The truth abut the New Zealand economy

Our Road Runner economy is zooming towards the cliff-edge - Rod Oram’s Sunday Star-Times column for July 24th, 2016

By Rod Oram

When the Road Runner zooms out over a cliff, looks down and sees the gaping chasm beneath, it loses momentum and plummets.

Perhaps the cartoon character is telling us something about the New Zealand economy. Seven news items this week give us a glimpse into the void.

1. Auckland house prices and the NZ dollar are “overcooked,” says David Hisco, chief executive of ANZ in New Zealand. “The ending is pretty much the same – sometimes a little plot twist, but usually messy.”

2. Global dairy prices are struggling to recover, says the OECD-FAO in their annual world agricultural outlook. To break even, the average NZ farmer needs a price of US$2,650 per tonne of whole milk powder. But it won’t reach that level until 2019.

The US$3,400 price the government is using in its Budget won’t be reached until after 2025, the latest OECD-FAO forecasts show.

A brave banking executive needs to tell the truth about the deep stresses on dairy farm lending, as Hisco has done on the housing market. All he or she needs to do is use the OECD-FAO’s global analysis, available at nz2050.com/DairyOECD.

Far too many NZ dairy sector leaders still argue farmers are suffering only a severe cyclical swing in prices. The OECD-FAO report, however, shows how deeply structural the shift is.

On the demand side, Chinese imports had grown by 20 per cent a year in the decade to 2015. They have plunged by a third since and are now forecast to grow by only 2.5 per cent a year.

On the supply side, Irish production increased by 18.5 per cent and the Netherlands’ by 11.9 per cent in the year to March 2015. EU exports are forecast to increase by 58.5 per cent from 2015 to 2025.

3. Inflation is moribund. It was 0.4 per cent in the year to June, and equally weak or dipping into deflation in many other countries. In its June Monetary Policy Statement, the Reserve Bank had forecast 0.6 per cent inflation. But the outlook has “weakened since,” it said on Thursday.

Markets expect the Reserve Bank to cut the OCR by 0.25 percentage points in August to 2 per cent, with a further cut likely later in the year. But, as elsewhere in the world astonishingly low interest rates are failing to stimulate economies.

4. The NZ dollar is far too strong. Its trade-weighted value is 6 per cent higher than the June MPS forecast, adding greater pain, for example, to dairy farmers. The Reserve Bank says a “decline in the exchange rate is needed.”

But the Reserve Bank has no levers it can pull to make that happen. Only a loss of confidence, either in the global or NZ economy, will take the heat out of our dollar.

5. The global economy is slowing. In April, the IMF reduced its forecasts for global growth, with only China among large economies edging a tad higher. Since then the IMF has highlighted Brexit and other factors that have made the outlook more uncertain.

6. Global income is stagnating for many people. Two-thirds of households in 25 advanced economies suffered flat or falling real incomes between 2005 and 2014, according to analysis just released by the McKinsey Global Institute. Some 540 million people are affected, says the report available at nz2050.com/McKinseyInequality.

7. Voter fury is spreading. The vindictive, mob mentality of US Republicans at their convention this week is but one example of the global malaise. Donald Trump, their agitator-in-chief, believes this tide of outrage will sweep him into the White House.

Quite what he would do there remains mostly a mystery, particularly on economic policy. He talks of US$9.5 trillion of tax cuts, an increase in social security spending and unleashing trade wars. Moody’s, the credit rating agency, forecasts they would trigger a US recession longer and deeper than the one the nation suffered after the Global Financial Crisis.

We are utterly exposed to all these local and global conditions. Yet, our government deludes itself, and tries to sucker us too, into believing the high dollar, house prices, immigration and tourism are all signs of success.

We’re not at the cliff-edge yet. But only strong-eyed realism will save us in time.

ENDS