BNZ Weekly Overview - Oliver Broomfield
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BNZ Weekly Overview 16 August 2018
ISSN 2463-4328
Mission Statement
To help Kiwi businesspeople and householders make informed financial decisions by discussing the
economy and its implications in a language they can understand.
Migration in a large economic dent. Supportive factors for
growth include
Tomorrow I will deliver a presentation at an
immigration conference in Auckland where I am -loosening fiscal policy
expected to discuss the economic contribution of -an 8% fall in the NZ dollar over the past year
immigrants. They’ll probably want some -low interest rates for potentially many years
presentation notes. This is them. -strong commodity prices
-strong construction (though minimal actual
Attendees will expect me to talk about things like growth)
infrastructure and housing impacts, benefit use, -tourism
employment, tax revenue etc. I’m not going to. -healthcare, aged care, digital sector etc
Partly this is because the jury remains out on the -average world growth.
net impact measured using these traditional
gauges. So why waste time rabbiting about There are risks to growth coming mainly from
something for which an end conclusion is not
possible? -an emerging market crisis centred around
foreign currency debt burdens
I’ll be taking a different direction in my comments -trade war
because the evidence of a collapse in business -capacity constraints
sentiment despite good economic conditions -poor NZ business adaptation to the effects of the
suggests many Kiwi businesses are struggling to technological revolution.
adapt to the new technological revolution
affecting almost everything we do. What we need And this is where we enter the twilight zone. On
from migrants is not proof of a positive fiscal the list of negatives we should have rising
impact 5, ten, or 15 years down the track (time- inflation, rising interest rates, and a rising
frames around which traditional impact studies exchange rate. But these factors have been
coalesce). We need their skills in helping us absent for many years and look like remaining
adapt to a rapidly changing world which Kiwi so.
businesses used to blaming the government,
unions and Reserve Bank for hard times are There are many reasons for why inflation is
struggling to handle. staying low and a key one is inability of
businesses to easily raise selling prices to cover
But let’s start with the macro picture to set the higher costs. These days if a business lifts its
scene. selling price we consumers use new technologies
to easily and often enjoyably search for
Our economy has performed very well over the alternatives online, anticipating a dopamine hit
past four years with growth of almost 15% due when we find something slightly cheaper. We
strongly to booms in tourism, construction, and may also slam the business through social
net immigration. There has also been assistance media.
from trend growth in sectors like healthcare, aged
care, digital, and non-dairy primary. Plus interest Getting price increases across the line these
rates were cut 1.75% over 2015-16 and days is very difficult for most (not all) businesses
international oil prices fell strongly from 2014. and this is probably one factor behind business
pessimism.
Looking ahead prospects for growth still look
good and I am of the view that the sadness being
expressed by the business sector will not result
Page 1BNZ WEEKLY OVERVIEW
These pricing difficulties are not going to dissipate They embrace new learning and are used to
and businesses will need to change the way they seeing things as ever changing gestalts and not
operate to survive. New products will need to be static linear processes.
developed (innovation), new distribution methods,
new technologies used, new connections made For Kiwi businesses it is important to embrace the
with helpful collaborators, new data sources openness which young people can bring and not
developed to deliver real-time useable market dismiss the “snowflake generation” and how it is
information. hard to give them negative feedback without
having some cry, demand a safe space, call the
But the NZ business sector is not well positioned police, and file a PG.
to make the adaptations required to survive in the
technological revolution through which we are The relevance of immigrants is this.
now living.
1. Most of them are used to far faster business
As discussed here recently, NZ businesses tend environments than we have traditionally seen in
not to innovate, have poor digital offerings, focus New Zealand. They are used to bargaining, they
strongly on lifestyle, and don’t focus enough on are used to getting products into a market quickly
growth. And as discussed back in 2011, the before they are copied, and they tend to think
typical Kiwi business culture is one of resistance forward to how their product needs to change to
to change, resistance to “book learning” and hiring stay ahead of the competition. Immigrants can be
of expert advisors, inability to understand foreign better suited to help businesses handle the vast
client requirements, unwillingness to accept changes they see occurring than Kiwi owners and
outside capital and loss of some control, operators used to blaming the government or
unwillingness to grow big and risk being chopped Reserve Bank when times seem tough.
down like a tall poppy, and inadequate focus on
export markets. 2. Immigrants can see things in different ways.
Diversity is a key element to business success
Change in the old days tended to be driven from nowadays. Different people bring different ideas
the top down – new management systems, new and ways of doing things and this cross breeding
bosses etc. But these days as we live this of methods and attitudes is far better suited to the
technological revolution, change comes from cross breeding nature of technology development,
developments much further down the mutation, and implementation than straight line
management scale and from outside parties. “this is the way we do things around here”
Innovation comes from those who feel thinking.
unconstrained by old thinking, old business
models, old hierarchies. 3. On average over the past two decades we have
suffered an annual net migration loss of 22,000
This type of new thinking and innovation comes Kiwi citizens per annum. Immigrants are needed
from young people including migrants willing to to help offset this “natural” flow of Kiwis, largely
bring in new ideas and test existing boundaries young innovative open-minded ones, offshore.
erected by conservative business operators.
So in a nutshell…
Thus, a second probable source of restraint on
wages growth beyond business resistance • There are new pressures being felt by Kiwi
because of pricing weakness is young people not businesses these days contributing to the
looking for higher remuneration in one job or one plunge in their sentiment.
firm. Instead they anticipate some payoff down the • Technological developments make raising
track through involvement in something NEW and selling prices difficult.
highly profitable – the next Google or Apple or • These developments also continually threaten
popular app. Their focus is on the new and on the existing products, processes, markets,
enjoyment of being at the frontier of developments distribution channels etc.
in potentially many fields. They don’t see • Labour availability has structurally declined
themselves as helping run the old world like a and wages pressure hasn’t even come
toymaker’s apprentice, but making the future one. through yet the data tell us.
Page 2BNZ WEEKLY OVERVIEW
The fact that government is being blamed despite Housing “Speculation”
the economy being firm, interest rates and the
exchange rate low, commodity prices high etc., It has become an article of faith amongst those
suggests NZ businesses are struggling to adapt to who got their house price forecasts wrong in
the new world. recent years or who would prefer house prices
were much, much lower, that the economy has
In the Weekly Overview over the past few years been driven by “housing speculation” and
we have attempted to highlight some of the long- spending of housing wealth. Do these claims
term changes which businesses need to stack up?
understand if they are to succeed going forward.
We have written about business blindspots, trend If people are speculating on a thing how does that
changes in house prices, net migration flows, boost the economy? If more people bet online on
labour availability, inflation and interest rates, the horses is the economy boosted? Only if the
typical Kiwi business cultural impediments to increased interest leads to growth in the breeding
success and economic growth, the growth of industry and more races being held.
China, and effects of the technological revolution.
So, has all the apparent housing speculation led
There are no simple answers, but whatever the to more houses being built and higher turnover for
solutions are they revolve around realisation by real estate agents?
SME owners that the old world in which they have
grown and managed their firms since the 1970s The number of dwelling consents has risen from a
has gone. Not all have adapted. That is why for multi-decade low of 13,500 in 2011. But that was
some their businesses are essentially worthless always going to happen because the GFC effects
as they now place them on the market aiming for would pass. The question is whether consents
a sale to fund retirement. have been pushed not just above average, but
more above average than usual during a period of
Success going forward will require strong growth.
• an openness to the different ways of thinking Consents rose above the 20 year average of
and working of young people nowadays 23,400 in the middle of 2014. They now sit at
including migrants, 32,860 for the past year. Can the extra 9,000 per
• greater reliance upon growth through capital annum or so be considered to be the result of
expenditure on new systems etc. rather than “speculation”. No. The last time numbers were
simply trying to hire more level pullers, near these levels, 33,000 in 2004, the country was
• greater collaboration with other firms in related enjoying an annual net migration gain of 42,500
fields, people. This past year the gain has been 65,000
• greater product experimentation and shorter and a year ago 72,300.
shelf lives,
• embracing the implications of the growing More building looks like simply reflecting more
environmental focus of societies, people and catch-up after the lowest level of new
• a shift away from thinking of margin construction since the 1960s when the population
management in terms of selling price was below 3 million. There is no basis for claiming
alterations toward changes in products, add- that “speculation” has produced a wasteful surge
ons, servicing terms, distribution systems etc. in building of houses. And everyone wanting
house prices to be lower wants more houses to be
Migrants are not the biggest answer to the built anyway – frankly we all do.
problems facing NZ businesses. But they can be
an important element in the mix. So all that leaves those claiming speculation has
driven our economy is higher real estate industry
activity and spending of higher house prices.
Turnover of dwellings rose from 55,000 to be
above the 20 year average of 82,500 in the middle
of 2015. The latest annual turnover was 74,000
and the peak was 95,000 mid-2016. The last time
turnover peaked was 120,000 in 2004, again
Page 3BNZ WEEKLY OVERVIEW
when net migration inflows were a lot less than Are You Seeing Something We Are Not?
they are now. It is hard to run any argument that If so, email me at tony.alexander@bnz.co.nz and
the real estate sector has been a key driver of our let me know.
economic growth in recent years or that if it were
that this was due to “speculation.” If I Were A Borrower What Would I
So we are left with spending of housing wealth. Is Do?
there evidence that people who have seen their
house prices go up have boosted their mortgages, Nothing new. As we have been writing here for
run up higher consumer debt, or cut their savings literally years now, inflationary pressures in NZ
rate? are being suppressed by new consumer
resistance to price rises made possible by online
The ratio of household debt to the value of the search technologies. Plus wage rate growth is
housing stock fell from 30% at the start of 2012 as being suppressed by a wide range of factors we
average house price inflation kicked up. It now don’t yet fully understand. It adds up to a
stands at 24.7%. This is the lowest ratio since structural change in the relationship between the
1996. That argues against a view that people pace of economic growth, the pace of jobs growth,
have taken their higher housing paper wealth and wages growth, and consumer price growth.
spent it.
The Reserve Bank have for some time now been
But the ratio of debt to disposable income has pulling back from model-based analysis of the
gone from 146% to 166%. That suggests extra inflation risk to take more into account these new
borrowing over and above that permitted by structural factors and as we have been writing this
income growth has occurred. If so, that extra past year, have now decided essentially not to
borrowing amounts to $32bn more than one would raise interest rates until inflation is actually going
have otherwise expected. But taking 146% as the up. Pre-emptive policy tightening has twice failed
starting point is probably going too far as the post-GFC.
decline from 157% pre-GFC probably represents
the unusual impact of the GFC rather than Borrowers can look forward to a benign
normality. Let’s split the difference and start at environment for a long period of time, especially in
151%. light of the new worries about world growth. For
investors the news is bad in terms of returns on
That delivers debt growth over and above fixed assets, but good in terms of interest rate
“normal” expectations of about $21bn. support for valuations of other assets like equities
and property.
Over the six and a half year period from the start
of 2012 to now private consumption spending If I were borrowing at the moment I would remain
adds up to almost $900bn. So the implied extra happy to fix about two years for most of my
spending equates to a boost of about 2.3% or mortgage. And given the slowdown in the housing
about 0.35% extra per annum. But total GDP adds market already recorded in Auckland and coming
up to $1.6tn so the boost from extra household to the rest of the country, I’d be happy to bargain.
debt perhaps caused by people spending paper
wealth from rising house prices is 1.3% of GDP all
up or on average 0.2% per annum.
It seems safe to say that some of the growth in
house prices has been spent. But to say that the
economy has been driven by a speculative fervour
is not correct. That means absence of surging
house prices does not lead one to conclude that
either consumer spending growth or overall
economic growth are about to implode.
Page 4BNZ WEEKLY OVERVIEW
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not
purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly
Overview each Thursday night please sign up at www.tonyalexander.co.nz
To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the
contents should not be relied upon or used as a basis for entering into any products described in this publication. To the extent that any
information or recommendations in this publication constitute financial advice, they do not take into account any person’s particular financial
situation or goals. Bank of New Zealand strongly recommends readers seek independent legal/financial advice prior to acting in relation to any
of the matters discussed in this publication. Neither Bank of New Zealand nor any person involved in this publication accepts any liability for
any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether
negligent or otherwise, contained in this publication.
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