Economic Update May 2021 - Russell Investments
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Economic Update May 2021
This presentation is general in nature and should not be seen as personalised advice. It has
been designed in an educational nature and should not be relied upon as advice for your
personal situation.
Bagrie Economics accept no liability for any loss or damage caused by this presentation.
Data and information have been gathered from sources Bagrie Economics believes to be
reliable. The content does not constitute advice.
1
Top companies on the NZX in 1995
• Telecom
• Carter Holt Harvey
• GuocoLeisure
• Lion Nathan
• Fletcher Challenge Paper
• Goodman Fielder
• Tenon (Fletcher Forests)
• Fletcher Challenge Energy
Source: Bagrie Economics, Forsyth Barr
2
Dealing with change is the new normal, and
NZ is complacent
How much has the market How much change do you
changed for you in the past expect going forward?
2-5 years?
4% 10% 7%
43% 8%
14% 9% 36%
29%
33%
39% 48%
A lot A fair amount A lot A fair amount Not that much
Not that much Not at all
Not at all Unsure
Unsure
Base: All respondents Base: All respondents (n=600)
Source: Bagrie Economics, Suncorp
3 Business Success Index
Theme 1: Collision between economics,
politics and social needs
Covid-19 and global warming dominating. Inequality too. Housing unaffordability
Share of the economic pie / where are the workers?
Sovereign tensions – China and USA, the UK and Europe, Australia prodding China
Nationalism replacing globalisation
Central Banks doing whatever it takes and no exit strategy
Have central banks lost their social license?
Bigger government
Supply chain disruption / inflation
All about digital
Source: Bagrie Economics
4
- Theme 2: A downtrend in interest rates at an end
Interest rate trends Low and lower interest rates have dominated
14
12 Wealth creation has been asset price dominated
10
8 Government / fiscal policy has been average
6
4 Where will growth come from going forward and
2 what will drive it?
0
Feb 1991 Feb 2001 Feb 2011 Feb 2021 New growth model
Official Cash Rate (OCR) Overnight interbank cash rate
Businesses will need to focus on “real” growth
5 year govt bond 10 year govt bond Government policy will need to step up
Higher electricity prices exposing poor decisions
Source: Bagrie Economics, RBNZ 5
-
Theme 3: Redistribution policy agenda pressure
Compensation of employees - share of Compensation of employees - share of GDP
GDP % (USA) % (NZ)
55 60
55
50
50
45
45
40
40
35 35
30 30
1959 1969 1979 1989 1999 2009 2019 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Source: Statistics NZ, FRED 6Theme 4: What worries people?
Feb 2021
1. Housing
2. Poverty / inequality
3. Inflation/ cost of living
4. The economy
5. Healthcare
• Housing is perceived as the most important issue today by 60% of people –
more than double the next most important issue (poverty / inequality)
• Housing a concern for just 22% of Australians
Source: Bagrie Economics, Ipsos Issues Monitor 7Government has acted – RBNZ next (again)
“We have not done enough of what we can do,
Interest only loans by category (% of all loans)
80.0%
and that is what we will be doing over the next
70.0% few months.”
60.0%
50.0% Debt-to-income caps?
40.0%
Change bank risk weightings?
30.0%
20.0% Additional capital buffer on some residential
10.0%
0.0% lending?
Dec 2016 Dec 2017 Dec 2018 Dec 2019 Dec 2020
Caps on interest only lending for investors?
Owner occupier Property investor
Business Agriculture Bottom line – residential less attractive
Source: Bagrie Economics, RBNZ 8Property investors in the firing line
Brightline extension well flagged
Removing interest rate deductibility is major
$80 billion property investor debt @ 3% = $2.4 billion non-deductible expense removed
Gross yield now needs to be higher to compensate for removal of deduction
• Rents?
• Decline in asset value?
Banks will change lending criteria
Government being more interventionist / taking risk as land banker
Can the government undertake and manage risk?
Alternatives for investors?
Source: Bagrie Economics 9Theme 5: A technical recession
Don’t blink - we are in recession but about to
come out of it too!
December quarter negative and March 2021
too. We are in April
Post lockdown surge tempered by settling
period
Border control restrictions now biting
Source: Bagrie Economics, Statistics NZ 10- Tourism faces a long recovery. Airfare cost trend
to reverse?
International tourism spend $m International airfare costs (index)
20,000 1400
18,000
1200
16,000
14,000 1000
12,000 6 years
800
10,000
8,000 600
6,000 400
4,000
200
2,000
0 0
1999 2003 2007 2011 2015 2019 Dec-06 Dec-10 Dec-14 Dec-18
Source: Bagrie Economics, Statistics NZ 11Stress metrics still contained and not showing a
recession
Credit card advances 90 days past due (% of Quarterly personal involvencies
advances outstanding) (number)
1.4% 2000
1.2% 1800
1600
1.0% 1400
0.8% 1200
1000
0.6% 800
0.4% 600
400
0.2%
200
0.0% 0
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Dec-06 Dec-13 Dec-20
Source: Bagrie Economics, RBNZ, MBIE 12- Theme 6: Lots of stimulus
COVID-19 Response and Recovery Fund $ billion Fiscal stimulus is still major but fading in
30 size
25 There will be pressure to “spend” the
20 -$6.9b remaining $10 billion from the COVID relief
15 fund
10 -$9.8b
Shovel ready projects have been a mirage
5
The government would be better to help
0
2020 2021 2022 2023 2024 the supply side (i.e RSEs)
Total of COVID-19 decisions Unallocated COVID-19 funding
Source: Bagrie Economics, NZ Treasury 13- Unconstrained OCR highlights degree of stimulus
Unconstrained OCR (%) Unconstrained OCR is a representation of
10 monetary policy including unconventional
8 measures
6 Very stimulatory but less so relative to last
4 year
2
0 Deployment of funding for lending program
-2 (a crisis tool) is puzzling
Mar-03 Mar-07 Mar-11 Mar-15 Mar-19 Mar-23
No exit strategy in play yet
Feb-21 Nov-20
Laws of unintended consequences
appearing – strong lift in deposits
Source: Bagrie Economics, RBNZ 14Theme 7: Demand is not the issue; meeting
demand is. Finding staff!!!!!
Seek NZ Job Ad Index (2013=100)
180
160
140
120
100
80
60
40
20
0
Mar-06 Mar-09 Mar-12 Mar-15 Mar-18 Mar-21
Auckland the only region with job ads below 2019 levels
Skill shortages appearing despite 200k people out of work
Source: Bagrie Economics, Seek 15Imports were the 2020 story. Exports 2021?
Exports and imports 2020 vs 2019 $m Exports 2021 vs 2020 $m
2,000 200
- -
(200)
(2,000)
(400)
(4,000)
(600)
(6,000)
(800)
(8,000) (1,000)
(10,000) (1,200)
1/01/2019 1/06/2019 1/11/2019 1/01/2021 1/02/2021 1/03/2021 1/04/2021
exports imports
Source: Bagrie Economics, Statistics NZ 16- What do supply disruptions mean?
Constrained growth = less volume
Lower productivity
Rising costs including wages
Margin erosion if you can’t pass on price increases
Competition for supplies (including labour)
Investment decisions get delayed. i.e. horticulture’s inability to access RSEs may mean
fewer trees planted
Conversations will change and security of supply will be focused on = more nationalism
Opportunities for manufacturing to come back home? Industrial property?
Source: Bagrie Economics 17Student school attendance
% of students regularly attending school Student attendance by year level
75 100
70 80
65 12 percentage 60
60 point drop
40
55
20 Biggest declines at primary school
50
45 0
40 -20
2011 2012 2013 2014 2015 2016 2017 2018 2019 1 2 3 4 5 6 7 8 9 10 11 12 13
Year level
change 2019 vs 2015 2019 2015
Source: Bagrie Economics, Ministry of Education 18Theme 8: Interest rate expectations continue
-
to normalise. Interest rates well off lows
Interest rates
2.0
1.5
115
bps
1.0
80 bps
0.5
0.0
Early nov Early Dec Early Jan Early Feb Early Mar Now
OCR 5 year bond 10 year bond
19
Source: Bagrie Economics, ANZ, RBNZWill rising wholesale rates lift borrowing
-
rates? Bank funding costs are key
Share of bank deposits • Banks continue to benefit from cheap
60.0% funding
50.0% • 85% of bank funding is- Theme 9: Pressure on costs
Pricing intentions and costs (net balance
expecting increase)
80
60
40
20
0
-20
Mar-1993 Mar-2000 Mar-2007 Mar-2014 Mar-2021
Cost of good / services Pricing intentions
Source: Bagrie Economics, ANZ Business Outlook Survey
21Theme 10: Less low interest rates but still low
Neutral Official Cash Rate has fallen
This means lower interest rates than we
are used to
Even when interest rates move up, it will
not be by much
Other levers RBNZ can pull to tame the
likes of housing
Term deposit back to 3%?
Source: Bagrie Economics, RBNZ 22Theme 11: Are we going to end up building too
-
many houses?
Net migration - monthly Net migration - annual
14000 120,000
12000 100,000 Population
10000 80,000 growth 90k
8000 60,000 We are
6000 here
40,000
4000
2000 20,000
0 0
-2000 -20,000
-4000 -40,000
Dec-17 Dec-18 Dec-19 Dec-20 Dec-03 Dec-09 Dec-15 Dec-21
Net migrationWhere to from here?
Good / winners Challenges and questions
Healthcare Tourism faces a long road back
Infrastructure Where to for housing?
Can we get water policy right? Post COVID19 supply chains?
Digital transformation has gone explosive Economics and social side are colliding
Food supply but caveats Govt policy will become more interventionist
The green economy / renewables Poor decisions now exposed i.e. gas
Manufacturing? If we can be competitive Inflation pressures are simmering
COVID has reinforced importance of China Can NZ remain “Switzerland” in China issues
Source: Bagrie Economics 24You can also read
