For a while, the news seemed dire for the Left, and impressively positive for National;
- A recent Fairfax Media-Ipsos poll put National on 49.4% versus 31.8% and 10% respectively for Labour and the Greens.
- The latest Roy Morgan Poll had National at 48%, compared to 30% and 12% for Labour and the Greens respectively.
- Annual average economic growth was 2.6% to September 2013.
- The Household Labour Force Survey for the December 2013 Quarter showed a drop in unemployment, from 6.2% to 6%.
- Dairy prices (and thusly export reciepts) continued to rise.
- The trade deficit continued to slowly improve.
- And there was just enough ambiguity around recent child poverty statistics to allow National, and it’s drooling sycophants, to claim that it was no longer a growing problem (it was simply a constant problem).
However, is everything as it really seems? Is the news all rosy and are we rushing head-first toward the “promised land“, the much heralded, Neo-liberal Nirvana?
Or, are dark clouds beginning to appear on the horizon?
New Zealand’s economic recovery is predicated mostly on the Christchurch re-build, and piggy-backing on the global economic situation picking up. As Treasury reported in 2012;
The Canterbury rebuild is expected to be a significant driver of economic growth over the next five to ten years. The timing and speed of the rebuild is uncertain, in part due to ongoing aftershocks, but the New Zealand Treasury expects it to commence around mid-to-late 2012.
As predicted, the ASB/Main Report Regional Economic Scoreboard recently revealed that Canterbury had over-taken Auckland as the country’s main center for economic growth.
Meanwhile, the same report outlines that Auckland’s “growth” is predicated on rising house prices. Economic “growth” based on property speculation is not growth – it is a bubble waiting to burst.
The other causal factor for our recovery is international. The IMF reported only last month;
Global activity strengthened during the second half of 2013, as anticipated in the October 2013 World Economic Outlook (WEO). Activity is expected to improve further in 2014–15, largely on account of recovery in the advanced economies. Global growth is now projected to be slightly higher in 2014, at around 3.7 percent, rising to 3.9 percent in 2015, a broadly unchanged outlook from the October 2013 WEO. But downward revisions to growth forecasts in some economies highlight continued fragilities, and downside risks remain...
Being being mostly an exporter of commodities (meat, dairy products, unprocessed timber, etc), New Zealand cannot but help ride the wave of an upturn in the global economy as increasing economic activity creates a demand for our products.
Any economic recovery, as such, has little to do with the incumbent government – just as the incumbent governments in 2008 and 2009 had little to do with the GFC and resulting recession (though National’s tax cuts in 2009 and 2010 were irresponsible in the extreme, reliant as they were on heavy borrowings from overseas). We are simply “riding the economic wave”.
As the global up-turn generates growth in New Zealand’s economy, paradoxically that leaves us vulnerable to new, negative, economic factors;
1. The Reserve Bank has indicated that it will begin to increase the OCR (Official Cash Rate) this year.
Most economists are expecting the OCR to rise a quarter of a percentage point on March 13. As Bernard Hickey reported in Interest.co.nz;
Wheeler said in early December he expected to raise the OCR by 2.25% by early 2016, which would lift variable mortgage rates to around 8% by then. The bank forecast interest rate rises of around 1% this year and a similar amount next year.
2. An increase in the OCR will inevitably flow through to mortgage rates, increasing repayments.
As mortgaged home owners pay more in repayments, this will impact on discretionary spending; reducing consumer activity, and flow through to lower business turn-over.
Even the fear-threat of higher mortgage interest rates may already be pushing home owners to lock-in fixed mortgages. Kiwibank for example, currently has a Fixed Five year rate at 6.9%. ANZ has a five year rate at 7.2%. Expect these rates to rise after March.
If home owners are already fixing their mortgages at these higher rates, this may explain the fall in consumer confidence, as the Herald wrote on 20 February,
New Zealand consumer confidence fell from its highest level in seven years this month, while remaining elevated, amid a pickup in inflation expectations and the prospect of interest rate increases.
It may also explain, in part, this curious anomaly which recently featured in the news cycle,
The Herald report goes on to state,
The smaller tax take was across the board, with GST 2.3 per cent below forecast at $7.5 billion, source deductions for personal income tax 1.2 per cent below forecast at $11.71 billion, and total corporate tax 4.9 per cent below expectations at $3.56 billion.
Treasury officials said some of the lower GST take was due to earthquake related refunds, and that the shortfall in Pay As You Earn might be short-lived. The corporate tax take shortfall was smaller than in the previous month…
- A drop in GST would be utterly predictable if consumer spending was falling.
- Personal income tax would be falling if employers were cutting back on part-time work available. Which indeed seems to be the case, according to the latest Household Labour Force Survey (HLFS) Poll on unemployment,
Over the year, the total number of under-employed people increased by 27,200 to 122,600. As a result, the under-employment rate increased 1.0 percentage points to 5.3 percent.
Less wages equals less spent in the economy and less PAYE and GST collected by the government.
- This would also account for the drop in corporate tax take falling by 4.9%.
The effect of the Reserve Bank’s decision to begin raising interest rates will be to dampen economic activity and consumer demand. This will be bad news for National.
3. An increase in the OCR will inevitably also mean a higher dollar, as currency speculators rush to buy the Kiwi. Whilst this may be good for importers – it is not so good for exporters. If we cannot pay our way in the world through exports, that will worsen our Balance of Trade; in turn risking our international credit rating; which in turn can impact negatively on the cost of borrowing from off-shore (the lower our credit-rating, the higher interest we pay to borrow, as we are considered a higher lending risk).
This, too, will affect what we pay for our mortgages and capital for business investment.
4. As economic activity and consumer demand falls, expect businesses not to hire more staff and for fresh redundancies to add to the unemployment rate. Unemployment will either stay steady later this year, or even increase.
Less people employed or a reduction on work hours for part-time employees will also result in a lower tax take.
5. As interest rates rise, in tandem with the Reserve Bank’s policy on restricting low-home deposits, expect home ownership to fall even further. This will increase demand for rentals, which, in turn will push up rents. Higher rents will also dampen consumer spending.
6. As the global economy picks up and demand for oil increases, expect petrol prices to increase. This will have a flow-through effect within our local economy; higher fuel prices will lead to higher prices consumer goods and services. This, in turn, will force the Reserve Bank to ratchet up interest rates (the OCR) even further.
7. As businesses face ongoing pressures (described above), there will be continuing pressure to dampen down wage increases (except for a minority of job skills, in the Christchurch area). For many businesses, the choice they offer their staff will be stark; pay rise or redundancies?
8. Expect one or more credit rating agencies (Fitch, Moodies, Standard and Poors) to put New Zealand on a negative credit watch.
9. According to a recent (21 February) Roy Morgan poll, 42% of respondents still considered the economy their main priority of concern. 21% considered social issues as their main concern.This should serve as a stark warning to National that people will “vote with their hip wallets or purses” and if a significant number of voters believe that they are not benefitting from any supposed economic recovery, they will be grumpy voters that walk into the ballot booth.
Interestingly, the “Economy” category also included the social issue of “Poverty / The gap between the rich and the poor”. 16% believed that “Poverty / The gap between the rich and the poor”was a major factor within the economic situation – a significant sub-set of the 42%.
Add that 16% to the 21% considering social issues to be the number one priority, and we see the number of respondents in this category increasing to 37%. That is core Labour/Green/Mana territory.
10. National has predicated it’s reputation as a “prudent fiscal manager” on returning the government’s books to surplus by 2014/15. As Bill English stated just late last year,
“We remain on track to surplus in 2014/15, although it will still be a challenge to actually reach surplus in that financial year.”
Should National fail in that single-minded obsession, the public will not take kindly to any excuses from Key, English, et al. Not when tax payer’s money has been sprayed around with largesse by way of corporate welfarism. Throwing millions at Rio Tinto, Warner Bros, China Southern Airlines, Canterbury Finance, etc, will be hard to justify when National has to borrow further to balance the books.
The concern about government debt is not so much about its level, but the pace at which it is increasing. In June 2008 net government debt was $10 billion, or 5.6 per cent of GDP, and gross debt $31 billon, or 17.2 per cent of GDP.
Since 2008, New Zealand’s sovereign debt has increased six-fold – made worse in part by two ill-conceived and ultimately unaffordable tax cuts. Those tax cuts were, in essence, electoral bribes made by John Key to win the 2008 general election. (Labour’s paying down of massive debts it had inherited from National in the 1990s, plus posting nine consecutive surpluses, had come around to bite Cullen on his bum. Taxpayers were demanding “a slice the action” by way of tax cuts.)
That debt will eventually have to be repaid. Especially if, as some believe, another global financial shock is possible – even inevitable. With a $60 billion dollar debt hanging over our heads, we are not well-placed to weather another global economic shock. In fact, coupled with private debt, New Zealand is badly exposed in this area (as the OECD stated, in the quote below).
So the “good news” currently hitting the headlines is not so “good” after all, and many of the positive indicators have a nasty ‘sting in the tail’. As the OECD recently reported,
The New Zealand economy is beginning to gain some momentum, with post‑earthquake reconstruction, business investment and household spending gathering pace. Risks to growth remain, however, stemming from high private debt levels, weak foreign demand, large external imbalances, volatile terms of trade, a severe drought and an exchange rate that appears overvalued. The main structural challenge will be to create the conditions that encourage resources to shift towards more sustainable sources of prosperity. Incomes per head are well below the OECD average, and productivity growth has been sluggish for a long time. Lifting living standards sustainably and equitably will require structural reforms to improve productivity performance and the quality of human capital.
As the election campaign heats up, expect the following;
- Greater media scrutiny on National’s track record,
- The public to become more disenchanted with Key’s governance as economic indicators worsen and impact on their wallets and purses,
- National (and it’s sycophantic supporters) continue to blame welfare beneficiaries; the previous Labour government; the GFC and resulting recession; and other “external factors” for their lack-lustre performance,
- Key and various business figures to become more strident in their attacks on Labour and the Greens,
- A dirty election campaign , including a well-known extremist right-wing blogger releasing personal information on political opponants, which will backfire badly on National,
- National to fall in the polls; NZ First will cross the 5% threshold; and Labour/Greens/Mana to form the next government, with Peters either sitting on the cross benches, or taking on a ministerial portfolio outside Cabinet.
So it’s not the Left that should be worried.
National is on shakier ground than many realise.
Fairfax Media: National on wave of optimism – poll
NZ Herald: Economic growth hits 4-year high
Statistics NZ: Household Labour Force Survey: December 2013 quarter
Fairfax Media: Dairy prices squash trade deficit
Fairfax Media: Inequality: Is it growing or not?
NZ Treasury: Recent Economic Performance and Outlook
Fairfax media: Canterbury overtakes Auckland in economic survey
Reserve Bank: Price stability promotes a sustainable expansion
Statistics NZ: Unemployment December 2013 Quarter
Fairfax media: Public debt climbs by $27m a day
NZ Herald: Govt debt – it’s the trend that’s the worry
NZ Herald: Cullen – Tax cuts but strict conditions
Previous related blogposts
The Daily Blog: Latest Roy Morgan Poll shows the Labour funk
Above image acknowledgment: Francis Owen
= fs =