not sustainable if it is just operated by ramping up visitor numbers”
        
        That’s a significant qualifier to what you were arguing before. Where did you get the idea NZ tourism is just about “ramping up visitor numbers”? Have you read the TIA NZ Tourism Strategy? (http://www.tianz.org.nz/main/nz-tourism-strategy-2015/). Or how about this “Auckland is committed to the visitor economy and has committed significant investment to develop the necessary infrastructure to enable this growth”. (http://www.aucklandnz.com/invest/tourism-sector).
        
        NZ is investing in tourism, and is developing strategies to ensure it is a sustainable industry for the long term. You seem intent on relegating it to an also ran. It isn’t.
        
        Graeme …
        
        30 January 2016 at 5:22 pm
        
        Well, have a look at this table in the link you graciously provided
        
        http://nzdotstat.stats.govt.nz/wbos/Index.aspx?DataSetCode=TABLECODE7573
        
        Mean visitor spend in 1998 was $3,033.44 from 1,305,367 international visitors. In 2015 it was $3,083.22 form 2,644,890 international visitors.
        
        OK, there’s a bit of cyclic variation in spend, but just accounting for inflation it should be around $4500/pax
        
        Sorry, but you can’t escape the conclusion that all the growth is in ramping up numbers and yield has gone backwards, probably by 40% The other conclusion is that the stats are bullshit.
        
        Thanks for the great leadership of our industry.
        
        lprent []
        
        30 January 2016 at 6:07 pm
        
        Sorry, but you can’t escape the conclusion that all the growth is in ramping up numbers and yield has gone backwards, probably by 40% The other conclusion is that the stats are bullshit.
        
        Glad you dragged that out. I was going to do it, but today I wound up fixing some irritating bits of the site that changed after the last major wordpress update.
        
        That reduction in the take has been my impression as well. If you look over the last couple of decades, tourism promotion has all been about bringing numbers into the country rather than increasing the take off the customers.
        
        Now it could be that the cost of provision has gone down through assiduous cost cutting and improved procedures thereby increasing the margin. But that doesn’t seem likely based on both what I have seen and the general bitching inside the tourist operators and their employees. I get the impression that profit margins are very slim and that the only reason they have been able to have any at all is because they squeeze their employees into longer hours and effectively lower hourly rates.
        
        Of course the industry is pretty variable. There will be operators running on nothing and others making major profits and passing them to employees. But as a sector, it is not exactly the type of industry we need to grow that much. The way it has been developed, all it does is impoverish employees.
        
        Graeme …
        
        30 January 2016 at 7:14 pm
        
        Tourism that respects our environment and people can drop a lot of money into the country. Last year that 2.6 million visitors spent $8.15 billion. But the $3000 figure is a mean figure, and considering what we see from the middle of the market, there’s a lot above us, there are an awful lot of visitors who spend next to nothing here. It’s common to have people for whom a bottle of water is too expensive.
        
        If we had 2 million visitors spending just $6000 each we’d have 12 billion. $6000 in-country spend really isn’t much, I have customers that spend more than that just with us and that’s what keeps us and our artists alive. And there’s a lot a lot way above that. When rooms are for $500/night rather than $50 there’s enough for staff to have some dignity, and as a country we don’t have to fill nearly as many to have better return and employment. And a lot easier on environment and infrastructure.
        
        The blindness of our leadership, as shown above is stunning. It’s all about getting more and more low yield customers, and then crowing about how well the industry is doing. Never anything about profitability, or growing yield. Oh, there’s the obligatory aspirational stuff in the strategy, but in 12 -24 months “we were unable to meet expectations in that market”
        
        Nick Nack …
        
        1 February 2016 at 11:19 am
        
        “Mean visitor spend in 1998 was $3,033.44 from 1,305,367 international visitors. In 2015 it was $3,083.22 form 2,644,890 international visitors.”
        
        So? You’re trying to argue that because visitor numbers doubled the industry is unsustainable?? That tourist operators and leaders are doing a bad job??
        
        You really don’t seem to understand the factors that impact on visitor spend, they are many and varied. This article may help you:
        
        http://www.infometrics.co.nz/total-tourist-spend-falls-despite-increased-visitor-arrivals/
  - Keith 1.1.2
    
    29 January 2016 at 8:28 am
    
    “Short-term”, a phrase so deeply synonymous with John Key!
    - Stuart Munro 1.1.2.1
      
      29 January 2016 at 3:01 pm
      
      “You must be the worst lover in the world!”
      “How can you judge someone like that in just two minutes?”
- savenz 1.2
  
  29 January 2016 at 8:18 am
  
  @Tautuhi +1
  
  “Don’t worry there will be plenty of Offshore Buyers lining up to buy the farms, how come we go from a “Rockstar Economy” to this situation in two years.”
  
  Not to mention the 60,000 migrants buying up residential property and the number of unidentified off shore investors doing the same.
- Lanthanide 1.3
  
  29 January 2016 at 10:40 am
  
  It was always a one-hit-wonder, but National talked it up like it was the Rolling Stones.
Ad 2

29 January 2016 at 7:21 am

There’s commentary around from large US hedge fund managers that the global effectiveness of reserve banks everywhere is weakening. They essentially have no power in the next crisis.

Sucks wholesale when citizens aren’t rewarded for diligent saving, can’t trust shares, bonds are shit, buying a fsrm is stupid, and the only asset returning anything is rented houses.

Key’s economic legacy just gets worse.
- Jones 2.1
  
  29 January 2016 at 8:55 am
  
  No assets will be returning anything because they will all be over-valued, unless with rented properties the rent is jacked to cover the mortgage, at which point most will be unable to pay. I see debtor prisons on the horizon.
  - Stuart Munro 2.1.1
    
    29 January 2016 at 8:14 pm
    
    Small arms & penicillin – best industries when the collapse hits.
- Nic the NZer 2.2
  
  30 January 2016 at 9:35 am
  
  “There’s commentary around from large US hedge fund managers that the global effectiveness of reserve banks everywhere is weakening. They essentially have no power in the next crisis.”
  
  I guess that puts them above average, but still extremely far behind on the curve. MMT economists have been saying that monetary policy is pretty ineffective at both preventing bubbles, and supporting aggregate demand.
  Of course that’s not news, that applies to the great recession and will continue to apply going forward. If the world wants to actually deal with the recession then governments will need to support aggregate demand directly, actively using fiscal policy. MMT economists have been saying this for around 2 decades already and it was known well before then in the right circles as well.
Al66 3

29 January 2016 at 7:22 am

Can wages in this country actually fall lower? Thanks National.
- savenz 3.1
  
  29 January 2016 at 9:58 am
  
  @AI66 +1
  
  Yes wages can fall more. We are ‘lucky’ as our minimum wages are high compared to some of our other TPPA signatory countries, Vietnam, 65 cents per hour, USA $6 p/h some states, etc.
  
  Not to mention the 60,000 new migrants also looking for jobs and the 6000 jobs projected to be lost under TPP in NZ under the Natz stewardship – I think we now know what the Natz next excuse for screwing over Kiwi’s even more – it was deflation (and Labour caused it somehow!).
  
  How much government debt have the Natz racked up now?????
Keith 4

29 January 2016 at 8:24 am

It’s ironic in Aucklands property ponzi scheme that deflation makes the debt you take on today even dearer years later if it persists for any extended length in the complete opposite of inflation that erodes debt.

Interest rates cannot drop infinitely in deflation and persistent deflation can become a self fulfilling proficy. It can even force wage cuts. So at this point ones investment homes get a bit more worrying and if any further proof were needed there is now very little if anything that is supporting Aucklands runaway property market.

Deflation isn’t all bad but the skewed way our economy is set up means housing investor’s risk getting badly burned. Terrible, maybe real home buyers who want somewhere to live may soon have a chance!
mikesh 5

29 January 2016 at 8:54 am

Tax cuts for low income earners (or a UBI) could be more helpful than interest rate cuts, but the government’s deficit phobia seems to rule that out.
- savenz 5.1
  
  29 January 2016 at 10:12 am
  
  Was talking to a friend the other day about a UBI. He thought it was a good idea and a great way to restart the economy. By giving people a safety net they can then become a lot more creative and work on projects they have always wanted to do, this renaissance of creativity can restart the economy with a plethora of patents, innovations and so forth. Instead of the Rogernomics punish your way into inequality and consumerism and growth it works by reducing hours of work for many so they can concentrate on other things and the economy grows in other areas not previously thought of.
  
  Many of the jobs we have these days would have been unheard of 100 years ago, so instead of ploughing away at keeping the existing jobs – you create space for creative capital to start to solve world problems. It also can radically reduce social problems, mental heath, addictions, criminal behaviour, health problems and therefore save the state in other areas as well as simplifying welfare.
Richard Christie 6

29 January 2016 at 10:13 am

With annual inflation at 0.1 percent

I presume that’s made up of CEO salary increases and housing price rises.
- Macro 6.1
  
  29 January 2016 at 7:25 pm
  
  “CEO salary increases and housing price rises.”
  That would be about it.
DH 7

29 January 2016 at 10:27 am

This is ridiculous. The existing low consumer inflation is externally driven, our own prices aren’t falling. Non-tradables inflation was 1.8% and would have been higher if not for the big fall in oil prices.

Economists need to get their heads out of their arses. Reduced import prices will not lead to people saving instead of spending. If it did we’d have been living with deflation for years. We’re a consumer society, we stopped saving decades ago.
esoteric pineapples 8

29 January 2016 at 11:03 am

So all the responsible decision making on New Zealand’s finances are left on the shoulders of Reserve Bank Governor Graeme Wheeler instead of the Prime Minister and cabinet who are supposed to be running the country. He isn’t the one who should be worrying about the Auckland property market.
- Brendon Harre -Left wing Liberal 8.1
  
  29 January 2016 at 10:19 pm
  
  +1
Draco T Bastard 9

29 January 2016 at 1:06 pm

There is no question it is a devilishly delicate path Wheeler has to tread, especially as curbs to the Auckland property market will undercut spending that flows from the “wealth effect” of inflated property prices.

I’ve been saying for awhile now that the only reason why we’re not in a recession/depression is because of the housing bubble. National have, of course, been propping that bubble up as long as possible because as soon as it pops they’re going to be blamed.

Not all blame should lie with National though. Labour holds some as they were encouraging it in the early 2000s. It does look like they may become concerned with it before the 20008 election though.

The bubble will pop – it has to. The correction will be painful for many. Hopefully the government won’t bail out the banks but, unfortunately, they’ve been doing so since forever.
- ropata 9.1
  
  29 January 2016 at 10:57 pm
  
  The Australian government would never bail out Kiwis who use their greedy banks, that’s for sure
Henry Filth 10

29 January 2016 at 2:52 pm

Will there be mass sacking at the Reserve Bank over their failure to achieve their inflation targets?

Or does accountability not apply to nice, middle-class economists?
dave 11

29 January 2016 at 5:33 pm

dairy is over never coming back the expansion of mega dairy will relegate NZ to a bit player, there nothing wheeler can do to save this economy the house hold debt levels are past the point of no return the economy will hit the wall with aloud pop of the housing market its only a case of when not if
- Stuart Munro 11.1
  
  29 January 2016 at 7:38 pm
  
  It won’t pop. Overseas investors are largely unaffected by the collapsing NZ economy – they won’t go belly up nearly as fast as their tenants. When Key’s work is done & NZ defaults, housing will deflate by maybe 40%. But most renters will be out, and leveraged landlords will be screwed too.
  - savenz 11.1.1
    
    30 January 2016 at 9:03 am
    
    @Stuart M +1
    I’m inclined to agree – what is inflating property is overseas investors and migrants and they are getting a lot more than a house – they are getting a NZ passport by coming here. Migrants just have to stick out our poor wages for a few years and voila, they have a passport to NZ and OZ, can get all he family over here and free medical, social security and so forth. At this point most of the migrants I know who originally got the job to get the passport, move off overseas to earn real money.
    
    I don’t blame migrants for this at all, I blame government policy that defies common sense. Or maybe it doesn’t as our while our wealth is being transferred overseas and taxpayers are getting poorer, some Kiwis can feel affluent. Like Key and his obsession with short term gain this is a short term situation that is due to go bad when people on local wages can’t afford to live in NZ anymore but have no where else to go.
    
    But will it effect property – don’t think so. There are plenty of migrants wanting to get out of their home country and unlike Kiwis – overseas investors are getting residency on the road to citizenship often with that.
    
    NZ is still a fantastic place to live – you just need to have enough money to live here but due again to government policy there is zero incentive to make a long term living here or provide long term jobs for locals, (the opposite incentives to get more cheap migrant workers in) and you are competing internationally for resources here.
    
    The only way to contain property prices is to reduce immigration or strengthen criteria and National and Labour don’t seem keen to do that. The other thing that may damage property is the mortgage scams and ponzi schemes popping up – had a Korean person I know who has no job, never paid tax in NZ but is on pension, loans to Korean mafia and hey presto no problem getting a rate much lower than offered to her A++ credit rated Kiwi born working partner.
    
    If someone wants to help Kiwis then do something to get wages up and contain the extreme profiteering by banks and power companies. All we ever hear about is landlords – but there is a shortage of them – you guessed it because the housing supply is being sucked up by 60,000 migrants who need somewhere to live. Rents and property prices will fall or stagnate when migration falls.
    
    The only reason that there has not been a massive riot about cost of living by Kiwis is that interest rates and petrol have fallen and items like TV’s etc which has allowed people to keep going and the government schemes to prop up wages like working for families.
Incognito 12

29 January 2016 at 11:45 pm

It is a good post but quite one-sided as it only focuses on the RBNZ. I thought I was going to fly a parrot that would be quickly shot down but there seems to be a whole pandemonium of parrots here.

The RBNZ operates within a legal constraint that includes a yearly Statement of Intent to Bill English. The Government has many more options and flexibility to stimulate the economy and direct policies to achieve certain desired outcomes. Instead, it pumps billions of taxpayers’ money into a few large infrastructure projects (mainly roading) that will take years to complete. Somehow and sometime (?) that magical trickle-down effect has to appear out of nowhere and provide a stimulus that is needed right now, not in 2023, 2030, or some other time in the future.

IMO one of the best and most direct measures to stimulate the economy in a fair and equally distributed way is to lower GST. Obviously, this is antithetic to anything this Government believes in; it comes down to dogmatic faith or trying something different for a change.
Bill 13

30 January 2016 at 9:37 am

Guessing this is kind of relevant

The Bank of Japan (BoJ) has imposed negative interest rates on banks to encourage them to lend to businesses, instead of hoarding cash, to support the flagging economy and the country’s battle to break free of deflation.

http://www.theguardian.com/world/2016/jan/29/bank-of-japan-achieve-imposing-negative-interest-rates
- Nic the NZer 13.1
  
  30 January 2016 at 10:04 am
  
  Unlikely to have much effect. Here is an explanation of what’s going on from several years ago.
  http://bilbo.economicoutlook.net/blog/?p=4763
Foreign waka 14

30 January 2016 at 11:22 am

We need to take into consideration the current world situation impacting greatly on NZ trading conditions. China’s growth has all come to a stand still, the US elections are this year which means another great export market will essentially be on “hold” for a while. Europe has the refugee crisis that costs billions (!) of dollars that will be missed in the circulation and economic activity for the next few years. The middle east is on fire and the oil price is being used to bring Russia to its knees.

NZ should protect its shores, no signing of anything right now please as we do not know what the new geopolitical situation will be in the next 5 years. What we should start doing is protecting food sources, clean water and sustainable farming.
It is not only NZ but most of the western world that looks at deflation as the gulf between profit and wages has widened so much that there is a disconnect of major proportion and unrest is growing everywhere. The economic model of growth cannot be sustained and the environmental consequences are obvious.
Anyone out there who actually wants to find a solution rather than cutting the nose despite the face is in my view and so many of the current 20-30 year old’s, more than welcome. Lets start to define democracy and enshrine it into a written constitution, by law unshakable, not to be sold against baubles and blankets.