Fiscally sound and seeking growth …we need more infrastructure . Connect with KiwiEconomics on: Jarrod Kerr Jeremy Couchman @kiwieconomics inner.kiwi/commentary/ Chief Economist Senior Economist kiwieconomics@kiwibank.co.nz
Everything we need to know… Interest rates are low, very low, and will remain very low for a very long time. Interest Rate Curves % (Bond Rates) 2.00 Rate cuts We’re below are priced 1%! 1.60 USD US+1 1.20 NZD AUD 0.80 0.40 GBP 0.00 JPY -0.40 GER -0.80 -1.20 Cash 6m 1yr 2yr 3yr 4yr 5yr 6yr 7yr 8yr 9yr 10yr 2
Term interest rates are falling… fast. Over $16 TRILLION is invested in bonds with NEGATIVE interest rates. KIWI bonds are still attractive. Value Invested in Negative Yielding Bonds US$ trillion (USD amount invested globally) $18 NZGBversus UST T and nd Average AAA % (New Zealand 10-year Govt Bond yield against "peers") 5.0 $15 4.0 NZGB-UST 10-year NZGBs versus average AAA's 10-year $12 3.0 $9 2.0 1.0 $6 0.0 $3 -1.0 Barcap Index 90 94 98 02 06 10 14 18 $0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 3
There are 5 reasons for record lows 1. 1. Demographics rates: 2. 2. Inequality 3. 3. Populism 4. 4. Disruption 5. 5. Fiscal austerity
The secular decline in real interest rates, globally. Source: NZIER 5
#1 The tectonic shift in demographics Life Expectancy Real Interest Rate Net Worth 6
#2 The rise in inequality is enraging many Weak wages growth, especially for the lower deciles. 7
#3 The rise of the angry voter, is popular in disbelief. Rising Inequality has produced populists in: Trump’s US, Italy, Philippines, Turkey, Brazil, plus Brexiteers, and Frexit followers. *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 8 in Italy. It doesn’t include major emerging country populists, like Erdogan in Turkey or Duterte in the Philippines. (Bridgewater Daily Observations)
#4 Disruption includes globalisation and technology Protectionism is flaring up (again) post-crisis. KOF Index of Globalisation (1970-2015) Trade Restrictive Measures in G20 (Cumulative measures introduced from 2008) No. Source: WTO 1200 800 400 0 2010 2012 2014 2016 9
#5 Fiscal austerity is exactly what we don’t need. “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 % of GDP $billions 80 32 Forecast 70 28 60 24 50 20 40 16 30 12 20 8 10 4 0 0 2009 2011 2013 2015 2017 2019 2021 2023 Year ending 30 June Net core Crown debt % of nominal GDP (RHS) 10
Keeping your finger on the impulse. We get a good, delayed, lift from the Budget. But then we get a drag on growth … % of GDP % of GDP 10 4 Forecast Forecast 5 2 0 0 -5 -2 -10 -4 2009 2011 2013 2015 2017 2019 2021 2023 Year ending 30 June Fiscal impulse (RHS) OBEGAL CAB 11
We are growing well, with a boost to come. Keeping our finger on the impulse, we get a good lift from the Budget(s). Annual average % change 5 Forecast 4 3 2 Impulse is delayed but still large 1 0 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly Treasury Budget Update RBNZ May MPS Kiwibank 12
Inflation is still some way away. Treasury is the most optimistic, well ahead of the RBNZ and Kiwibank. Annual % change CPI Inflation 3.0 Treasury has the Forecast strongest profile 2.5 2.0 RBNZ: June 1.5 2021! 1.0 0.5 0.0 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly Treasury Budget 2019 RBNZ May MPS Kiwibank 13
The RBNZ are likely to cut again, and again… 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. 14
Labour pains: firms are complaining of labour costs/shortages, and Labour policies 39326 39417 39873 39965 40513 40603 41061 41153 41699 41791 42248 42339 42887 42979 38869 38961 39052 39142 39234 39508 39600 39692 39783 40057 40148 40238 40330 40422 40695 40787 40878 40969 41244 41334 41426 41518 41609 41883 41974 42064 42156 42430 42522 42614 42705 42795 43070 43160 43252 Business Confidence Net % Net % 80 80 60 60 40 40 20 20 0 0 Labour, and -20 -20 Labour -40 -40 ANZ general confidence -60 -60 NZIER's QSBO general business conditions Source: ANZ, NZIER -80 -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 Sep-18 May-19 GDP and ANZ Business Activity Outlook Agriculture, or Wellingtonians? Ann % Net % 80 8 ANZ Own Activity Outlook 70 Source: NZIER 6 GDP 60 50 4 Business confidence should be supported by: 40 30 2 20 Abolition of CGT, and nothing unheard-of 10 0 in the tax group. 0 -10 -2 -20 Lower interest rates. Source: ANZ, Statistics NZ -4 -30 2005 2007 2010 2013 2016 2018 15
Taking the pulse of the regions Regions c cool b but it’s not all bad
Economic factors 2019 Economic factors 2016 17
Tourism is directly exposed to slowdown in global growth 18
Agriculture is protected by commodity prices for now 19
There are 3 Ps to Property: 1. 1. Population 2. 2. Preference 3. 3. Policy
#1 Population: a mammoth migration boom... % 000s 60 30 Net Inflow RBNZ Our population estimates (F) HP do not peak , in our KiwiBank (f) 40 20 lifetimes. 20 10 0 0 -20 -10 00 06 12 18 21
…concentrated in the north, but a boost everywhere! 22
We like playing with models. Here’s ours… Change in Housing Demand and Supply Number of Dwellings 45,000 40,000 Demand Supply 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Sources: StatsticsNZ, Kiwibank 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 23
We are short 130,000 homes! The recent spike in people per dwelling confirms undersupply. Think battery hens rather than free range. People’s preferences are adapting. 24
The regions are playing catch up… as some Aucklanders leave But not just investor led, Population is playing a role too! 25
The hunt for yield… …has led Aucklanders to the regions. 26
#2 Preference: is now higher density (globally) 27
Auckland and Queenstown benefited from foreign buying. REINZ house price index Foreign buying comes and goes, 3-mth annual % change 35 35 and then comes back again. New Zealand 30 30 Hawkes Bay 25 25 Southland Auckland 20 20 Manawatu-Whanganui 15 15 10 10 5 5 0 0 -5 -5 -10 -10 Source: REINZ -15 -15 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 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 “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. 29
Are there any questions 30
The tectonic shift in demographics Population growth rates are falling, and we’re ageing. % Fall of Rome WWI WWII 2020 Jesus 1970 25 World Population Growth 20 Average Interest Rate 15 1920-40 spike 10 1800s ~5% 1985 5 1950 0 Black Death -5 31
Brexit Breaking Bad… Brexit is possibly the most complicated political situation you’ll ever see. 32
Globalisation, and EU entry, exposes some workers. The relative wages of workers exposed to global labour markets get squeezed. 33
Tr(i)umphant Trump is a Populist Protectionist… The US-China trade deal should be signed, but is only the start. 34
We are geographically closer to the action. We are right next door to the most populous part of the planet. 35
“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. 36
New Zealand 37
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