8 things at 8 am: McDermott gazes at the stars; Electoral contortions

The RBNZ's output gap chart suggets the economy could have plenty of spare capacity. Source: Reserve Bank

1. 'Vote for the other guy'

One of the unintended and quirky outcomes of MMP is the contortions that major parties get themselves into every election when they not so quietly suggest their supporters vote for a minor party's candidate to ensure their survival for a coalition.

Former Prime Minister John Key semi-formalised these arrangements in carefully stage managed 'cups of tea,' which also had unintended consequences...

Prime Minister Bill English yesterday put out a press release and held a news conference to announce National wanted its supporters to give their electorate vote to United Future Leader Peter Dunne in Ohariu and to ACT Leader David Seymour in Epsom.

English also said National voters in the Maori electorates, where National hasn't had candidates since 2002, should vote for the Maori Party.

However, English was less contorted than Key, agreeing that he would actually vote for Dunne if he lived in Ohariu. Key, who lived in Epsom, could never quite bring himself not to vote for the National candidate.

National's Ohariu candidate and list MP Brett Hudson even admitted on Twitter yesterday that he would vote for Dunne too.

Dunne, who won Ohariu by 710 votes in 2014, may need all the help he can get. The Greens, who received 2,764 candidate votes in 2014, have withdrawn their candidate to give new and higher profile Labour candidate Greg O'Connor (the long-time former head of the Police Association) a clear run against Dunne.

It's clear though that it still makes a few people uncomfortable. English's news release has yet to be posted on either the Beehive or National party sites.

Newsroom's Sam Sachdeva has taken a deeper look at the political calculations behind the moves, including the remote prospect that National could even pull their candidates from the electorates completely if the arithmetic was getting too tight.

Hudson, for example, received 6,120 electorate votes in 2014.

See Sam's full piece here on Newsroom Pro,
where it was published first yesterday.

2. McDermott gazes at economy's stars

Reserve Bank Assistant Governor and and Head of Economics John McDermott gave a speech in Auckland yesterday about the unobservable but important economic 'stars' or asterisks that the bank follows when setting monetary policy.

"When looking at the stars, it is not a desperate attempt to adopt astrology to aid my understanding of the economy. Rather, I am looking at the trends in our economy," he said.

Those trends are: the neutral interest rate; potential output growth; and the equilibrium real exchange rate.

McDermott said the neutral interest rate had fallen over time and was now around 3.5 percent, which meant the current Official Cash Rate of 1.75 percent was stimulatory.

The bank viewed potential output growth at around 2.9 percent of GDP, with the current strength driven by strong net immigration and investment, rather than productivity growth.

McDermott made a few suggestions on this puzzling productivity weakness, which is also being seen overseas.

"Firstly, there could simply be less innovation now than in the past. Or, it may be the case that we just have not utilised recent innovations yet," he said.

"Alternatively, measurement errors may be at play; for example, it is hard to measure efficiency gains from use of the internet or ICT services."

McDermott was also cautious in his comments about the equilibrium exchange rate, which he said was consistent with net foreign liabilities remaining around their current level of 60 percent of GDP. It would need to be lower for net liabilities to fall.

"Indeed, from a growth point of view, a lower real exchange rate would help rebalance growth towards the tradables sector, especially as not all traded industries are benefiting from the current high terms of trade," he said.

This is all very topical, given the New Zealand dollar rose to its highest levels since early 2015 overnight and the Trade Weighted Index rose to 79, which is 4.2 percent above the Reserve Bank's forecast at its last Monetary Policy Statement. This represents a significant tightening of monetary conditions and another major headwind for the export sector.

McDermott pointed to the Reserve Bank's sectoral factoral model of annual inflation when talking about the core inflation 'star'. It was 1.4 percent in the June quarter and fell from 1.5 percent in the March quarter.

"So while inflation pressures have lifted from the lows seen in early 2015, they still appear to be relatively moderate," he said.

Economists interpreted the speech as reinforcing the bank's last neutral statement and indicating the bank would remain patient to see the 'whites of the eyes' of inflation pressures before hiking. The Reserve Bank's last set of forecasts did not envisage the first rate hikes until late 2019.

I found the Reserve Bank's output gap chart (above) the most interesting. (Yes, I need to get out more.) It showed a wide range of plus or minus two percent around the bank's central forecast, which suggests the economy could actually have plenty of spare capacity, and needs lower interest rates, or is running too hot and needs tightening.

Obviously the Reserve Bank has made the judgement call not to shift rates, but the core inflation measure of 1.4 percent (which is below the 2.0 percent mid-point of the bank's target range) suggests they could just as easily loosen as tighten, particularly when the currency is so high.

McDermott made that point about the judgement call in his speech.

"Given the important role that the potential output estimate (and thereby the output gap) plays in influencing inflation pressure, these estimates garner considerable discussion and scrutiny as part of the policy process, and are judgementally-adjusted as necessary," he said.

3. Change, but not radical

The Government yesterday revealed its initial response to a tertiary education report that recommended a major shake-up to the system, but won’t be adopting some of the more radical suggestions.

Newsroom's Shane Cowlishaw reports students will still have to sit University Entrance exams, while quick “micro credentials” will be trialled as a new approach to tertiary education is formulated.

Tertiary Education Minister Paul Goldsmith announced the direction the Government would take in improving the industry, following consideration of a Productivity Commission report that identified several problems within the adult education sector.

See Shane's full report on Newsroom Pro, where it was first published yesterday.

4. Milestones

Introduced - Workplace Relations and Safety Minister Michael Woodhouse announced the introduction of the Employment (Pay Equity and Equal Pay) Bill to Parliament. Unions criticised the bill for making it harder for women to choose the comparator industry for a pay equity claim and said the current bill would have made it much harder for the Kristine Bartlett's aged care claim to proceed if it had been in place before the claim.

Re-elected - Fonterra Shareholders’ Council Chairman, Duncan Coull, was re-elected unopposed to the Chairman’s role for a third term. He will be joined for the first time by Deputy Chair Ivan Lines.

Published - A survey by Colmar Brunton for Treasury on the transparency of its Budget process.

Appointed - Tauranga lawyer Anna Pollett was appointed Crown Solicitor for Tauranga. She takes over the role from Greg Hollister-Jones after his appointment to the District Court Bench.

Investigated - Green Co-Leader Metiria Turei said yesterday she had been contacted by a fraud investigator from MSD. She said she would cooperate and pledged to pay back any monies owed from her time as a solo mum receiving benefits when she was also receiving money from flatmates.

5. Quotes and numbers of the day:

4,207 - The number of electric vehicles registered at the end of June, which was five months ahead of the Government's target for the end of June. About 200 EVs a month are being registered.

$5.097 billion - New mortgage lending fell to $5.097 billion in the month of June from $6.036 billion in May and was down 25 percent from June 2016, Reserve Bank figures showed. New rental property investor lending of $1.219 billion was down 48 percent from a year ago, which is the result of the Reserve Bank's new 40 percent deposit requirement introduced in the second half of 2016.

$207 mln - The Auckland Council agreed yesterday to buy 17 new electric trains, with an initial payment of up to $25 million in the current 2017/18 financial year. for trains

Core Logic senior analyst Nick Goodall commenting in a monthly update that he sees a rebound in house prices after the election if there is no major policy change:

"We’re likely to see a continuation of the quiet winter as credit is still difficult to come by. Longer term though, many of the major market drivers remain and, assuming there are no major policy changes introduced as a result of the September Election, should start to push prices up further."

Mike Hosking on pay equity and the issue of male newsreaders getting paid more than female newsreaders.

"On the surface it turns out the highest-paid people are the men and the assumption is made that people doing the same job should get paid the same money. In an artistic pursuit like newsreading it is simply not the case."

6. While you were sleeping

The US Federal Reserve announced this morning it had held its official rate at 1.0 to 1.25 percent as expected, but also beat the drums a little louder about reversing its quantitative easing. This bond sale programme could in theory push up longer term interest rates. However, the Fed also noted that US inflation had fallen below the key two percent level. The US dollar and US interest rates fell.

The New Zealand dollar rose to a two-and-a-half year high of 75 US cents as a result.

7. Coming up...

Statistics New Zealand will release its Household Living-costs Price Indexes for the June 2017 quarter at 10.45 am today.

The Government is expected to launch its new version of the Business Growth Agenda later today.

Parliamentary Commissioner for the Environment Jan Wright, will be publishing her report, “Stepping stones to Paris and beyond: Climate change, progress, and predictability” later today in Wellington.

8. One fun thing

This is perhaps not such a fun thing, but it's a sign of the times. Last night US President Donald Trump announced via Twitter that the US military would stop accepting transgender recruits, apparently without telling the Pentagon or his Defense Secretary Jim Mattis:

This tweet from Nancy Youssef captured the mood this morning:

"Overheard at the Pentagon: "We're taking orders via Twitter now?"

However, to end on some dumb troll-like fun, here's Mark Cubey with some advice for the press gallery trying to deal with Winston Peters, who has given up smoking for the election campaign:

"Every reporter should tempt Winston with a delicious ciggy."