web analytics

Recovery nightmare

Written By: - Date published: 9:25 am, July 29th, 2009 - 27 comments
Categories: economy - Tags:

‘A nightmare’ scenario. That’s how ANZ chief economist Cameron Bagrie speaking on Morning Report described the outlook for the economy as the recession comes to an end.

Wait isn’t growth good? Well, not all growth is created equal. The problem is where our growth prospects are coming from.

It’s the housing market once again. Interest rates are low, prices have dropped. It’s a good time for a cashed up investor to get in, picking up houses relatively cheaply when other falter. Apart from the problem of more housing being concerntrated in fewer hands, this is a recipe for another bubble. As prices start to rise again it will draw in more money, pushing up prices further, and the cycle of great returns as long as more money keeps flowing into the system (not so different from a pyramid scheme) will start up again. In turn, this generates a ‘wealth effect’, the paper value of your home increases, you borrow against that increase to fund more consumption.

Real growth has to come out of exports but the opposite is happening.

The dollar is high and rising (up 30% since Key called it to drop below 50 cents and stay there six months ago), which is hurting export returns. Export groups bilthley say ‘well, the world still needs to eat and we export food’ but the reality is that prices for our major exports (dairy and tourism) are down and the dollar is just making it worse. Merchandise exports are still falling and show little sign of recovery. Tourism is in even deeper trouble due to the economic woes of major tourism sources like Japan, the UK, the US, and Germany. Even the cycleway won’t turn that around.

Domestic borrowing is set to grow, along with imports while exports limp along. All this leads to is higher debt, a higher current account deficit, and a higher dollar. The seeds of the next bust are already being sown. A nightmare scenario indeed.

27 comments on “Recovery nightmare ”

  1. Bill 1

    I wonder if it is feasible to have a ‘recovery’ based on consumer spending when so many potential consumers have already borrowed up to the hilt against their previously overvalued homes. How is the domestic borrowing going to be financed when the main asset people used as security for borrowed money is now worth so much less than before and the borrowing against it was already maxed out for many?

    Given that ‘nobody’ is cashed up, I see a long grinding nightmare of recession ( Where does this idea that it is coming to an end come from?) and depression with no recovery of any type whatsoever.

  2. Surely surely surely we need to review the Reserve Bank Act ASAP so that the OCR can focus more on having a stable currency and less on simply “inflation”.

    • jasper 2.1

      Perhaps the alternative is to implement measures such as ensuring that any profits raised by Australian owned NZ businesses remain in NZ instead of flowing back out overseas – the likes of Hardly Normal, Sponge and Sponge and Hole Teemings, who generally are the main sellers of consumerist items that kiwis buy.

      It’s partly for this reason that wages remain low in NZ as Australian parents continually plead poverty on their NZ assets when much of their underlying profit base comes from NZ.

      For this reason alone, it’s why I no longer shop at any store that’s owned by overseas interest. If the shop assistant doesn’t know who owns the store, then they don’t get my business.
      I’d much rather shop somewhere that keeps profits in NZ and invests in capital and labour, therefore increasing productivity.

      You can’t increase productivity when no capital is being applied.

    • Draco T Bastard 2.2

      Inflation shouldn’t be a concern of the reserve bank at all. Need to have wages linked to inflation and then inflation will be controlled by those who keep pushing prices up.

  3. Zaphod Beeblebrox 3

    This is a good follow on from the “Nice try, Roger” post. The reforms of the 80s and 90s and the failure to establish Capital Gains Tax and Stamp duty from property investments have led to investment in the wrong places and an artificially high dollar.

    The Clark Government acknowledged this problem but was happy to cruise along with the housing/borrowing fueled growth.

    Interesting to see how the Laissez Faire Government we have at present respond to this.

  4. burt 4

    We need to focus for a moment on the factors that created the domestic recession before the global crisis. I apprciate that politically it is expedient to ignore the fact we were in recession before the global mess but if we want to learn and understand what was sick in our economy we need to face the music.

    Open honest debate about the cause of the domestic recession without BS like blaming the failed policies of the 90’s is what is required now.

    • r0b 4.1

      Open and honest debate from you Burt? I look forward to that day.

      According to Reserve Bank Governor Allan Bollard: “The international financial crisis actually played little role in the early part of New Zealand’s economic recession. Rather, it was drought, falling house prices and high petrol prices that dragged New Zealand GDP growth negative over the first three quarters of 2008”.

    • burt 4.2

      Oh great, so we don’t need to worry about it then. Thanks rOb, here was me thinking that the economy was managed by Labour in a prudent way yet you highligh that it’s random and we should just carry on like we were.


      • snoozer 4.2.1

        no, burt. Read with your eyes not your jerking knee.

        The Reserve Bank governor attributed the domestic recession to “drought, falling house prices and high petrol prices ”

        That doesn’t say that all economic outcomes are random and separate from government action.

        • burt


          Yes you get it, the policies of the govt do make a difference and some naval gazing about the domestic recession might be a good idea. Of course we could be myopic tossers and blame external factors the govt had no control over if we wanted to indemnify the Labour party from any responsibility for the domestic recession.

          Or we could shoot the messenger who suggested we might want to learn something so we can try to not repeat or continue it. See acknowledging any responsibility for bad things gets messengers shot but claiming responsibility for good things is essential for partisan hacks funny world rOb lives in where govt own the good stuff and the bad stuff is out of their control.

        • burt

          Bollocks rOb

          You started discussion shooting the messenger “Open and honest debate from you Burt? I look forward to that day.”

          You probably didn’t even notice that you did that.

      • r0b 4.2.2

        So Burt, you call for “open and honest debate”. I start discussion with a quote from the Reserve Bank Governor. And you throw a big hissy fit and sulk. OK then. I suppose I should have known better than to reply to you in the first place. My bad.

    • Draco T Bastard 4.3

      You can’t have open and honest debate if you prevent the discussion from even mentioning a large chunk of the problem in the first place.

  5. Funnily enough I think everyone’s arguing the same point here: we need to actually have a good look at the reasons behind New Zealand’s underlying economic issues. It’s probably advantageous to at least try to be somewhat politically dispassionate whilst doing so.

    That’s why I said we should look at reviewing the Reserve Bank Act.
    That’s why Zapohd also blamed Labour for not doing anything about a capital gains tax etc.
    That’s why jasper was concerned about the repatriation of profits to Australia.

    Those aren’t necessarily “Labour good/National bad (or vice versa) debates”. More along the lines of “holy heck we’re potentially screwed, what can we do about it?”

    • r0b 5.1

      Very well put jarbury.

    • jasper 5.2

      not just Australia, but to anywhere overseas.

      However I can just see the BRT getting all fired up over this issue. Australia was only in a recession for 1/4, and now they’re out of it.

      What with all the ads encouraging us to buy buy buy, it’s no wonder. Great stuff Noo Zilland, we helped out the great western isle recover faster.

  6. burt 6

    jarbury proves that rOb responds differently to the same thing depending on who said it.

    Thanks jarbury – I agree with you.

    • r0b 6.1

      Ahhh, no. Jarbury’s comment is considerably wider in scope than yours, and considerably less partisan, and did considerably less to prejudge the issue.

      But you’re right that I respond to different people in different ways. Jarbury is a thoughtful and valuable contributor here.

    • burt 6.2


      Have you got anything to say about that? I would respond but I’ll be wrong and you will be right even when we same the same thing so I’ll leave it to you.

  7. Draco T Bastard 7

    Real growth has to come out of exports but the opposite is happening.

    The simple reality is that real growth must come from the real creation of wealth and not from “paper wealth” where the figures get bigger but everything else stays the same. The Archdruid has a good article about it.

    The late and loudly lamented housing bubble is a case in point. It’s a remarkable case, not least because houses which are usually part of the secondary economy, being tangible goods created by human labor were briefly and disastrously converted into tertiary goods, whose value consisted primarily in the implied promise that they could be cashed in for more than their sales price at some future time. (As a tertiary good, their physical structure had no more to do with their value than does the paper used to print a bond.) When the price of a secondary good goes up, demand decreases, but this is not what happened in the housing bubble; instead, the demand increased, since the rising price made further appreciation appear more likely, and the mis-, mal- and nonfeasance of banks and mortgage companies willing to make six- and seven-figure loans to anyone with a pulse removed all limits from the supply.

  8. pantson 8


    Inflation shouldn’t be a concern of the reserve bank at all. Need to have wages linked to inflation and then inflation will be controlled by those who keep pushing prices up.

    Zimbabwe anyone? Weimar Republic perhaps? If you don’t like the rich-poor gap now, see what a few years of double digit inflation would do for you. Incidentally – thats the biggest argument against the vast right wing secret banking conspiracy – they’d achieve all their aims simply by letting inflation run loose. So until we see that happen the conspiracy remains on hold. Awaiting orders.

    But I agree with your real wealth versus paper wealth comment.
    Inflation is the worst outcome possible for the less advantaged in society. They own few hard assets and no matter what mechanism you use, will always have wage growth lag inflation, while hard assets (mostly owned by the capital class) retain their real value.

    Three things that would help:

    – capital gains tax on 2nd or more properties plus ring fencing of tax deductions on property
    – retain RBNZ focus on price stability and monetary policy tools.
    – give the RBNZ the abilty to also alter the GST rate around the 15% target, with any tax over the 15% being sent off to the cullen fund.

    Those changes would get rid of the investment property distortion plus give the RBNZ a more refined tool than the currency to nfluence aggregate demand.

    If you think about central banking – the RBNZ tools (like all central banks) were mostly created or refined in the 70-80’s and given the particular problems then were hugely effective in creating price stability (volcker -Fed, brash-RBNZ etc). Banks still use pretty much the same tools but look how larger, more complex, more interrelated, less centrally controlled that economies have begun. As someone very much at the invisible hand end of economics I would however argue for the creation of some more hands on type tools for the RBNZ – the lesser of two evils.

    • Draco T Bastard 8.1

      So, you think retailers and employers, faced with wages rising every time prices went up, would uncontrollably raise prices?

      I wasn’t suggesting that the OCR be taken from the RBNZ either. That can still be used to price the NZ$ on the international market as is what was happening during the housing bubble. The high interest rates that the RBNZ was using to bring inflation down was doing the opposite as people from around the world bought up bonds denominated in NZ$. This resulted in a few things happening:
      1) Money flooded into the country making credit easy to get and so fueling the housing bubble and
      2) Pushed up the values of the NZ$ making imports cheap which
      3) increased our current account deficit.

      These two together, inflation controlled by businesses and international value of the NZ$ by the reserve bank would, IMO, bring about an actual stable currency (not that the economy is actually ever stable).

      They own few hard assets and no matter what mechanism you use, will always have wage growth lag inflation,

      Using political power might get it.

      while hard assets (mostly owned by the capital class) retain their real value.

      That is, IMO, incorrect. The hard assets are over valued.


      From Steve Keen’s <a href="http://www.debunkingeconomics.com/"Debunking Economics. Can’t remember which chapter – the book has a couple looking at the issue from both the POV of labour and capital. The conclusion is that capital is over compensated and labour is under compensated. This is due to relative political power and is not set by the market as neo-liberalism says.

  9. pantson 9

    Yes employers actually would raise prices as much as they could within the bounds of price elasticity – wages are the easiest thing for an employer to control – think outsourcing, contract workers, investment in productivity. The other inputs are harder to control. And there will always be many businesses that do better with inflation and they won’t be incentivised to control prices.

    And we actually do have a stable currency by most market measures – what we have is a currency that is generally higher than the export sector likes. The problem with using interest rates as a policy tool is that is a blunt instrument. The objective of monetary policy is to influence aggregate demand. The implementation though is very inefficient – short term rates have some effect on long term rates which have some effect on the currency. What is needed is a fiscal tool – that will affect aggregate demand and hence inflation much more directly and evenly across the economy. Otherwise the RBNZ will continue to try and affect one sector (consumers) by doing something that affects exporters primarily and actually helps consumers buy more imports. Doesn’t make sense.

    Re the hard assets – i don’t disagree with you in that many hard assets are relatively overvalued, but the point I was making is that in an inflationary environment hard assets will do better than financial assets. Not sure if you were around in the mid-late 80’s as a house owner – 20% mortgage rates etc, but if you owned a house you made out like a bandit. Despite high interest rates money in the bank was a losing proposition in terms of real purchasing power.

    And I havent read the Steve Keen book though I will track it down – but my spin on your conclusion is that he’s missed the point. Political power is market power and vice versa. No political system is sustainable if you don’t have a profit motive – but we should mitigate the worst inequalities, but everyone cannot have equal outcomes – equal opportunities yes.

    I’m not entirely sure capital is over compensated – it has become relatively more important and transferable than the labour input in many industries, particularly the ones NZ is heavy with.. The “problem” with labour is simply supply and demand – old fashioned labour is a declining value commodity and protectionist measures to preserve its value will fail in the long run, there will always be someone willing to do it cheaper or better.

    I think that is the whole point of the productivity debate – we need more knowledge based workers and fewer manually skilled workers. The former have some monopoly value and they will extract a higher share of compensation.

Recent Comments

Recent Posts

  • NZ announces a third P-3 deployment in support of UN sanctions
    The Government has deployed a Royal New Zealand Air Force P-3K2 Orion (P-3) maritime patrol aircraft to support the implementation of United Nations Security Council (UNSC) resolutions imposing sanctions against North Korea, announced Minister of Foreign Affairs Winston Peters and Minister of Defence Ron Mark. “New Zealand has long supported ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Pacific trade and development agreement a reality
    Pacific regional trade and development agreement PACER Plus will enter into force in 60 days now that the required eight countries have ratified it. Trade and Export Growth Minister David Parker welcomed the announcement that the Cook Islands is the eighth nation to ratify this landmark agreement. “The agreement represents ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Securing a pipeline of teachers
    The Government is changing its approach to teacher recruitment as COVID-19 travel restrictions continue, by boosting a range of initiatives to get more Kiwis into teaching. “When we came into Government, we were faced with a teacher supply crisis,” Education Minister Chris Hipkins said. “Over the past three years, we ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Border exceptions for a small number of international students with visas
    The Government has established a new category that will allow 250 international PhD and postgraduate students to enter New Zealand and continue their studies, in the latest set of border exceptions. “The health, safety and wellbeing of people in New Zealand remains the Government’s top priority. Tight border restrictions remain ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • First COVID-19 vaccine purchase agreement signed
    The Government has signed an agreement to purchase 1.5 million COVID-19 vaccines – enough for 750,000 people – from Pfizer and BioNTech, subject to the vaccine successfully completing all clinical trials and passing regulatory approvals in New Zealand, say Research, Science and Innovation Minister Megan Woods and Health Minister Chris Hipkins. ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • International statement – End-to-end encryption and public safety
    We, the undersigned, support strong encryption, which plays a crucial role in protecting personal data, privacy, intellectual property, trade secrets and cyber security.  It also serves a vital purpose in repressive states to protect journalists, human rights defenders and other vulnerable people, as stated in the 2017 resolution of the ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Ministry of Defence Biodefence Assessment released
    The Ministry of Defence has today released a Defence Assessment examining Defence’s role across the spectrum of biological hazards and threats facing New Zealand. Biodefence: Preparing for a New Era of Biological Hazards and Threats looks at how the NZDF supports other agencies’ biodefence activities, and considers the context of ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • New Approaches to Economic Challenges: Confronting Planetary Emergencies: OECD 9 October 2020
    New Approaches to Economic Challenges: Confronting Planetary Emergencies: OECD 9 October 2020 Hon David Parker’s response following Thomas Piketty and Esther Duflo. Good morning, good afternoon, and good evening, wherever in the world you might be. I first acknowledge the excellent thought provoking speeches of Thomas Piketty and Esther ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Kaipara Moana restoration takes next step
    A Memorandum of Understanding has been signed today at Waihāua Marae between the Crown, local iwi and councils to protect, restore and enhance the mauri of Kaipara Moana in Northland. Environment Minister David Parker signed the document on behalf of the Crown along with representatives from Ngā Maunga Whakahī, Ngāti ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • New Zealand and Uruguay unite on reducing livestock production emissions
    Agriculture Minister Damien O’Connor and Uruguayan Minister of Livestock, Agriculture and Fisheries Carlos María Uriarte have welcomed the launch of a three-year project that will underpin sustainable livestock production in Uruguay, Argentina, and Costa Rica.  The project called ‘Innovation for pasture management’ is led by Uruguay’s National Institute of Agricultural ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • 3100 jobs created through marae upgrades
    Hundreds of marae throughout the country will be upgraded through investments from the Provincial Growth Fund’s refocused post COVID-19 funding to create jobs and put money into the pockets of local tradespeople and businesses, Regional Economic Development Minister Shane Jones and Māori Development Minister Nanaia Mahuta have announced. “A total ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Health volunteers recognised in annual awards
    Health Minister Chris Hipkins has announced 9 teams and 14 individuals are the recipients of this year’s Minister of Health Volunteer Awards.  “The health volunteer awards celebrate and recognise the thousands of dedicated health sector volunteers who give many hours of their time to help other New Zealanders,” Mr Hipkins ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Community COVID-19 Fund supports Pacific recovery
    The Minister for Pacific Peoples, Aupito William Sio says a total of 264 groups and individuals have successfully applied for the Pacific Aotearoa Community COVID-19 Recovery Fund, that will support Pacific communities drive their own COVID-19 recovery strategies, initiatives, and actions. “I am keen to see this Fund support Pacific ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Community benefits from Māori apprenticeships
    Up to 50 Māori apprentices in Wellington will receive paid training to build houses for their local communities, thanks to a $2.75 million investment from the Māori Trades and Training Fund, announced Employment Minister Willie Jackson today. “This funding will enable Ngāti Toa Rangatira Incorporated to provide its Ngā Kaimahi ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Training fund supports Māori jobseekers
    Rapidly growing sectors will benefit from a $990,000 Māori Trades and Training Fund investment which will see Wellington jobseekers supported into work, announced Employment Minister Willie Jackson today. “This funding will enable Sapphire Consultants Ltd. to help up to 45 Māori jobseekers into paid training initiatives over two years through ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Ruakura Inland Port development vital infrastructure for Waikato
    The Government is investing $40 million to develop an inland port at Ruakura which will become a freight super-hub and a future business, research and residential development for the Waikato, Urban Development and Transport Minister Phil Twyford, and Māori Development Minister Nanaia Mahuta announced today. The funding has been has ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Appointments made to Defence Expert Review Group
    Defence Minister Ron Mark announced today the establishment of an Expert Review Group to review a number of aspects of the New Zealand Defence Force’s (NZDF) structure, information management and record-keeping processes.  The Expert Review Group’s work arises out of the first recommendation from the Report of the Government’s Inquiry ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • No active community cases of COVID-19
    There are no active community cases of COVID-19 remaining in the country after the last people from the recent outbreak have recovered from the virus, Health Minister Chris Hipkins said today. “This is a big milestone. New Zealanders have once again through their collective actions squashed the virus. The systems ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Clean energy upgrade for more public buildings
    More public buildings will be supported by the Government to upgrade to run on clean energy, the Minister for Climate Change James Shaw announced today. Minister Shaw announced that Lincoln and Auckland universities will receive support through the Clean-Powered Public Service Fund to replace fossil fuel boilers. Southern, Taranaki, and ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Schools back donations scheme for the second year
    More schools have opted in to the donations scheme for 2021, compared to 2020 when the scheme was introduced. “The families of more than 447,000 students will be better off next year, with 94% of eligible schools and kura opting into the scheme,” Education Minister Chris Hipkins said. “This is ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Ruapehu cycle trails gets PGF boost
    The spectacular Mountains to Sea cycle trail in Ruapehu District will receive $4.6 million in funding from the Provincial Growth Fund for two additional trails, Regional Economic Development Minister Shane Jones announced today. “This is an exciting development for the local community, and one that will provide significant economic opportunities ...
    BeehiveBy beehive.govt.nz
    3 weeks ago