Newsroom Pro's 8 things: QSBO shows how politics affects business confidence; Westpac survey shows the flipside; Adrian Orr's big inflation hunt

For samplers of Newsroom Pro's daily email, here's our first email of the year, which looked at

Happy New Year to all our subscribers and we hope you've had a relaxing summer break. We're starting our emails for 2018 slightly earlier than planned as the news has already started to flow.

1. Where's the inflation?

This is the year that many expect inflation to finally rear its head after a decade of being missing in action. There are early signs overseas that coordinated expansions in the European, US, Japanese and Asian economies may finally be generating some warmth under wages and prices.

In theory, that would filter through to New Zealand and put upward pressure on our interest rates just as incoming Reserve Bank Governor Adrian Orr is getting his feet under the desk from the end of March.

The big news in financial markets since the beginning of the year has been a rise in expectations about US inflation and a rise in the 10 year Treasury bond yield over 2.5 percent. It had been stuck around 2.3-2.4 percent for most of last year because of doubts about Trump and continued weak wage inflation.

The chart here shows the so-called 10 year break-even rate, which is the best measure of long term inflation expectations in global financial markets. It measures the difference between a regular 10 year Treasury bond yield and an inflation-linked yield -- essentially stripping out the inflation expectations of the world's most liquid financial market.

The 10 year breakeven rate has risen sharply in the last two weeks from 1.88 percent to 2.03 percent in the last month, in part because of enthusiasm about the surprise cut in the corporate tax cut to 21 percent from 35 percent passed through the Congress in late December. There may be plenty of geo-political noise around US President Donald Trump and North Korea, but the global economy is rediscovering the cylinders that have have been misfiring since 2008.

However, it is yet to show through in substantial pick-up in wage inflation despite strong jobs growth and US unemployment falling to 4.1 percent by December, which is seen as below the official measure of full employment at 4.65 percent.

The same is true in New Zealand. Our unemployment rate was 4.6 percent in the September quarter, which is seen as close to our (unspecified) full employment rate, but wage inflation has remained low.

The latest information on New Zealand inflation came yesterday with the publication of ANZ's monthly inflation gauge. It showed prices rose 0.3 percent in seasonally adjusted terms in December from November and were up 2.8 percent from a year ago. This annual inflation rate was unchanged from the previous month.

The inflation is not widespread though. Two thirds of the 0.3 percent increase in prices came from the Housing and Household Utilities part of the economy, which includes rents, new house building costs, rates, household energy and property maintenance. Rents rose 0.8 percent in the month and the cost of buying new housing rose 0.9 percent.

Once the effects of housing inflation are excluded, prices rose just 0.1 percent for the month, which is unchanged from the 0.1 percent to 0.2 percent range for the last eight months. Annual ex-housing inflation is barely above one percent.

"The generalised inflation story remains elusive," ANZ's Sharon Zollner wrote in the inflation gauge report.

So when will the inflation come? Or has something changed in the guts of the economy that means it can tolerate fast growth and low unemployment without generating widespread inflation? These will be the big questions for those watching the economy and thinking about interest rates this year. It will be the biggest task for Orr, who isn't due to start until the end of March.

The next official indication of how the bank views inflation is due with its next Official Cash Rate decision and Monetary Policy Statement on February 8.

However, one headwind beating down inflation has strengthened in recent weeks. The New Zealand dollar rose over 73 US cents overnight for the first time since the election in September and is up from a late November low of 68 cents. This is partly due to surprising US dollar weakness in recent weeks.

Most market economists do not see the Official Cash Rate here needing to rise until much later this year, and the Reserve Bank itself forecast in November that it saw rates on hold until late 2019 at least.

The speed of any rate hikes will depend in large part on whether Orr thinks something has changed in the bowels of the economy to let it run faster without much more inflation, or whether he sees an inevitable 'reversion to the mean' of the relationship between inflation and growth.

His last public comments in mid November suggested he is in the 'reversion to the mean' camp. He pointed in a speech as NZ Super Fund CEO to firming growth in Japan and a 'goldilocks' situation in the global economy where growth was currently neither too hot or cold. He regularly referred to the idea that markets and economies eventually return to their long-term patterns.

2. Will the confidence slump hit GDP?

The other big unanswered question in the political economy is whether the slump in wider business confidence in the final quarter of 2017 because of political uncertainty actually translates into an economic slowdown.

It all depends on whether the slump is driven more by politics than what is actually happening in business decision makers' and consumers' bank accounts.

Jobs growth and household income growth remained strong through the second half of last year and the global economy is purring. Construction activity remains at high levels in Auckland with the prospect of plenty more building to come from the Government's Kiwibuild programme.

But the slump in confidence about the wider economy in the ANZ's monthly Business Outlook series in November and December showed business decision makers were concerned about the change of Government and the outlook for 2018.

It's worth noting though that confidence about their own businesses did not fall as much and remained in net positive levels in December.

The NZIER released its Quarterly Survey of Business Opinion for the December quarter this morning, which also confirmed that wider confidence had deteriorated more than confidence about businesses' 'own activity'.

Confidence about the wider economy dropped 16 percentage points to a net 11 percent negative in the December quarter from a net five percent positive in the September quarter. Confidence about business leaders' own business, however, dropped by much less. Net confidence about 'own activity' fell from a net 13 percent positive in the September quarter to a net 10 percent positive in the December quarter. That is in line with the long run average of 10 percent.

"Previous QSBO surveys have shown business confidence tends to fall after Labour takes office, in contrast to a lift in confidence when National takes office, but the effect on actual activity has been muted," NZIER's Principal Economist Christina Leung said in the report.

"Businesses may be worried about the outlook for the New Zealand economy under the new Labour-led Government, but for now this is not reflected in demand in their own business," she said.

The contrast between the wider outlook and the actual experience was evident in the detail of the survey results, with a widespread fall in confidence, particularly in manufacturing and retailing not being matched in the actual experience of individual businesses.

NZIER said the pessimism was not reflected in activity indicators.

"Domestic sales remain solid in the retail and manufacturing sector. The building sector also reported solid output and new orders," Leung said.

A mirror image

The flip-side of this political skew to confidence surveys was also clear in the Westpac McDermott Miller employment confidence survey released this morning.

The survey of 1,555 employees (rather than employers) in the first 10 days of December showed lower wage workers were particularly confident in the December quarter with an expectation that a change of Government would be good for their pay packets. The new Government has promised to raise the minimum wage by 27 percent over the next four years to $20 an hour. It has also promised to revisit pay equity deals for large sectors such as teacher aides, mental health workers and hospital workers, which could potentially repeat the double-digit pay increases agreed by aged care workers and the Government last year.

The Westpac-McDermott Miller Employment Confidence Index rose 0.1 point to a 10 year high of 113.9 in December from November.

Workers reported more job opportunities with expectations of more to come, but only a few saw wage increases.

“The exception to this pattern is those households whose annual income is less than $30,000," said Westpac's Senior Economist Satish Ranchod.

"Households in this group are the most optimistic they have been about their chances of receiving a pay rise since 2011. In part, this will be related to the ongoing strengthening in the labour market over the past year. It’s also likely that many of these households are set to benefit from planned increases in the minimum wage over the coming years," Ranchod said.

McDermott Miller's Managing Director of Strategy and Economics, Richard Miller, also noted sentiment of various categories of employees had been influenced by the election result.

“Some categories who were pessimistic under the previous Government are less so now and others more so,” he noted.

“Perhaps a highlight of the survey results is that all employee groups earning less than $100,000 per annum increased in confidence and are optimistic this December quarter,” said Miller.

“This is largely because of more positive expectation of increased earnings over the coming year. In contrast, employees in the highest income bracket (more than $100,000 pa), while still optimistic, lost confidence slightly, because they expect lower earnings and are more anxious about job security,” he said.

Miller also pointed out private sector employees were less confident than in the public sector, with Wellington workers seeing a particular lift.

“This is the first time the public sector has been more optimistic than the private sector since June 2009. This helps explain the divergence in employment confidence of Auckland, the main private sector employment centre, and Wellington, the main public service centre (confidence in Auckland fell by over 6 points to 115.6, while in Wellington it increased significantly, up 11.2 points to 113.9)."

3. And we're back...

The rhythm of the political year normally doesn't get into the full swing of things until late in the third week of the year with the annual Ratana celebrations that politicians attend, and the lead-up to Waitangi Day on February 6.

Things are starting a tad earlier this year. Prime Minister Jacinda Ardern is clearly back at work already, appearing twice on TV3 yesterday -- once on the AM Show with Duncan Garner and again last night on The Project. She was also interviewed this morning on Summer Report on RNZ. TV3 seems to have kicked off its normal schedule a week earlier than the other major news outlets.

Ardern and her ministers have already begun preparing for their first cabinet meeting of the year, which is scheduled for next Tuesday. Normally it's on a Monday, but next Monday is Wellington Anniversary Day.

Parliament will also have an unusually early start this year, with a single week sitting before the long Waitangi weekend and then resuming for a three-week block from February 13. It will be busy enacting the Government's 100 day plan.

Here's the Parliamentary schedule for 2018 for your calendars.

4. Winston on the global stage

The Deputy Prime Minister and Foreign Minister, Winston Peters, was also firmly back at work yesterday, giving Newsroom's Sam Sachdeva an interview before jetting off to Vancouver for a meeting of 21 foreign ministers to discuss the North Korean nuclear situation.

There are plenty of nerves around on the issue after Hawaii's false alarm of an impending nuclear missile strike on Sunday morning.

Winston Peters was hopeful of progress and even left open the suggestion that he could get personally involved in some sort of process to broker more substantive talks. He was cagey in his answer, but didn't rule it out, given he will be rare politicians in the room who has actually traveled to North Korea.

Peters saw an opportunity to use more sanctions to bring North Korea to the table. The talks are being held in Vancouver this week. Here's Sam's full interview published on Newsroom Pro yesterday.

Although there is a problem with the talks. They will not include China, Reuters reported overnight.

5. Private Passions: Anne Tolley

Newsroom's Sam Sachdeva has been on deck for some of the summer holidays and has been putting together a series of fun and fascinating videos documenting some of the hobbies and private passions of our MPs.

The first one was on Anne Tolley's practice of sewing her own clothes, including the ones she wears in Parliament. The video reveals a true talent and a hobby that helps the senior National MP have a break from political life. It's well worth a watch.

Sam has done a few more that I'll highlight through the emails this week.

6. Briefly in the local political economy

Reinforcing the doubts about stronger inflation, Statistics New Zealand reported yesterday that food prices fell 0.8 percent in December from November and were down 0.3 percent in seasonally adjusted terms during the month. Annual food price inflation was unchanged at 2.3 percent. Fruit, vegetable and grocery prices fell, including butter, which fell 4.9 percent.

Mercury Energy, the former Mighty River Power, announced yesterday it had selected Tesla for a trial of the first national grid-connected battery. It said it was investing more than $2 million to research the integration of 1-2 megawatt/hour batteries into the national grid. The Tesla Powerpack 2 large-scale battery chosen is the same one used in Tesla's South Australia and Southern California projects.

7. Briefly in the global political economy

Ford announced overnight it would spend US$11 billion by 2022 to have 40 hybrid and fully electric models in its lineup. This was more than double its previous plans. (Reuters)

Britain's second largest construction firm, Carillion, collapsed into liquidation overnight, causing chaos with local and central Government contracts for building and running schools, railways, hospitals and homes. The collapse has again fueled the debate about the worth of public-private-partnerships. (New York Times.)

In another sign of China flexing its muscles on the international stage, its aviation ministry ordered all foreign airlines to check their website listings for Taiwan, Macau, Hong Kong and Tibet to ensure they are not listed as separate countries. This came after hotel Marriott listed them as countries and after Delta apologised for similar transgressions. (Caixin Global)

Further to the debate about China's use of soft power overseas, The University of Texas has rejected a plan by the leader of its new China centre to accept money from the China United States Exchange Foundation. The Hong Kong-based foundation and its leader, Tung Chee-hwa, are linked to the branch of the Chinese Communist Party that manages influence operations abroad. Tung is vice chairman of the Chinese People’s Political Consultative Conference, which identifies itself as a United Front organization. (Washington Post)

8. One fun thing

I'm an old fan of Father Ted -- the programme not the All Blacks coach.

This 'HaveIGotNewsforyou' Gif caught the mood around the Hawaii mistake.

Have a great week.

cheers

Bernard