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Weekly Overview May 22
Thursday May 22nd 2014
This week I travelled to Christchurch, Ashburton and the West Coast. Activity is forging ahead in Christchurch but there are deepening concerns about the quality of some work being undertaken by those who have flocked to the city with a gold rush mentality. Ashburton is active on the back of dairy sector investment. On the West Coast the coal mining sector remains weak but tourism is picking up and lots of tradespeople are busy cleaning up and undertaking repairs following the winds of a month ago.
This week the NZD has eased slightly on the back of a weaker Aussie dollar, and bond yields have crept lower in response to growing concerns about the underlying state of the US economy.
The government’s budget this afternoon contained no surprises with a return to surplus predicted for next year and a complete absence of the horror underway across the Tasman where chickens have well and truly come home to roost after years of fiscal laxity. The divergence in the annual budgets with spending slashed in Australia and tax rates rising, versus scope for tax cuts here in NZ down the track will reinforce the massive switch in Trans-Tasman migration flows underway. Before the end of this year it is likely that for the first time since 1991 there will be a net gain to our population from Trans-Tasman flows.
Job numbers have soared by 83,000 or 3.7% in the past year. But wages growth shows no sign of accelerating as yet. This will however happen and employers need to give thought to how they will handle the coming extended period of labour shortages and rising labour costs.
This week we take a look at Labour’s proposal to make Kiwisaver subservient to Reserve Bank monetary policy desires and conclude on a number of fronts that it is not a good idea, though good on Labour for giving thought to alternative monetary policy weapons. One major problem nobody else seems to have picked up on is that forcing people to save more when the economy and share prices are soaring will exacerbate share price gains and cause people to buy more shares when prices are high.
Then when the economy is weak and share prices low and or falling, people will be forced to buy fewer shares thus worsening price declines. Labour’s policy would unfortunately exacerbate share price volatility and reduce long term Kiwisaver returns as people would be forced to buy high and buy less when prices are low.
Their policy would also tend to boost household and external debt because lower and less volatile interest rates will make borrowing money safer. That will in turn encourage more investment in housing, especially as returns to term deposits would on average be lower, and that would price housing even further out of reach of young families. Labour’s policy would also tend to boost bank profits through not just raising debt levels and giving banks more Kiwisaver business, but encouraging people to stay floating rather than fixing, given reduced risk of interest rate shocks. Bank margins are bigger on floating than fixed rate loans.
But again, good on Labour for thinking outside the square to try and address the issue of the interest rate impact on the Kiwi dollar.
In this holiday-shortened week we have seen another tightening of monetary policy, a slight rise in the NZD, and data revealing booming net immigration which has fairly clear implications for the housing market if not the economy overall.
Inflation remains low in New Zealand at just 1.5%. But with the pace of economic growth lifting in an environment of resource shortages the rate will soon start heading toward 3%. That is why the Reserve Bank is likely to raise its official cash rate again next Thursday and the current pinch of weakness in the NZ dollar may not be sustained.
New Zealand is experiencing a migration boom with the net loss of ourselves to Australia plummeting from near 40,000 in mid-2012 to just 15,000 in the past year. The all-country gain for the NZ population is now 29,000 and headed toward 40,000. The implications are obvious for the pace of economic growth.
This week we note how the recent surge in NZ productivity growth is just a catch-up following the rout of 2008-09 rather than evidence of a new permanently higher growth path for the NZ economy. This is important because it means inflation risks will potentially easily build as growth accelerates this year which is why further interest rate rises loom and the NZ dollar will remain well supported though with some capping from easing dairy prices and continued tapering of US money printing.