Slowing economy?

Written By: - Date published: 7:30 am, August 14th, 2019 - 39 comments
Categories: australian politics, capitalism, Economy, economy - Tags:

The Singapore Government have just cut their forecast economic growth rate to near 0 per cent. The impact of the U.S.-China trade war is really hitting, and it’s going to hit us harder too.

Australia – on whose economy we are very reliant – has had a massive stimulus passed in its last budget. Also, straight after their election the Australian Federal Reserve Bank cut interest rates to 1% .That’s the lowest level on record. The RBA Governor Glenn Stevens has said the probability of recession in Australia is 100%, “only the timing is uncertain”. Droll as usual. Australia hasn’t been in a recession for over 20 years.

As to New Zealand, in May our Treasury was projecting growth accelerating from 2.4% to 3% in 2019-20. Our Reserve Bank has reacted the same way as the RBA, and pessimistically cut to 1%. Both can’t be right.

There’s plenty of concern about Auckland property, but property values outside Auckland are at record highs. Unemployment is low, but it looks like it needs to go even lower to get real wages forced up. The government has plenty of borrowing headroom if it really needed to, which is excellent because business sentiment is really terrible and two of our biggest businesses in Fletcher Building and Fonterra are in recovery mode from a very, very low base.

There are no breakout companies on our sharemarket or taking over the world.

Singapore’s economic signal is important to watch, and while it doesn’t make recession here certain, it’s a signal that it’s more likely and soon.

39 comments on “Slowing economy? ”

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  1. Sanctuary 1
    14 August 2019 at 7:48 am

    The way right wing commentary was able to frame the RB interest rate cut as a negative was impressive, made more effective (yet again) by Grant Robertson's technocratic distain of political engagement and parallel invisibility in the media.

    • Nic the NZer 2.1
      14 August 2019 at 12:32 pm

      Samubeel is right to say this. On the contrary Ad chooses to present it in missleading terms. "The government has plenty of borrowing headroom if it really needed to" this implies that the NZ govt has an external borrowing constraint, which is false. In reality the NZ government (as for any government which runs its own currency issuing central bank) can never run out of money. The government can (and to some extent does already) just mandate its central bank to carry out spending on its behalf. The actual reason the government borrows is not to acquire spending resources, it is to maintain higher borrowing costs at commerical banks in line with OCR policy. If the government doesn't do this then the 90 day bank bill rates and likely borrowing costs will fall away from and below the OCR. Always borrowing the deficit before spending is a policy choice of the government and Reserve bank.

      In short the deficit is not a constraint on government spending, ever. It is a policy choice to maintain as minimal a deficit as possible and politically up for grabs. The upshot of this choice is that it constrains NZers income and savings (as most government spending is on NZ businesses and individuals).

      • Dukeofurl 2.1.1
        14 August 2019 at 12:38 pm

        There is some suggestion that Australia who seem to have faced headwinds a bit earlier than us are thinking of the 'quantitative easing' rather than negative interest rates. That is of course the fancy way of creating money nowdays.

        https://www.afr.com/policy/economy/zero-rates-qe-possible-rba-s-lowe-20190809-p52fhw

        With the cash rate at a record low 1 per cent, Dr Lowe said that if the bank ever cut rates "very close" to zero, buying "risk-free" government bonds to drive down long-term yields would probably be the next option.

        • Nic the NZer 2.1.1.1
          14 August 2019 at 1:08 pm

          Both QE and negative interest rates are monetary policy tools and therefore will be ineffective at boosting the OZ economy. The difference is that fiscal policy increases somebodies income directly, monetary policy just provides an opportunity to someone to earn more income with a lower interest rate.

          To give credit to the governor of the RBA he also said to treasury recently that its not his job to tell treasury what to do, but they could in his opinion do some fiscal policy.

          Describing QE as creating money is common but a bit nonsense too. Its an exchange of a long term asset like a bond for a short term asset like cash. This doesn't really change the total assets floating around the economy which is why it has so insignificant an effect. Yes, it is how central banks fund the government fairly directly via a kind of back door channel however.

  3. lprent 3
    14 August 2019 at 8:46 am

    I'm with the Reserve Bank on this, but both forecasts are probably correct. The Treasury forecasts are largely measure the immediate forthcoming growth in the internal economy. But the longer term inputs that drive the profitability of our economy come from the external trade economy

    The global economy is in a strange space at present, one that would have been more familiar to my parents and grandparents than to me. I was born in 1959. So in my lifetime, international trade has always moved towards having less national restrictions rather than more. Our income as a country has become dependent upon that.

    But with an optimistic fool in the White House attempting to bankrupt his farming community with a trade war, it just encourages the kind of idiotic behaviour that made the depression in the 1930s such a long drawn out mess of misery.

    Sure we haven't had any particular internal economic issues for the moment apart from the ones mentioned in the post. High employment and low wages which has been common across all developed economies in this economic cycle, undercapitalisation across all businesses apart from banking, and its congruent speculative over-priced housing and land market.

    But we clearly have an under-developed internal economy with insufficient capital going into the infrastructure required for our increased population and the productivity improvements to make better use of employees. We effectively have had a 1-2% growth per annum in population (and more like 2-3% in Auckland) for the last 30 years without the required levels of infrastructure being put in. This means that we're now hitting our limits to growth in housing, companies, and business.

    The RB decision, along with considerable work being done in diminishing speculative activity, are clear signals about where investment needs to go. Not into the hands of the internal rentier economy, who are largely the people fueling the business confidence levels, but into productivity.

    Frankly I don't have that much sympathy for the whiners in the real estate, banking, and importer/retailer sectors who make up the majority of participants in business confidence surveys. They have had their decade from National of creaming off the easy money.

    But I'm pretty sure that even they must realise that the bill for the lack of investment in our productive economy has to come sooner or later – and it only gets worse later. We haven't been building the nascent export businesses and productive people who don't have to spend large portions of their life sitting in cars on motorways and pay most of their wages to get a roof.

    With the uncertain Trumpian future in the far more competitive external economy where I work, it is pretty clear that the flow of trade to the country isn't going to allow their kind of National party easy living to continue. We need to start doing some better decisions and more investment for our and our kids futures.

    • Nic the NZer 3.1
      14 August 2019 at 12:37 pm

      You used the word measure to describe a forecast. Its worth acknowledging that no forecast no matter how accurate ever is a measure (or actual). Treasury forecasts are also just not that accurate.

      • lprent 3.1.1
        14 August 2019 at 6:32 pm

        Agreed. However they're usually within about 10-25%, usually on the optimistic side; as long as there isn't an external shock that really screws them.

        The reason for that relative accuracy (compared to business who are usually crazy bad on their budgeting) is the combination of provisional tax estimates by companies, the gst receipts and the stats filled out by businesses.

        • Nic the NZer 3.1.1.1
          14 August 2019 at 7:29 pm

          Its my own belief that they are "within about 10-25% usually on the optimistic side" because they are incoherent models of the economy. The DSGE variety assume that there is an economic equilibrum to which the economy is attracted in the long run (if nothing were to change, which never happens). This model is so poor in the short run that it is modified with ad-hoc concepts like 'frictions' and these parameters tuned so sometimes the model is close in the short run, and sometime still quite wrong.

          The problems with this are that the long run model is completely shielded from scientific inquiry as there is no time period matching the long run, its a forecast of what is supposedly going to happen far into the future if nothing changes to interfere with the equilibrium annealing process (eg its a forecast of something which never happens).

          The short run is a modification of this underlying long run. The problem here is the frictions introduced are not coherent concepts which could be externally to the model measured and inserted, they are instead concepts which only make sense in the model.

          For anybody unfamiliar, you can take many such functions of enough parameters and typically fit them to data to estimate the parameters and so generate an estimate of further values. This may produce a better or worse fit but that function doesn't have to be a sensible model of the data being forecast, or the names of the parameter values don't have to hold any meaning for this to work.

          At a high level the problems are that

          * this macroeconomic process is not up for scientific inquiry or challenge, it functions disconnected from reality.

          * sometimes policy decisions are made based on these models internals. This is true most specifically describing a parameter called the NAIRU which is certainly not describing anything you could measure.

          * being systematically optimistic produces systematically pesimistic outcomes. If it wasn't systematic this might not be a problem, but it clearly is and leads to systematic underspending on the public ledger again and again.

  4. Pat 4
    14 August 2019 at 9:09 am

    "Borrowing the phrase of former US Treasury Secretary Hank Paulson, the central bank needs a “bazooka” at the zero bound that makes credible its commitment to achieving its policy rule. Negative interest rate policy is precisely the requisite intrument, and this can be achieved by making the legal, tax and regulatory changes needed to use unconstrained negative interest rate policy effectively in fighting a deep recession. Most of the necessary adaptations of the financial plumbing needed to make negative interest rate policy effective – potentially as effective as interest rate policy in positive territory are straightforward. The most vexing issue is preventing large-scale cash hoarding by pension funds, insurance companies and financial institutions (small depositors can easily be exempted). If hoarding is decisively dealt with (one way being to allow the trade-in value of paper currency at the central bank to depreciate over time during negative interest rate episodes a la Eisler 1933), it should solve the problem of bank profitability (to the extent there is one) by making it straightforward to pass on negative interest 35 rates on to large-scale depositors. This will ensure that the normal stimulus effects of lower interest rates on consumption and investment will transmit to the real economy. Of course, as is usually the case, lower interest rates will likely also push up the prices of housing, equities and other assets, while at the same time pushing up nominal interest rates on longer-term bonds due to higher long term expected inflation as well stronger medium term growth."

    https://www.hoover.org/sites/default/files/lilley_rogoff_hoover_monetary_conference.pdf

    NZ being a tiny economy has little choice but to play the game the way those making the rules have determined

  5. esoteric pineapples 5
    14 August 2019 at 9:19 am

    Three words: Negative Bond Yields

    "A quarter of the bonds issued by governments and companies worldwide are currently trading atnegative yields — which means that $14tn of outstanding debt is being paid for by creditors in a bizarre reversal of normal practice."

    https://www.ft.com/content/e27c430f-30bc-3cf6-9917-962ca2eee807

    "The U.S. Treasury yield curve — a barometer for market confidence — normally slopes upwards because investors demand higher yields for bonds with longer maturities. But this March, it inverted for the first time since 2007, signaling that investors are so worried that things are going to get worse that they’d rather lock in lower rates for the future today than risk long-term rates going even lower. The curve has inverted before each and every recession in the past half century — with only one false signal."

    https://medium.com/@teamwarren/the-coming-economic-crash-and-how-to-stop-it-355703da148b

  6. Muttonbird 6
    14 August 2019 at 9:56 am

    Have you considered one was to achieve the other?

  7. SHG 7
    14 August 2019 at 10:00 am

    Treasury is no longer an employer of choice for the best economists in the country and it doesn't have the brainpower it once did.

    • Dukeofurl 7.1
      14 August 2019 at 12:40 pm

      Agree with you on that… their forecasts are unreliable, their oversight its amateur hour.

  8. Fact-checker 8
    14 August 2019 at 11:02 am

    You comment included a couple of factoids/comments that need fact checking.

    Firstly: "Unemployment is low, but it looks like it needs to go even lower to get real wages forced up."

    Fact: Last week Stats NZ released the latest jobs and wages data which showed average hourly earnings increased 4 per cent over the past year to $32.37 an hour. That is the largest year-on-year percentage increase since June 2009. With annual inflation at 1.5% and falling, a 2.5% annual increase in 'real' wages is pretty darned good in most people's books.

    Second: "There are no breakout companies on our sharemarket or taking over the world."

    Fact: A2 dairy company has seen it's market capitalisation rise to around $12 billion (actually it has slipped down from $14b last month) and is now more than double the cap of Fonterra. A2 is tipped to announce another fabulous result that is likely to see its share price continue its journey north.

    Fact: Xero's share price is now around $64 – 4x its price of two years ago. It is now capitalised at ~$9 billion, more than 2x that of Fletcher Building.

    These are companies that are taking on the world and winning.

    • Stuart Munro. 8.1
      14 August 2019 at 11:38 am

      You want to be a little careful of average wages – a couple of clowns on $8 mill like Theo Sperlings tend to throw them out. Median wage growth was a more moderate 3%, probably below rent and utilities increases.

      • greywarshark 8.1.1
        14 August 2019 at 12:32 pm

        Thanks SM we need to keep up the game of tennis or squash? and bat back the inadequate statistics we live by – fast food is unhealthy, fast stats can kill ya.

    • Dukeofurl 8.2
      14 August 2019 at 12:48 pm

      "is now more than double the cap of Fonterra. "

      Thats a fallacy as Fonterra is mostly a Coop whos value is not in the 'farmers shares' side of the business.

      Fonterra is a $20 bill a year revenue company, with massive cash flows- most of which goes to its farmer- owners outside the 'share dividends'

      A2 is probably the size of a medium sized Fonterra plant, one of dozens.

      Xero and A2 are what they call bubble companies which share values not matched by any sort of decent cash flow. Bubbles like that will burst in an overheated economy where interest rates are low – which means share prices are high

      • tc 8.2.1
        14 August 2019 at 12:56 pm

        Xero's a classic bubble entity that shows the feelgood factor of share prices and a growth yarn rather than one based on a hard nose look at it's financials.

        Fletchers is a bricks and mortar company that’s been run badly with more financial pain to come. Sky City convention centre etc. the market knows this.

        Comparing the 2 is nonsense.

        • Dukeofurl 8.2.1.1
          14 August 2019 at 4:01 pm

          essentially yes.

          But Fonterra and Fletchers share one thing in common having a so called hot shot CEO from outside who is given a mandate from the board to buy up overseas businesses to 'grow the business' or what other bumpf they can come up .

          As they buy up they both have to write off the investment ( mostly bought with borrowed money which they are still on the hook for) or sell at less than optimum prices.

          Its too stupid for words, and hardly ever works. Grand procession of NZ companies who follow that well trodden path.

        • greywarshark 8.2.1.2
          14 August 2019 at 5:45 pm

          Xero and A2 probably represent the desire from investors for NZ to actually get on and do business instead of wading round with mud to the ankles. We develop stuff and then sell them on instead of grimly getting on with keeping and running the company for a NZ reward. That is partly feelgood reaction by shareholders and partly a desire to support a NZ enterprise to be a winner.

      • Blazer 8.2.2
        14 August 2019 at 2:55 pm

        ATM is an IPO Coy.It pays farmers more for their milk(mainly Jersey cow)and contracts processing in NZ to Synlait.

        It has more than 10% of the market in Australia and international patents for A2 MILK,which is meant to have health benefits, that A1 protein milk does not have.(unproven).

        Its big growth is in China..Platinum A2 infant formula and is increasing sales in impressive fashion.

        Nestle and Fonterra have become interested in the product too.

    • Tricledrown 8.3
      15 August 2019 at 9:56 am

      Xero hasn't made a profit yet. If the share market crashes it will go down quickly. A2 is riding on flimsy science, poor examples.

  9. infused 9
    14 August 2019 at 11:07 am

    Just from the customers, I deal with, it's easy to see a slowdown. In particular, manufacturing which is coming off the steam, or has been for a few months now. All the stats you read are lagging.

    Lucky with those manufactures, most export. all have said the NZ market is pretty dead. Mainly because the big govt projects have slowed/stopped/ended.

    Consumers still seem to be spending like mad though.

  10. greywarshark 10
    14 August 2019 at 12:29 pm

    I have to pay $40 GST on insuring my household contents. My repair bill for my car shows about $60 GST. So $100 tax on a low income person to keep things going, try to maintain my household and services. This is a grossly unfair tax on a country of mostly low to medium income earners. I say again, though I am sure that august group working on tax would never hear it, that GST should be lower and I think it should be 8 percent with 4% going to the consolidated fund? and 4% being returned to the locality, region it came from and divided up between the councils and hospital boards, mostly going to the people's councils and a quarter to regional, and quarter to DHBs.

    That way it would spread out and have a multiplier effect beyond the basic, and a better distribution and sharing in returns from whatever enterprise survives in this country (besides road building, house buying and continuing repairs of houses and structure – talk about makework!).

    • Dukeofurl 10.1
      14 August 2019 at 12:42 pm

      Unfortunately that benefits higher income people too.

      Councils and DHBs arent necessarily wise spenders of money. Half the DHB spend isnt on Hospital side of things.

      • greywarshark 10.1.1
        14 August 2019 at 5:32 pm

        Are you critic and arbiter of anything financial from The Treasury Dukeof Url? 'Councils and DHBs arent necessarily wise spenders of money. Half the DHB spend isnt on Hospital side of things.' All entities don't spend money wisely all the time. And people on higher incomes can benefit from changes. The intention with change is to have them pay a fairer amount of tax for the good running of the state for all people.

        A lot of the money that is wasted is spent on overhyped IT systems. And on CEO and top managers salaries. I suggest a tender system for the executives. At present the salary at the top is applied in almost exactly the same way that wages went up for workers – automatically keeping pace with inflation. They have had the wind taken from their sails, but the executives are riding on that uplift to the stratosphere with their dosh.

    • infused 10.2
      14 August 2019 at 12:47 pm

      Well, if you really are that low income, you're likely getting topped up. So in real times, likely paying no tax.

      • Dukeofurl 10.2.1
        14 August 2019 at 12:53 pm

        That was the intention of GST to remove a lot of income tax payments for the first $40 k.

        Its called shifting tax from income to expenditure , its still there for higher incomes as they have more income left over after meeting living costs and can move money into ' investing' where taxing is light

        Labour already has moved more money into beneficiaries by the 'winter energy' flat rate payment . It took some doing as the payment system wasnt set up for it.

        Make it all year round!

        • Infused 10.2.1.1
          14 August 2019 at 3:04 pm

          I've always supported a higher tax free threshold. The tax brackets need moving and a 4th bracket introduced

  11. Craig H 11
    14 August 2019 at 4:17 pm

    The amount of private debt in NZ is large, so lower interest rates are good for the economy if the decrease is passed on in some manner. It might be a year or two for that to happen because most of the debt is fixed term mortgages.

    • Poission 11.1
      14 August 2019 at 4:50 pm

      Households fund most of the private debt.

      june 2017 160 b

      june 2018 171 b

      june 2019 180 b

      Business (non financial) seem to have run out of ideas as their bank deposits have increased.

      june 17 76b.

      june 18 80b

      june 19 86b.

  12. tc 12
    14 August 2019 at 5:01 pm

    Gdp is diminishing across the board as the global economy is plugged into fossil fuels.

    Peak oil was a tipping point. Until we retool our economy for sharing and sustainable practices it's all downhill IMO.

  13. Ad 13
    15 August 2019 at 11:45 am

    Fairly sharp decline in dollar and sharemarket here.

    Its heart in mouth time for all on Kiwisavers

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