Business confidence has rebounded now that six weeks have passed since the Christchurch earthquake.

Recently released surveys have shown declines in both business and consumer confidence about the economy following the February 22 earthquake in Christchurch. Our BNZ Confidence Survey released on March 7 was the first gauge of this fall, and our survey for April released on April 11th is the first to show that this collapse in confidence has not persisted. In fact optimism has returned in force with a net 14% of the 418 respondents in our latest survey expecting the economy to be better in a year’s time. The March survey showed net 21% pessimism and the early February survey revealed a net 22% of respondents feeling optimistic. Continue reading “Business confidence has rebounded now that six weeks have passed since the Christchurch earthquake.”

Ideas for the future

Last week I wrote about the way in which New Zealand’s economic progress from 1935 into the late 1960s revolved around booming primary exports allowing deeper and deeper welfare and economic insulation policies. Then when things turned to custard from the late-1960s these policies were viewed as not having gone far enough so the economy and society became more and more controlled to the point where we rebelled and either voted with our feet or simply voted out national socialism for deregulation. The deregulation initially made things worse though a credit boom clouded the situation, then following some five years of no growth from 1987 we have seen the much-watched reading on GDP per capita versus the OECD average stabilise, improve, edge back, and now is hitting record lows. The bonus from the deregulation has been spent and as other countries have pursued their own market-freeing policies we have once again become an economy not renowned for its openness – especially when it comes to foreign direct investment, laying off staff, tax compliance, government asset ownership, getting anything built, and getting primary goods in here.
Looking forward things are going to have to change or we will end up looking more like Fiji (without the dictatorship one hopes) than Australia. So as promised here are a selected few ideas from a paper I am preparing which will be put on my website sometime in the next few weeks.

Our culture means we produce good ideas and inventions but we are bad at making money from them. The Chinese are good at copying other people’s things but struggle to develop their own as idea-generation requires freedom and that is something the Chinese mainlanders do not have. Scope would appear to exist for us to help them with their weakness if they help us with ours through some appropriate research and development centres etc.

The NZD/AUD exchange rate has shifted structurally lower but the AUD has shifted structurally higher against all other currencies buoyed by high prices for coal, iron ore and gold. There is probably scope for a great number of Australian exporters now finding themselves unprofitable because of their high currency to relocate their production facilities here and enjoy an exchange rate which once again will deliver them profits. Lower wages as well.

Farm incomes are booming and farmers are paying down debt. At some stage they will do what they have always done and devote rising incomes to borrowing and buying their neighbours’ land. Unlike Australia our farm exports cannot be scaled up as prices rise by digging more holes. Our farmland area is in fact on long term decline. The challenge is to stop this structural farm income rise going straight into soaring land prices by giving farmers other options for “investment”. These may include on-farm co-production activities such as turning effluent into biofuel, or creating special farmer-owned venture funds for outside investments.

On average each year 84,000 people shift to NZ permanently and move from being specialists in their former fields to generalists here. That is a lot of skill going to waste. In addition one of our problems in growing our exports is that as Kiwis and being NZ-centric we fail to appreciate the true requirements of our customers offshore and have a reputation for not being willing to spend time on the ground to build relationships. We struggle with the Americans because they find us unemotive – primarily unenthusiastic. We struggle with Asians because they value relationships and a long term focus whereas we prefer rules and regulations and being low risk takers we focus short term. But many migrants come from established networks with good customer knowledge. It would be good if we could somehow corral migrant skills, knowledge and networks to assist our growth – like some sort of ongoing new NZ-based network or a debriefing room!
These are just some export-focussed growth ideas waiting to be threshed out. There are plenty of other more domestic-focussed ones but they will appear in the paper on the website later on sometime.

Housing costs in NZ

The newly formed Productivity Commissions has been charged with examining why NZ house prices are so high. In this paper we remind them that this job was done three years ago by the Commerce Select Committee and perhaps time and taxpayer funds would be better spent on actually examining business productivity growth impediments rather than repeating an exercise which on the face of it failed to lead to house price cutting policies.

Shocks to our economy have been many in recent years. A lot more are sure to arrive.

Shocks To The Economy Will Continue

Over the past 14 years our economy has achieved growth averaging 2.5% per annum, jobs growth of 1.6% per annum, and inflation of 2.3%. Yet over this same period of time we have endured some fairly major shocks – especially in the past three years. In 1997/98 we had the combination of a prolonged drought and the Asian Crisis. After that came the Dot Com crash. Then the 2001 terrorist attacks, in 2003 SARs and the Iraq War, followed by soaring petrol prices in 2008 then the global financial crisis of 2008-09 and more recently two earthquakes. Continue reading “Shocks to our economy have been many in recent years. A lot more are sure to arrive.”

Up to date and accurate data will be difficult to find as the effects of the earthquake(s) run through the numbers for many months.

Data Unreliable For Quite Some Time

Evidence of how the economy has been affected by the February 22 earthquake in Christchurch is going to take many months to appear and the risk in these uncertain times is that we too pessimistically interpret the early numbers. For instance our monthly BNZ Confidence Survey recorded a fall in sentiment of businesspeople to a net 21% pessimistic post-quake from a net 22% optimistic three weeks before. At those levels one would be expecting minimal growth in the economy for a long time. But we have a better outlook than that because we think shock sentiment will fade.
The ANZ-Roy Morgan Consumer Confidence Index has decreased by a lesser amount easing to 101.4 from 108.2 where 100 is neutral. That result suggests some growth in retail spending but of a very minor nature.

The Department of Labour Jobs Online Report shows that in trend terms job advertising in Christchurch for all of February fell 0.6% whereas it had grown 0.2% in January and 0.8% in December. In mid-2010 this measure was for a while rising near 3% so there was in fact a slowing underway anyway undoubtedly due partly to the September 4 earthquake.

In comparison Auckland job ad numbers rose 2% in February from 2.3% growth in January and 2.7% in December with growth for a while at 4% just before the middle of last year. So the Christchurch slowing over the second half of last year was not unique, just larger than in the biggest NZ jobs market.

We also have in hand the Reserve Bank’s experimental weekly home loan approval series though there is no city breakdown and the results need to be treated with caution. Their series shows home loan approvals in the three weeks leading up to the earthquake were running on average 4% down from a year ago. In the three weeks since the change has grown to 13% down. Again we stress that one should not over-read the results but they do suggest the housing market has gone on hold somewhat since the disaster. We emphasise these few almost up to the minute readings because when the Gross Domestic Product numbers appear this Thursday they are going to be almost completely irrelevant to the state of the economy right now and where we go for the rest of this year. The GDP numbers will reflect surveying done on average in the middle of the December quarter – November in other words. That means the numbers are on average four months out of date. More than that they are subject to sometimes hefty revisions as better data appear and if they show a technical recession (two negative quarters in a row) it is possible this will be revised away in just three months, 12 months, or three year’s time. Or the result may be a small positive which then one day gets revised into showing a recession.

What we are trying to emphasise here is that the newspaper headlines will either say something like “Back In Recession” or “Recession Just Avoided” on the basis of numbers which will change and which statistically can be almost 0.3% higher or lower without the result actually changing (normal standard statistical errors involved in all survey data). So the message we are giving is fairly much ignore whatever the numbers are this Thursday and instead concentrate on more up to date data. The second message is ignore also that up to date data because it is going to be sloshing backwards and forwards for many months as we respond to bad events like earthquakes and wars, cricket results etc.
What do you do then? Keep your eye on the long term ball which is one of improving growth late this year with potentially good strength over 2012. Focus on cost control, cash flows, staff upskilling, investing for productivity rather than capacity growth, reducing debt, and low inventories until it is abundantly clear we one day do have strong growth in our time.

Kiwis Crossing The Ditch

This paper examines the factors which appear to influence the net outflow of migrants from New Zealand to Australia. The conclusion is that with the NZ dollar at a two decade low against the AUD, a large difference in respective unemployment rates, “catch-up” flows after people stayed put during the global financial crisis, and more active recruitment out of Australia, the net annual loss will comfortably exceed the record of 35,395 recorded over calendar 2008.

Why we write about the economic consequences of disasters.

The Consequences of Earthquakes

It never rains but it pours and unfortunately this applies to the terrible devastation and loss of life wrought by earthquakes here in New Zealand and in Japan in recent weeks. Picking through what will likely be the economic consequences of such events is a fraught exercise partly because it seems insensitive when so much attention is naturally on the suffering of those affected. But attempting to place a framework around what the broader financial consequences will likely be is an important part of the control process following such an event.

Naturally when something shocking like an earthquake, hurricane, flooding etc occurs we habitually nervous humans ask ourselves if this is the end of everything. Are we on a path back toward a minimalist existence amidst depression-like conditions? The way sharemarkets, currencies and even house prices can sometimes collapse with little change in the current economic environment show the way in which sentiment regarding the future greatly influences the way we behave now. And the way we behave now largely determines what the future will look like.
Or to put it another way. Modern economies function on mutual trust and confidence in the future with that confidence dependent upon our vision of the form and stability of future government, institutions, laws, and so on. Retaining the confidence of employers so they do not lay off their staff and the confidence of consumers so they do not cease purchasing anything except food and clothing is the first priority for governments and for those of us with some (limited) power to influence sentiment of the masses.

So, when journalists call us economists, politicians, business and community leaders up soon after a major catastrophe we do not say all bets are off the table and anything is possible. We assume the current foundations of our society and our economy will continue and we will adapt to the changed circumstances rather than fold in front of them. We try to estimate the immediate extent of damage, we try to work out what the adjustment/recovery path will look like, and we try to envision what the new equilibrium will look like when all adjustments to the new shock have occurred.
In the context of Christchurch that means we try to estimate the damage to infrastructure, the damage to economic activity and how long it will last, how businesses will respond and what the impact will be on various industries and parts of the country. Visionaries, architects and city planners generally leap beyond all that and attempt to imagine what Christchurch will/could look like in 10-15 years time. We economists speak in terms of an adjustment path. They speak in terms of a potentially brighter future.

In Japan this exercise involves a far greater international element because they are the third largest economy in the world, the devastation and loss of life is much greater than in Christchurch, the portfolio investment exposures are magnitudes greater than here, and they form part of the global supply chain in the manufacturing sector. We largely don’t. The long term element for them is not so much the reconstruction if at all of devastated villages, but the prospects for their nuclear industry given six reactors at risk of meltdown. This throws up vital questions regarding the ability of nuclear power to supply not only a large part of Japan’s energy needs but requirements elsewhere, and importantly, the ability of nuclear energy to supplant coal and gas for electricity generation and therefore contribute to reduced growth in greenhouse gas emissions.

Only time will really tell us what the damage costs are here and in Japan of the earthquakes, what the adjustment paths will look like, and what the new stable patterns (city layout, nuclear energy use etc.) will be. But the exercises of attempting to calculate these things just hours after the events are an essential way of containing the natural panic we all feel when we see such devastation as has occurred recently.

What we lack – 1

In this paper we start by discussing New Zealand’s fall down the OECD income per capita ladder, our high net negative foreign direct investment position, our high net international investment deficit, the high dependence of the NZ banking system upon foreign funding, and our poor household savings rate. We then undertake our first examination of studies contained in the first report in this series, commencing with the World Economic Forum’s Global Competitiveness report.


Business confidence understandably slammed by the February 22 earthquake in Christchurch.

Last week we conducted our monthly survey of the confidence of BNZ Weekly Overview readers regarding the NZ economy and unsurprisingly sentiment has taken quite a tumble following the Christchurch earthquake. Whereas in the first week of February a net 22% of respondents expected the economy to et better in a year’s time our March 3 survey shows that now a net 20% expect things will get worse. Continue reading “Business confidence understandably slammed by the February 22 earthquake in Christchurch.”

Implications of the Christchurch earthquake.

The short term outlook for the NZ economy was already looking mediocre before the earthquake struck last week. Now prospects are even dimmer and it is likely that after registering close to no growth in the December quarter the economy will shrink or again register no growth over the entire first half of this year. Continue reading “Implications of the Christchurch earthquake.”

Why our economy lags behind the OECD average now.

Over the past few weeks I’ve been looking through the many international surveys
comparing economies. These surveys tend to get highlighted here in New Zealand when
we achieve a top 10 ranking, but otherwise don’t get much attention outside the policymaking
community. What I’ve been looking for are general indicators which may explain
why we have started going back down the OECD GDP per capita ladder again since
2004. Continue reading “Why our economy lags behind the OECD average now.”

Impact of migration flows on NZ house price inflation.

The Savings Working Group two weeks ago released their report on New Zealand’s
savings problem warning that we stand on the edge of an abyss. That terminology is
somewhat sensationalist and hopefully hasn’t panicked anyone into leaving the country in
case we go the same way as Greece and Ireland. Actually we already did that back in the
1980s when the economy had to be deregulated to face a changed world and the
government had to get its finances back in order after years of ballooning deficits. Continue reading “Impact of migration flows on NZ house price inflation.”

Retailing is weak, household savings are growing – long may this situation continue.

There is considerable uncertainty surrounding the household savings rate in New
Zealand and doubts even about the comparability of savings measures across different
countries. But for what it is worth, the Institutional Sector Accounts prepared annually by
Statistics NZ show that in the year to March 2010 New Zealand’s household savings rate
(as a proportion of disposable income) was -2.2%. That means we spent on average
2.2% more than we earned. That rate was better than 4.5% a year earlier and 8.9%
early in 2007. Continue reading “Retailing is weak, household savings are growing – long may this situation continue.”

Looking through the latest statistical data this is what we think is happening in the NZ economy.

Welcome back to work for 2011 and if you never left hopefully you can take some sort of
a break before the weather inevitably turns bad – after all, with Queensland hit by the
effects of the biggest La Nina weather pattern potentially on record there have to be
some effects here as well. Continue reading “Looking through the latest statistical data this is what we think is happening in the NZ economy.”