The Bennett Newsletter
The New Zealand economy is in a very low growth phase. Is this temporary? Or does the future involve a long, hard slog? The situation is somewhat dour despite great opportunities.
The NZ economy is always strongly influenced by its trading partners. If our customers were predominantly the British, American and Europeans, I would be slightly despondent, but fortunately we are increasingly trading with the dynamic economies of Australia, China, India, South-east Asia, and the Middle East. We are well placed to grab the coat tails of our prospering neighbours.
Inter-Asian trade has increased by 13.4% p.a. 2000-2009, and is gathering pace this year. Almost 50% of Asia’s exports go to other Asian counties, and only a third go the EU, US and Japan. As Australia is also booming, the context for our export –led growth strategy is excellent.
But we are not making the most of our opportunities. Our trade is still below 2008’s level. There is a rebound since 2009, but the latest results for the September quarter reveal a decrease of 2.5%.
The high exchange rate is an obvious problem. The deliberate US$ devaluation is causing anguish in many circles, especially manufacturers. The successful exporters are in products with insufficient value-enhancement, such as milk powder, logs meat and offal. But the economy is not responding to cheaper imports; these fell by 3.5% in the last quarter.
This indicates that although the exchange rate raises the bar for exporters, there are persistent problems with exports, they are not growing enough, and remain somewhat unsophisticated on the whole. There are exceptions in IT and hi-tech manufactures, but the record is unimpressive when compared to the Asia-Pacific region.
The fall in imports is a worry where it indicates a lack of ambitious expansion in capital investment or intermediate goods for processing and re-export. But it also indicates very low economic growth. Business probably contracted in the September quarter but growth may be about 0.4%. The economy is not able to take advantage of improving terms of trade. We can buy about 12% more imports for a given amount of exports than we could a year ago.
The domestic economy has shuddered to a near halt. Obviously there is a mixture of progress and lower activity. There is some wage growth for higher earners and a decline in the unemployment rate, but retail sales are very flat even though retailers are discounting frantically to clear their stock.
______________________________________________________
The Bennett Report - A bespoke independent in depth monthly Economics report
If you enjoy these complimentary newsletters from Dr Neville Bennett, and feel that you would like further insight from the author and a greater understanding of the complex economic environment we live in, then we invite you visit www.bennetteconomics.com here you will find back issues of the newsletter. You will also find information on how to subscribe to The Bennett Report
an in depth economic outlook produced by Neville together with his associates and global network. It is produced individually for each subscriber, in order to reflect your specific areas of interest in the global economy. This is a cost effective way for you or your organisation to source an independent economic assessment of the likely impacts of the global economy on your portfolios or businesses. Thus allowing you to position accordingly.
______________________________________________________
New Normal
The economy is still in shock from the financial crisis. That crisis terminated the so-called Great Moderation where the developed nations enjoyed an extended period of moderate economic growth, low inflation, a surge in asset-prices (notably in housing) and a culture of heady consumption. As assets seemed destined to follow a path of endless expansion, consumers spent more than their earnings. In the US personal debt reached 130% of income.
New Zealand was worse. New Zealand was worse: Household debt increased six times in dollar terms between 1990 and 2008 to a massive 160% of disposable income. Debt servicing took 15% of disposable income.
The magnitude of debt provoked few concerns until about 2008. Banks were anxious to provide 100% mortgages, and consumers often enjoyed the “wealth effect” of rising home values and stock investments. Consumers used their homes like an ATM: taking loans for home improvements, cars, furnishings and even holidays.
Personal savings virtually disappeared. They were about 10% of income in the 1970’s but by 2008, Kiwis spent $1.13 for every dollar earned.
New Frugality
Consumers in all the developed counties have curtailed their consumption as debt servicing is an increasing burden and debt reduction a new priority. This is putting pressure on growth because, in the American example, consumption was responsible for about 70% of GDP.
Consumers are deleveraging and might be changing their culture towards a new frugality. I have noticed that more office workers are not patronising food malls so much as previously. They perhaps cut their lunches and drink the firm’s coffee.
This frugality has many causes but housing must play a part. Home- owners are worried that house prices seem to be continuing a slow, but possibly deep, correction. Prices are slumping and sales volumes are very light. Houses have gone from being an ATM to an asset of declining value.
The situation is also fraught for people wanting to become home owners. As prices fall, it is tempting to hang off for another year when they might be cheaper. Houses are not really bargains anyhow as they are about seven years average earnings rather than three times which was the standard for decades.
Buying a house also requires consistent saving and this is fraught as many people have made unfortunate investments in the last few years. There have been massive losses in capital which will have hurt savers. Savers also need reliable income and disposable incomes are not increasing robustly.
Salary and wages
Statistics report a growth of 0.6% in the September quarter. I wonder if that comes from the top levels of business and the public sector, especially education and health. Many people are not getting an increase.
The Employers and Manufacturers report that employees have received an average of 3% this year, but workers in unskilled jobs averages a 0.1% decline in pay this year. Pay rates dropped for a quarter of the 215 job types in the survey. These workers were not suffering pay cuts but new entrants were offered lower rates.
I suppose most economists approve of the widening gap between skilled and unskilled workers. Some reward for skill and productivity is definitely in order. But I sympathise with hard working unskilled people who are suffering a decline in real earnings. They will be under great pressure to lift their performance and productivity especially as the pool of unemployed would provide plenty of takers if they lost their job. But they are taking back home less pay at a time when many costs are rising steeply, and this is another drag on consumption and GDP. They are doing very valuable work and are made to think they are lucky to get it.
A low wage economy is not the way to go. Kiwi’s are spending about $45 a week less than before the crisis. While saving is desirable, we have to create more, higher paid jobs.
|