Fiscally sound and seeking growth we need more infrastructure - - PowerPoint PPT Presentation
Its Ours. Fiscally sound and seeking growth we need more infrastructure Jarrod Kerr Connect with KiwiEconomics on: Chief Economist @kiwieconomics inner.kiwi/commentary/ kiwieconomics@kiwibank.co.nz We are growing well, with a boost
It’s Ours.
Connect with KiwiEconomics on: @kiwieconomics inner.kiwi/commentary/ kiwieconomics@kiwibank.co.nz
Jarrod Kerr Chief Economist
1 2 3 4 5 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly Treasury Budget Update RBNZ May MPS Kiwibank Annual average % change Forecast
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Keeping our finger on the impulse, we get a good lift from the Budget(s).
Impulse is delayed but still large
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We get a good, delayed, lift from the Budget(s).
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5 10 2009 2011 2013 2015 2017 2019 2021 2023 % of GDP % of GDP Year ending 30 June Fiscal impulse (RHS) OBEGAL CAB Forecast Forecast
0.0 0.5 1.0 1.5 2.0 2.5 3.0 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly
CPI I Inflat ation
Treasury Budget 2019 RBNZ May MPS Kiwibank Annual % change Forecast
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The Treasury is most conservative, even behind the RBNZ, and the mighty Kiwibank.
Treasury has the strongest profile RBNZ: June 2021!
4 8 12 16 20 24 28 32 10 20 30 40 50 60 70 80 2009 2011 2013 2015 2017 2019 2021 2023 $billions Year ending 30 June Net core Crown debt % of nominal GDP (RHS) Forecast % of GDP
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But why are we so obsessed with 20% (of GDP)? We don’t need to be…
The 20% target already reached
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3m 1yr 2yr 3yr 4yr 5yr 6yr 7yr 8yr 9yr 10yr
%
NZD US AUD EUR JPY
US+1
Interest Rate Curves
(Swap Rates)
GBP
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Interest rates are low, very low, and will remain very low for a very long time.
We’re well below 2%! Rate cuts are priced
1 2 3 4 5 6 7 8 9 99 01 03 05 07 09 11 13 15 17 19 Kiwi 10s Aussie 10s US 10s GER 10s JPY 10s %
InterestRate on 10-year Goverment Bonds
7
US rates are now above ours. That’s a first!
… as central banks turn dovish to protect asset values (inflation).
5 10 15 20 25
World Population Growth Average Interest Rate
%
Jesus 1800s ~5% WWI WWII 1950 2020 1970 Fall of Rome 1920-40 spike
1985
Black Death
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… we haven't seen lower levels ever, even when the Egyptians leveraged their pyramids.
0.50 0.75 1.00 1.25 1.50 1.75 2.00 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21
RBNZ central forecast May'19 Current market pricing Kiwibank Market pricing downside Kiwibank DOWNside risk
%
RBNZ OCR and Market Pricing
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Market traders always look to the next move, and the next.
The RBNZ have given us a 55% probability of another cut to 1.25% Market traders will play the risk of more.
0.0 1.0 2.0 3.0
0.0 1.0 2.0 3.0 00 02 04 06 08 10 12 14 16 18 20 22 May'19 May'18 Feb'17 RBNZ (f) RBNZ Forecast Output Gap
10
50 100 150 200 250
100 200 300 400 00 02 04 06 08 10 12 14 16 18 RBNZ policy stance (lhs) NZ 2s10s swap curve (rhs)
Bps, inverted Bps
Tightening policy above neutral, flattens the curve. Easy policy, steepens the curve. RBNZ Policy Stance and Interest Rate Curve
… and the RBNZ continues to forecast a move above potential (trend) growth.
1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 00 02 04 06 08 10 12 14 16 18 Neutral rate OCR
%
RBNZ OCR versus Neutral Estimate
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38869 38930 38991 39052 39114 39173 39234 39295 39356 39417 39479 39539 39600 39661 39722 39783 39845 39904 39965 40026 40087 40148 40210 40269 40330 40391 40452 40513 40575 40634 40695 40756 40817 40878 40940 41000 41061 41122 41183 41244 41306 41365 41426 41487 41548 41609 41671 41730 41791 41852 41913 41974 42036 42095 42156 42217 42278 42339 42401 42461 42522 42583 42644 42705 42767 42826 42887 42948 43009 43070 43132 43191 43252
20 40 60 80
20 40 60 80
Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18
Business Confidence
ANZ general confidence NZIER's QSBO general business conditions
Source: ANZ, NZIER
Net % Net %
10 20 30 40 50 60
2 4 6 8 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
GDP and expected own activity
GDP production (lhs) Own activity expected (rhs, adv 1 qtr)
Source: Statistics NZ, NZIER QSBO
% yoy Net %
Source: NZIER
Agriculture, or Wellingtonians? Labour, and Labour
Business confidence should be supported by:
in the tax group.
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The nominal economy is bigger, wages are starting to rise, and unemployment payments are fewer. More tax in and less welfare out, means a better budget position.
58 60 62 64 66 68 70 72
2 4 6 8 10 12
1994 1998 2002 2006 2010 2014 2018 Unemployment (lhs) Participation (rhs)
Labour Force Participation and Unemployment
% %
Source: Statistics NZ
2 4 6 8
2 4 6 8 1988 1992 1996 2000 2004 2008 2012 2016 GDP Employment
Employment and GDP
% change yoy
Source: Datastream, Kiwibank
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1.0 1.5 2.0 2.5 3.0 3.5 4.0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Private Sector Labour Cost Index % YoY
Source: Statistics NZ, Kiwibank
Kiwibank Forecast
Minimum wage hikes
… because inflation has been too tame for too long.
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The 3 P’s of property are:
Population – we’ve had a massive migration boom, that hasn’t ended. Policy – the RBNZ has tightened lending standards with one hand, and lowered interest rates with the
Bank capital hikes are
Preference – our dreams for housing have adapted to undersupply, and moved towards high(er) density.
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10 20 30
20 40 60 00 06 12 18 Net Inflow HP KiwiBank (f)
% 000s RBNZ (F)
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Our population estimates do not peak, in our lifetimes.
0.0 0.5 1.0 1.5 2.0 2.5 Mar 00 Dec 00 Sep 01 Jun 02 Mar 03 Dec 03 Sep 04 Jun 05 Mar 06 Dec 06 Sep 07 Jun 08 Mar 09 Dec 09 Sep 10 Jun 11 Mar 12 Dec 12 Sep 13 Jun 14 Mar 15 Dec 15 Sep 16
Natural increase Migration (other) Migration (30-49 years) Migration (15-29 years) Population
Contribution to population growth
(annual %)
Source: RBNZ
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“We find that the LVR restrictions have significantly improved the resilience of the banking system.” RBNZ LVR Review 2019 Lending was a little too aggressive over 2014-16. Now lending is safer, but slower. First home buyers have increased as a percentage of total.
20% 25% 30% 35% 40% 14 15 16 17
Residential investor mortgage lending share
% of total residential lending
Source: RBNZ Oct/Nov 2015: Auckland Investor LVRs begin (30% deposit) Oct 2016: Property Investor LVRs rolled out nationwide (40% deposit) Jan 2018: Property Investor LVRs eased a touch (35% deposit)
8% 10% 12% 14% 16% 18% 20% 20% 25% 30% 35% 40% 45% 50% 55% 60%
14 15 16 17
Residential mortgage lending share by borrower
% of total residential lending
Investor Other owner occupier First home buyer (RHS)
Source: RBNZ
20
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Foreign buying comes and goes, and then comes back again.
5 10 15 20 25 30 35
5 10 15 20 25 30 35 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
REINZ house price index
3-mth annual % change
New Zealand Hawkes Bay Southland Auckland Manawatu-Whanganui
Source: REINZ
Chinese buying had a large impact on Auckland, as well as Sydney, Melbourne, Vancouver, Singapore and London. English Property Rights
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As some Aucklanders leave.
500 700 900 1,100 1,300 1,500 1,700 1,900 2,100 2,300 2009 2010 2011 2012 2013 2014 2015 2016 2017
House Price Index: Regions play catch-up Dec 2009 = 1000
Auckland Hawke's Bay/Gisborne Wellington Southland Manawatū-Whanganui
Source: REINZ
5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Change in Housing Demand and Supply
Number of Dwellings
Demand Supply
Sources: StatsticsNZ, Kiwibank
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2.50 2.55 2.60 2.65 2.70 1996 1997 1999 2000 2002 2003 2005 2006 2008 2009 2011 2012 2014 2015 2017
Number of People Per Dwelling
National Ratio Assumed Trend
Sources: Statisitcs NZ, Kiwibank
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The recent spike in people per dwelling confirms undersupply. Think battery hens rather than open range. Peoples preferences are adapting.
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*The latest point includes cases like Trump, UKIP in the UK, AfD in Germany, National Front in France, Podemos in Spain, and Five Star Movement in Italy. It doesn’t include major emerging country populists, like Erdogan in Turkey or Duterte in the
Rising Inequality has produced populists in: Trump’s US, Italy, Philippines, Turkey, Brazil, plus Brexiteers, and Frexit followers.
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Brexit is possibly the most complicated political situation you’ll ever see.
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The relative wages of workers exposed to global labour markets get squeezed.
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The US-China trade deal should be signed, but is only the start.
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Source: NY Times
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400 800 1,200 1,600 2,000
India China
Million 1850 China ~430mn India ~285mn 1950 540mn 375mn 1980 975mn 695mn 2020 1400mn 1390mn 2050 India ~1700m China ~1350mn 2070 India 1750m
24.2 12.2 7.1 5.1 4.6 4.1 3.1 3 2.7 2.6
US Japan Germany France Italy UK Brazil Russia China Canada
1990
22.3 12.5 7.4 4.8 3.6 3.5 3.5 3 2.6 2.4
US China Japan Germany France UK India Brazil Italy Canada
2016 20.4 16.1 6.2 5.6 3.7 3.3 3 2.7 2.1 2
US China India Japan Germany UK France Brazil Canada Italy
2030
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We are right next door to the most populous part of the planet.
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China was once worse (lower) than India. India will one day match China today.
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China is still growing in travel, and India has a lot of catch up to do.
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“Migration paths do not lead primarily from very poor to very rich countries, but rather adhere to a graduated model. People move to countries where the economy is somewhat stronger than in their native country… from Bangladesh to India or from Zimbabwe to South Africa.”
(Latin, Asian, African).
many nations (African, Asian).
continent (despite largest outflows).
more migrants from East Asia, South Asia, and Africa over Europe.
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Japan Australia New Zealand United States
Contributions to population growth split by momentum, mortality, fertility and migration (purple).
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… to lifting tradables inflation and our exports.
150 300 450 600 0.20 0.40 0.60 0.80 1.00 1995 1998 2001 2004 2007 2010 2013 2016
Kiwi Dollar versus Rate Differential
NZD/USD (lhs) NZ-US rate differential (rhs)
NZD/USD NZ-US 2-year swap spread
42
… to lifting tradables inflation and our exports.
75 100 125 150 45 60 75 90 1987 1997 2007 2017
Kiwi TWI versus Kiwi ToT
Kiwi TWI (lhs) Kiwi Terms of Trade (rhs) Kiwi TWI
(Trade Weighted Index)
Kiwi ToT
(Terms of Trade)
43
Now they want to revive the inflation beast.
5 10 15 20 25 05 07 09 11 13 15 17
8 Developed nation CB's remain below target 12 Emerging nation CB's remain below target
11 Developed & 18 Emerging CB's in sample.
Emerging Developing
Inflation Targetting Is Harder Post-Crisis
(Number of central banks with inflation running below their target)
10 20 30 40 50 60 70 80 10 20 30 40 50 60 70 80 05 07 09 11 13 15 17
GLOBAL INFLATION TARGETING
(proportion below target)
11 Advanced & 18 Emerging CB's in sample
% %
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… because underemployment persists, and global inflation remains low.
AUSTRALIA'S PHILLIPS CURVE (1996-2008 vs. 2009-today)
0.0 1.0 2.0 3.0 4.0 5.0 6.0 4.5 5.5 6.5 7.5 8.5 INFLATION RATE UNEMPLOYMENT RATE 2009- today 1997- 2009
0.0 1.0 2.0 3.0 4.0 5.0 6.0 3.0 5.0 7.0 9.0 11.0 INFLATION RATE UNEMPLOYMENT RATE 2009- today 1997- 2009
NEW ZEALAND'S PHILLIPS CURVE (1996-2008 vs. 2009-today) US PHILLIPS CURVE (1996-2008 vs. 2009-today)
1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 4.5 5.5 6.5 7.5 8.5 INFLATION RATE UNEMPLOYMENT RATE 2009- today 1996- 2008
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