Report by NewsroomPlus.com
BERL chief economist Ganesh Nana’s overriding message at an economic briefing this morning could be characterised as ‘Keep Calm, But Don’t Carry On’.
First, the ‘Keep Calm’ part.
Invites to the event had posed three pairs of questions. The first pair was: Are we into a normal cyclical slowdown in growth? Or, do we have to dust off the ‘R’ word?
In his economist’s “reading of the tea leaves” Dr Nana’s assessment is a firm YES to a forecast of a cyclical slowdown, and a firm NO to conflating current economic conditions that are admittedly “radically different from that expected just 6 months ago” as a crisis.
To use a line from his media statement: “We knew commodity prices were going to adjust downwards, we knew the exchange rate was overvalued for a long time, and we knew the Christchurch rebuild was going to peak. Now these things are happening there is an adjustment occurring. We shouldn’t be too surprised by this (or that) there is more to come”.
The ‘Don’t Carry On’ part was Dr Nana’s broad-ranging set of cautions and risk identification against certain attitudes and actions that policy officials, businesses and commentators might be, or are, tempted to have or take, but need to be dissuaded against having or taking.
In a proximate way he cautioned against a number of attitudes and actions that would carry on unhelpful behaviour. Which can be listed like this:
- Don’t Carry On being obsessed with inflation when “inflation targeting misses the point” and distracts you to take your eyes off the ball – directed at the Government and officials
- Don’t Carry On “getting cold feet from seeing ghosts from inflation past and so not (further) reducing the OCR” and thus putting “the necessary NZ$ exchange rate adjustment” at risk of stalling – directed at the Reserve Bank
- Don’t Carry On “talking ourselves into a downturn” by losing confidence and “causing sentiment to impact on investment and employment and also potentially slowing the stimulus from the migration inflow” – directed mostly at businesses
- Don’t Carry On “be(ing) driven just by the financial and money market commentators” – partially directed at financial and money market commentators. [Coupled with a wish that the ‘gap’ between the speculative economy (sharemarkets and their indices) and real economy (GDP) might be narrowed some day]
- Don’t Carry On expending too much focus on Government accounts and notions of a surplus when that’s a “non story”, or inflation when that’s “yesterday’s story”, or other distractions – directed indirectly at other political parties, journalists, wider public
Dr Nana pointedly cautioned against leaving the exchange rate to be played with by the financial markets, which left to their own devices would default to a wrong direction that “shoot(s) ourselves in the foot”. Case in point:
Cycles as a ‘coincidence of events’
Dr Nana carefully gave equal balance to our economic glass being both half-full and half-empty – not bad for someone who owned to a reputation that has painted him as “relatively miserable”.
As contained in the preamble to the briefing, the recent coincidence of volatile Chinese share prices, dairy farmers facing negative cashflows, and seemingly no end to soaring residential property prices, does bring the idea of ‘battening down the hatches’ to mind.
It does amount to a warning sign, and it’s not helped by low visibility at the level of the global economy.
On the other hand is the argument that the coincidence of hefty domestic migration gains, a rebalanced set of Government books, low inflation and previously buoyant confidence, under conditions the Reserve Bank jargon refers to as “above potential growth”, shouldn’t count for nothing.
Things do come “off the boil”, but that doesn’t exclude positive news and should never exclude the perspective of a long-term view.
Speaking of the “elephant in the room” – as Dr Nana delicately put it – the dairy decline makes for a different picture when you wind back to a 40 year overview and a $6 payout as an average ‘water line’. Riding the cow’s back and betting on the high levels of recent years then starts to look like a gamble, calculated or otherwise, rather than a business case.
The consequence of the dairy dive will be a “lot of hurt” Dr Nana predicted, and some farmers exiting dairy – but a bigger risk, one that could contribute to knocking the economy into a potentially more damaging downturn overall, would be if banks take a more aggressive stance to mitigate their exposure to the agriculture sector.
Export receipts for meat, wine, kiwifruit, and forestry (putting aside a bit of a slump) have been travelling well, and are all in good positions to take a real and important advantage of a lower exchange rate.
Another good-looking trump card on the positive side is tourism.
The first job of export earnings from these primary resource and other sectors will be to cushion the decline in dairy and overall slowdown.
Whether there’s enough collective juice in NZ Inc to see the target for the export sector rocket to 40% of GDP by 2025 is another matter, with Dr Nana graciously not ruling it out as completely impossible.
As per any briefing about the New Zealand economy and NZ Inc’s “struggle to earn”, there comes that point where the talk this morning turned to the nature of our tradable sector, and that vexed, never-ending challenge of climbing up a perceived and actual value chain.
As observed by Dr Nana, climbing up that chain is an obstacle that New Zealand still hasn’t jumped, and that exposes the risk that our exchange rate religiously follows our commodities fate, like a “knife between the shoulder blades”.
He also observes that structural imbalances haven’t been shaken off, including a persistent external deficit and a tradable sector that continues to be “hamstrung by policy settings driven by short-term cycles”.
A double bind is that through factors like a positive productivity story – “something we shouldn’t bash ourselves up over”, says Dr Nana – the tradable sector’s contribution to job growth in New Zealand is static. Future job growth is reliant on the non-tradable sector, as seen here:
What will get us through?
According to BERL, with a cyclical slow-down, a reasonable call is that the economy won’t grow above 2% before heading back to ‘capacity’ 2.5%
Running through the economy’s “plus side”, domestic spending growth remains healthy even if it flattens out, and house building is catching up.
In his talk today Dr Nana favoured actions such as a gradual decline in the exchange rate by another 10%, and step by step cuts in the official cash rate (OCR) to 2%, and even as low as 1.5%.
During an exchange of questions and answers to conclude this morning’s well-attended briefing, Fairfax journalist James Weir asked if there is a housing bubble in Auckland? Yes said Dr Nana, but there is “no inherent factor that says it has to burst”.
Asked to opine on what advice he might have for the Government and Mr English as Finance Minister, his response was that “stimuli” from migration and infrastructure/ housing investment should continue.
He favours loosening the infrastructure purse strings – acknowledging they’ve already been loosened – and moreso if central government could back, and bankroll, more development in the regions.
Most of all he favours a loosening of the purse strings for “investing in training the people” and building the future skills mix of future New Zealanders – for long-term benefits.
Note: Established by a group of practising economists in 1957, BERL remains a privately-owned New Zealand company committed to long-term perspectives and standing apart from ‘vested interests’. For information on the company see: berl.co.nz
[Contributed by Stephen Olsen, NewsRoom_Plus. Disclaimer: Our landlord is BERL, but they don’t contribute to our rent :]