Pre-Budget Reflections on the New Zealand Economy
Posted on May 02, 2017
With the 2017 Budget to be delivered in late May, Cameron Bagrie, Chief Economist, the ANZ Bank, offered thoughts on the state of the economy to a well-attended Rotary Karori/ANZ Bank Business Breakfast held on 2 May.
New Zealand has over the last 50 years gone through 10 year cycles of strong growth followed by economic busts. While the trigger for these crises has typically been global events, there has also been a tendency for a domestic recession to occur prior to an external event. As a consequence, New Zealand has often suffered a more severe downturn. Such volatility and swings in the economic cycle make life difficult for business.
In some respects, the New Zealand economy today bears some of the same characteristics as the periods immediately prior to those earlier recessions of the 1980's, 1990's and 2008/9. House prices have surged. Construction costs have boomed and inflation pressures appear to be building. Borrowing growth is exceeding income growth. People are less inclined to save. Productivity is waning. Attention is turning to when the RBNZ will need to lift rates and by how much. Such forces are typically late cycle behaviours and precede corrections.
There are however significant differences in the current circumstances:
- Underlying productivity growth is reasonably solid, recognising that the headline numbers partly reflect the growth-suppressing effects of two major natural disasters in Christchurch and Kaikoura.
- Unlike those earlier pre-recession periods, consumption growth is subdued. The retail sector remains incredibly competitive. We are not seeing a housing and consumption boom go hand in hand and this is dampening inflation. This will keep the Reserve Bank tightening impulse on hold and when it comes, gradual as opposed to aggressive.
- We typically build too many houses at the top of the cycle. We can’t build enough this time around; firms are struggling to get staff. So we don’t have a glut that could swamp the market if conditions turn.
- The Reserve Bank has been active in restraining growth in the housing market through aggressive use of macro-economic rules to moderate credit growth.
- The banks in turn are recognising the risks inherent in current housing prices and are being more cautious this time around.
- There is no sign of growth in the shadow banking sector.
Those forces do not remove all economic risks. However, they do leave the economy better placed to handle challenges. A slow-down in Auckland housing prices and credit growth – which is occurring – is a good thing. If you give away some of the boom, you insulate more against the potential for a bust.
Conclusion: The New Zealand economic expansion is well underway. The challenge is to extend it further beyond the 10 year curse. Firms say their biggest challenge is finding skilled labour, that’s a better problem than a lack of sales. The principal area of concern is offshore. Productivity growth is weak, high leverage persists, valuations are extended and growth is slow. Interest rates are headed up – albeit slowly.
The resentment vote and surge of populism is forcing a rewrite of the social contract between government and citizens. Economic direction is shifting. Globalisation is being pushed against.
Free trade is now fair and balanced trade. No one knows what exactly that means. Themes like social justice will come more to the fore shaping economic direction. It’ll take time to work out where that takes us.
The 2017 election is likely to be dominated by housing affordability, inequality and migration; all housing centric. A pending issue is the economic impact of automation - technology and artificial intelligence will mean jobs in the future. They won’t be the jobs of today.
Today’s kids are tomorrow’s entrepreneurs and employees. A key priority for New Zealand needs to be the education sector and promoting adaptability, flexibility and innovation. Agility will be key. These are the skills the workforce of tomorrow will need.