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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.

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