Hive News Friday: Wheeler worries about Trump and sees migration moderating wage growth

Reserve Bank Governor Graeme Wheeler addresses the news conference following the release of the latest MPS. Copyright Lynn Grieveson / Hive news

Graeme Wheeler focused his strongest comments in yesterday's post Monetary Policy Statement commentary on the risks that a Trump-led slide into protectionism and fiscal profligacy could slow growth and lift inflation and interest rates in the world's largest economies, which could in turn spill over into our currently-humming economy.

"If you go to the US I think the biggest risk is primarily around protectionist policy," Wheeler said when asked about the risks around Trump.

He pointed to Trump's cancellation of the Trans Pacific Partnership (TPP), the stalled talks between America and Europe over the Trans-Atlantic Trade and Investment Partnership (TTIP) and the orange one's promise to renegotiate the North American Free Trade Agreement (NAFTA).

"You could end up with a situation, if it were followed through, of higher tariffs. And what would that mean to the global economy?" Wheeler said.

"Let's say for example the US really did get serious about imposing 45% tariffs on China, for example, or large tariffs on Mexico. Then that would have serious implications for the global economy," he said.

"Because one thing it would do, it would raise inflation rates in the US. The Federal Reserve would need to push harder against rising inflation so those interest rates would rise. The exchange rate in the US would probably rise. You'd see retaliation by other major countries."

He pointed to some research done by the OECD into what 10% tariff increases in China, Europe and the United States would do for the global economy. He said the OECD saw a 2-3 percentage point hit to GDP growth in those three economies -- the three largest in the world.

"That would not unexpectedly lead to a very significant slowdown in global growth, higher cost associated with trade, reduced volumes of trade, and slower growth in the rest of the world, which would certainly affect us," he said.

"So the biggest risk is the protectionist risk, and it's unfortunate that a lot of this rhetoric is taking place at a time when we've seen the slowest growth in merchandised trade volumes in the last five years than we've seen since the early 1980s."

Wheeler worried about what that sort of disruption to those global financial markets could do, given that they still roll over tens of billions worth of short-term New Zealand bank debt every couple of months.

"It could spill over into liquidity and funding costs quite quickly," Wheeler told the Finance and Expenditure select committee later in the day.

Earlier, he talked in more depth about the potential for higher bond yields overseas.

"The other risk out there in terms of bond markets, and therefore interest rates, is what the US does on fiscal policy in terms of the potential for tax cuts, infrastructure spending and then increases in operating spending such as around the military and other things that have been identified."

So what would the RBNZ do?

Wheeler was coy later in the news conference when I asked if the Reserve Bank would 'look through' a Trump-inspired inflation shock and not raise interest rates, or react with higher rates here too.

"It depends how much an inflation shock it would be and whether it's transmitted, how widely," he said, before going on to map how the Federal Reserve would be likely to respond to a big fiscal loosening with tighter short term interest rates.

Higher longer term rates would flow through regardless of what the Reserve Bank did, he pointed out.

"If you look at long-term rates in the US, by and large after a period of time they seem to get fully mapped into long-term rates around the world. Sometimes it's very quick, sometimes it can be within a quarter, but by and large they do get transmitted."

John McDermott added that the impact of a Trump shock on inflation expectations here would be important.

"We'd be watching the persistence of that shock, how long it lasts, and I think the most important thing is whether it changed inflation expectations and behaviour in New Zealand because if it did that, clearly we would have to lean against it," he said.

'Not quite as flexible'

The other hot topic was Steven Joyce's announcement on Wednesday that the Reserve Bank would have to do a cost benefit analysis and consult the public before it could include a debt to income multiple tool in its macro-prudential policy memorandum of understanding, rather than after it being in the toolkit, as was the case with the loan to value ratio changes.

The process of analysis and consultation is expected to delay the bank's ability to introduce a DTI tool, if it needs to.

Wheeler made clear again that even if he had the tool ready to use now he would not use it, because house price inflation had moderated -- although he was cautious about saying there was still a risk of resurgence.

He pointed in both the news conference and the select committee appearance to a comparison of house price inflation in the five months before the announcement of the 40% deposit requirement for rental property investments in July and the five months afterwards. He said house price inflation nationally, as measured by REINZ's stratified measure, had slowed to 0.1% a month or 0.5% in total in the five months from July to November, which was down from 10% in total in the previous five months. Auckland house price inflation had slowed to 0.3% a month in the last three months.

"We approached the government to see if we could have debt to income measures introduced into the macro-prudential toolkit and the government's made it clear - and we're very encouraged to have a response - they would like us to go and consult on that and we'll certainly do that," Wheeler said.

"They have asked us to be very clear about the costs and benefits of that instrument and that's something that were are also very happy to do. We've also been quite clear that, even if we put that in the macro prudential policy toolkit, we've indicated that we wouldn't necessarily use it at this point in time because we have been encouraged by what we been seen about this house price moderation."

However, he also made clear the bank would have preferred to have been able to put the DTI tool in the kit before doing the analysis and consultation.

"Would our preferred position be that we have this already in our toolkit? That would be our preferred position so that we could respond in that situation," he said.

"But the government has been clear that it wants a consultation on that. We would normally consult when we were about to introduce it, but it (the Government) has asked for it upfront, and we are happy to do that work."

Elsewhere on the DTI and LVR issues, National MP for Wairarapa Alastair Scott and ACT's David Seymour both attacked the Reserve Bank's interventions in the mortgage market in the select committee as distortionary and creating unintended consequences.

Wheeler defended the interventions, pointing to the success of the LVR policy in reducing the risks to financial stability by lowering collective LVR rates. Wheeler made a point of saying the banks had initially been sceptical about the the LVR policy, but now supported it.

  • Just to correct a point in yesterday's email, in which I reported Joyce had signed a new MOU with Wheeler. That is not correct. The new Finance Minister was referring in his statement to the previous MOU signed between Wheeler and the previous Finance Minister, Bill English.

'Migration is dampening wage growth'

Another topic raised in both the news conference and the select committee was the continued and surprisingly slow wage growth despite the economy being at near full employment and growing at a rate of around 3.5%.

The Quarterly Employment Survey measure of average ordinary time hourly wages rose 1.3% in the December quarter from a year ago, which was the slowest in six years and down from annual wage inflation of 2.2% in December quarter a year ago.

Michael Woodhouse has denied the record high net migration is slowing wage growth and the New Zealand Initiative's report on migration last month argued (on page 42) the impact was negligible.

But the Reserve Bank and Graeme Wheeler continue to say the record high net migration is playing a role in moderating wage growth.

"It's a very good question: why aren't you seeing the wage pressures start to develop more intensively? I think there's a couple of reasons, and one can never be sure on these things, but I think one is what's happened to the growth of the labour force," Wheeler said, pointing to the migration of 190,000 working age people since 2012 that had increased the labour supply by 5.5%.

"Which essentially pushes out the labour supply curve to the right for a given demand, and that in itself will start to put downward pressure or at least moderate pressure on wage rates," he said.

Wheeler also saw wage expectations as more adaptive or backward looking.

"So wage and price setters have seen low inflation, which is partly triggered by negative tradables inflation. They've seen the low inflation and that gets reflected very much in their wage demands or what they are able to achieve. So I think they are two factors that are that account for some of it."

Wheeler repeated the comment about increasing labour supply moderating wage supply when asked by new Labour MP for Mt Roskill Michael Wood in the select committee hearing.

McDermott pointed in the news conference to weak productivity growth as the ultimate reason.

"It's the link between real wages and productivity that in the long run really matters, and given that productivity has been pretty sluggish, you'd expect reasonably sluggish real wage growth," he said.

Both Treasury and forecasting weak real wage growth, which would contrast with the Government's arguments in recent years about strong real wage growth. The Reserve Bank's Survey of Expectations published this week (figure 7) showed businesses also expected very weak real wage growth over the next two years.

In other economic and financial news...

In another sign that housing supply is not keeping up with demand in Auckland, Statistics New Zealand reported a sharp fall in building consents in Auckland in December from January. There were 740 consents in December, which was down from 1,156 in December and below the 947 consents from a December a year earlier. Wheeler said yesterday Auckland housing supply continued to lag demand.

Statistics New Zealand also published its Household Living-costs price indices for the December quarter. The indices assess how inflation affects different income groups, beneficiaries and ethnicities. It found inflation was higher for beneficiaries, Maori households and superannuitants than for households generally. High spending households fared best because they owned their own houses and mortgage rates remained low, while fast-rising rents hit those on low incomes hardest.

Judith Collins announced MBIE would undertake a market study into fuel prices and returns after a doubling of fuel margins over the last five years.

Callaghan Innovation announced former Xero NZ MD and Auckland Mayoral candidate Vic Crone has been appointed CEO of Callaghan Innovation with effect from February 28.

Tweets of the day:

Anthonybs on the news that MFAT has created a 24 hour taskforce to watch Donald Trump:

Spare a thought for the Wellington bureaucrats who have to stay up all night scrolling through Twitter

Have a great weekend and look out below for a fresh crop of weekend reads.

cheers

Bernard

10 February 2017