Fiscally sound and seeking growth we need more infrastructure . - - PowerPoint PPT Presentation

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Jarrod Kerr

Chief Economist

…we need more infrastructure.

Fiscally sound and seeking growth

Jeremy Couchman

Senior Economist

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Interest Rate Curves

(Bond Rates) GBP

Everything we need to know…

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Interest rates are low, very low, and will remain very low for a very long time.

We’re below 1%! Rate cuts are priced

Term interest rates are falling… fast.

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Over $16 TRILLION is invested in bonds with NEGATIVE interest rates. KIWI bonds are still attractive.

$0 $3 $6 $9 $12 $15 $18 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Value Invested in Negative Yielding Bonds

(USD amount invested globally)

US$ trillion Barcap Index

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0.0 1.0 2.0 3.0 4.0 5.0 90 94 98 02 06 10 14 18 NZGB-UST 10-year NZGBs versus average AAA's 10-year

NZGBversus UST T and nd Average AAA

(New Zealand 10-year Govt Bond yield against "peers") %

There are 5 reasons for record lows rates:

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• 1. Demographics

2.

• 2. Inequality

3.

• 3. Populism

4.

• 4. Disruption

5.

• 5. Fiscal

austerity

The secular decline in real interest rates, globally.

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Source: NZIER

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Real Interest Rate

#1 The tectonic shift in demographics

Life Expectancy Net Worth

#2 The rise in inequality is enraging many

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Weak wages growth, especially for the lower deciles.

#3 The rise of the angry voter, is popular in disbelief.

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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 Philippines. (Bridgewater Daily Observations)

Rising Inequality has produced populists in: Trump’s US, Italy, Philippines, Turkey, Brazil, plus Brexiteers, and Frexit followers.

#4 Disruption includes globalisation and technology

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KOF Index of Globalisation

(1970-2015)

400 800 1200 2010 2012 2014 2016 No.

Source: WTO

Trade Restrictive Measures in G20

(Cumulative measures introduced from 2008)

Protectionism is flaring up (again) post-crisis.

#5 Fiscal austerity is exactly what we don’t need.

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“The persistence of low inflation and low interest rates is not a surprise when, as has been true in fact, the low interest rates fail to generate substantial fiscal expansion.”

Christopher Sims, Fiscal Policy, Monetary Policy and Central Bank Independence

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

Keeping your finger on the impulse.

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We get a good, delayed, lift from the Budget. But then we get a drag on growth…

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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

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

We are growing well, with a boost to come.

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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

Inflation is still some way away.

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Treasury is the most optimistic, well ahead of the RBNZ and Kiwibank.

Treasury has the strongest profile 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly

CPI Inflation

Treasury Budget 2019 RBNZ May MPS Kiwibank Annual % change Forecast RBNZ: June 2021!

The RBNZ are likely to cut again, and again…

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Market traders always look to the next move, and the next.

The RBNZ have given us a 36% probability of another cut to 0.75% Market traders are playing the risk of more.

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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 Sep-18 May-19

Business Confidence

ANZ general confidence NZIER's QSBO general business conditions

Labour pains: firms are complaining of labour costs/shortages, and Labour policies

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Source: NZIER

Agriculture, or Wellingtonians? Labour, and Labour

Business confidence should be supported by:

• Abolition of CGT, and nothing unheard-of

in the tax group.

• Lower interest rates.
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GDP and ANZ Business Activity Outlook

ANZ Own Activity Outlook GDP

Net % Ann %

Taking the pulse

• f the regions

Regions c cool b but it’s not all bad

Economic factors 2019

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Economic factors 2016

Tourism is directly exposed to slowdown in global growth

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Agriculture is protected by commodity prices for now

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There are 3 Ps to Property:

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• 1. Population

2.

• 2. Preference

3.

• 3. Policy

#1 Population: a mammoth migration boom...

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Our population estimates do not peak, in

• ur

lifetimes.

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10 20 30

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20 40 60 00 06 12 18 Net Inflow HP KiwiBank (f)

% 000s RBNZ (F)

…concentrated in the north, but a boost everywhere!

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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

We like playing with models. Here’s ours…

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We are short 130,000 homes!

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The recent spike in people per dwelling confirms undersupply. Think battery hens rather than free range. People’s preferences are adapting.

The regions are playing catch up… as some Aucklanders leave

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But not just investor led, Population is playing a role too!

The hunt for yield……has led Aucklanders to the regions.

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#2 Preference: is now higher density (globally)

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Auckland and Queenstown benefited from foreign buying.

Foreign buying comes and goes, and then comes back again.

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REINZ house price index

3-mth annual % change

New Zealand Hawkes Bay Southland Auckland Manawatu-Whanganui

Chinese buying had a large impact on Auckland, as well as Sydney, Melbourne, Vancouver, Singapore and London. English Property Rights

#3 Policy: Macropru policy restrained investors

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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.

Are there any questions

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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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Population growth rates are falling, and we’re ageing.

The tectonic shift in demographics

Brexit Breaking Bad…

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Brexit is possibly the most complicated political situation you’ll ever see.

Globalisation, and EU entry, exposes some workers.

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The relative wages of workers exposed to global labour markets get squeezed.

Tr(i)umphant Trump is a Populist Protectionist…

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The US-China trade deal should be signed, but is only the start.

We are geographically closer to the action.

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We are right next door to the most populous part of the planet.

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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.”

• The US attracts a vast array of

migrants (Latin, Asian, African).

• The EU also attracts many migrants

from many nations (African, Asian).

• Most of Asia’s migrants stay on the

continent (despite largest outflows).

• Australia and New Zealand now

attract more migrants from East Asia, South Asia, and Africa over Europe.

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New Zealand

Rising powers

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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

1990

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

China is the world’s largest trading partner.

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China’s new silk road and belt initiative is BIG.

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35 strategic Chinese-funded ports, will test the US.

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Source: NY Times

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China was once worse (lower) than India. India will one day match China today.

Protein consumption and wealth increase together.

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China is still growing in travel, and India has a lot of catch up to do.

Airline travel and wealth also move in line.

We are influenced by machines every day

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“Disinformation and misinformation on social media are exacerbated by algorithms that encourage viral sharing”. Platforms encourage clicks and likes, not artistic or civic values. #Fakenews… “A few providers are responsible for the majority of referral traffic, and just 5 companies take in almost 80% of global mobile advertising revenue – with Google and Facebook getting 90% of the growth”. We will see debate on the aligning of societies values to the use of AI.

Financial markets have used machines for years.

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Source: WilmotML

What could possibly go wrong?

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All content is for information only, is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to entering any transaction. To the extent permitted by law Kiwibank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material.

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