1. 8 things that mattered this week

1. A new old face for the Government

Prime Minister Jacinda Ardern gave birth to healthy girl weighing 7.3 pounds (3.31 kg) yesterday and handed over the role of Acting Prime Minister to Winston Peters for at least six weeks.

That's not a sentence anyone would have thought of writing a year ago, but here we are.

Peters has actually been the face of the Government for over a week since Ardern flew to Auckland for the last time last Monday. Peters led the Government in Parliament last week and chaired this week's cabinet meeting.

His initial performances were uninspiring and the Government's supporters will be hoping Ardern's maternity leave is no longer than planned. They will also hope events do not land on the Government in a way that forces Peters to be the face of the Government even more than he is now. As British Prime Minister Harold Macmillan was reputed to have said when asked what he feared most: "events my dear boy, events". (He became Prime Minister after the Suez Crisis forced out Anthony Eden and resigned after the Profumo scandal).

Peters began on Monday afternoon with an announcement that the Government wouldn't front up with any more money for nurses, who rejected an pay rise offer of more than nine percent which would have cost the Government an extra $500 million. It went downhill from there. He ended up in a dispute with journalists as he walked out of the news conference before questions had finished.

One of those events then tested Peters and the Prime Ministers' Office later in the week and they failed. Donald Trump's awful 'zero tolerance' policy of separating children from their parents on the border with Mexico required an immediate and clear statement from the Prime Minister. Instead, Peters started on Tuesday by saying it was an internal matter and then said on Wednesday that he didn't want to get into an outrage contest. I wrote this comment piece on Wednesday evening calling for Ardern to make a stronger statement that spoke for the nation.

I and others were surprised at the tone deafness of Peters' response and the apparent lack of awareness within the Prime Ministers' office about the political risks.

Ardern gave birth the next morning and later that morning Peters eventually issued this statement saying he welcomed Trump's early-morning about-face rescinding the zero tolerance policy. He said the Government had conveyed its concerns to the US ambassador the previous afternoon. Despite repeated requests on Wednesday afternoon and evening, there was no response from the Government mentioning this.

The poor coordination and slow response suggests a few teething issues in the early few days of the acting Prime Minister's coordination with the Prime Minister's office and the machinery of Government. Chris Hipkins' decision to force through the Auckland fuel tax and BEPs legislation through the Parliament under urgency contributed to the impression of a less than well oiled machine.

Ardern is clearly still at the top of the Government behind the scenes. Peters said he spoke to her twice on Monday in preparation for and after the cabinet meeting. I'm told she was regularly texting ministers and others during the week, including during Labour.

But the public is not seeing this. Leaders need to be seen to be leaders, and Ardern will not be in front of the cameras for at least the next six weeks. The Government will be hoping for fewer 'events' to challenge Peters as the face of the Government over the next 40 days or so.

2. The loosening of the foreign buyers' ban

The other big news in the political economy this week was the Government's decision to relent on calls from apartment developers and hotel builders to allow foreign investors to build and hold the apartments and hotel units they invest in. Previously, the Government's foreign buyer legislation would have forced foreign investors to sell the units as soon as they were built.

One of the most surprising features of the economy in the last six months has been a collapse in construction sector confidence, employment and investment intentions, despite a pipeline of $100 billion of work over the next 10 years. Fletcher Building's heavy losses in Christchurch and Auckland and its decision to pull out of vertical construction has soured sentiment, but more restrictive bank lending and uncertainty about the foreign buyer rules have also been a factor. The big apartment complex projects needed the foreign buyers off the plan to get bank funding, given 30 percent of pre-sales typically come from offshore.

Newsroom Pro (Thomas Coughlan) had the scoop on Monday afternoon with the release of the Finance and Expenditure Select Committee's report into the Overseas Investment Amendment Bill, . It included various tweaks aimed at addressing concerns the previous version actively discouraged foreign investment in new apartments and hotels.

There were winners and losers in the latest rounds of changes, and plenty of unintended consequences remain to be ironed out.

Telecommunications companies and foreign owners of forestry cutting rights got exemptions, but foreign owned winemakers and rest home operators did not get the exemptions they wanted.

Conveyancers also dodged a bullet because a requirement they prove a buyer is a resident was dropped. The resident must now prove that.

Viticulturalists are also still worried the ability of foreign owned wine companies to have picking rights on vineyards bigger than five hectares has not been exempted, while foreign owners of forestry cutting rights have been exempted.

The weak business confidence and the inevitable delays in getting KiwiBuild going were no doubt factors in the Government's decision to revert (essentially) to its pre-election position of banning foreigners from buying existing homes, but encouraging them to build new ones. That ban remains in place for stand-alone homes and small terrace projects, but not for apartment complexes and large terrace developments.

3. Is Trump wobbling the global economy?

US President Donald Trump threatened to put tariffs on up to US$400 billion worth of Chinese imports this week, further destabilising an already nervous world trading community.

China threatened its own retaliation in return, while the tariffs on European, Canadian and Mexican imports started to bite. Steel prices in America are already rising and the unintended consequences of these and other tariffs are already starting to flow.

As Jack Ewing makes clear in this New York Times report, BMW and Mercedes face big problems with their US plants, which import steel from Germany and export SUVs to China. Beijing has retaliated against America by increasing car import tariffs, which means global supply chains are often caught by tariffs by both countries. Daimler issued a profit warning this week because of the slowdown in SUV sales to China.

Meanwhile, China's financial markets slumped on fear about what the tariffs would do to the world's second largest economy.

The People's Bank of China was forced to intervene in financial markets on Tuesday and Wednesday, injecting $6.2 billion of cash and calling for calm after sharp falls on Chinese stock markets and downward pressure on the currency.

Yi Gang, governor of the People’s Bank of China, pledged that the central bank would “ensure liquidity and reasonable stability” after the Shanghai stock market fell to near a two year low. Dozens of Chinese Government controlled companies also pledged share buy-backs to stabilise stock prices. Markets rose slightly in China after the intervention and many still hope the war can be limited to a skirmish fueled by Trump's rhetoric ahead of mid-term elections in November. They hope China and America will settle the deal without too much damage being caused.

But the longer this goes on and the tariffs ripple out, the more risk there is they turn into a wave that gathers force as it goes around the global economy.

Trump's actions are fueled in part by the relative strength of the US economy, with growth over three percent and unemployment under four percent. He feels trade wars are easy and winnable, but that's much easier to say and think with an economy that is already strong. A weakening US economy would put Trump under further pressure, particularly in the wake of bad mid-term election results.

An angry and unleashed Trump may try to re-establish his popularity ahead of the 2020 Presidential elections (assuming he's still there) with even more bellicose action. Remember, that many of the Goldman Sachs alumni gathered around him in the first year have been cleaned out. He is now operating on instinct and is supported by his anti-globalist advisers in Stephen Miller, Peter Navarro and Wilbur Ross -- all of whom see China as a malign force that needs to be put back in its box.

4. An economy in transition

GDP figures published yesterday showed economic growth slowed to 0.5 percent in the March quarter from 0.6 percent in the two previous quarters and 0.9 percent in the June quarter last year. That dragged the annual growth rate down to 2.7 percent. It was 3.7 percent the previous year to March 2017.

The 0.5 percent quarterly growth was in line with the consensus economic forecast, but lower than the Reserve Bank's 0.7 percent forecast from its May Monetary Policy Statement.

The mix of growth suggested the economy is running out of breath a bit, although there were a few one off factors that economists expect will mean there is a slight rebound later in the year. Stink bugs were partly responsible. The decision to delay the arrival of car carriers because of bug infestation fears delayed 'consumption' of new and used cars by households. Retail spending was relatively flat too, while construction investment fell from its high levels.

The political debate focused again on per-capita growth rates, which remain low, largely because productivity remains low. GDP per capita was unchanged in the March quarter and was up just 0.6 percent from a year ago. The key factor was the 2.1 percent growth in New Zealand's population over the last year.

In essence, nothing has changed yet in the make-up of the economy. It is still being powered by near-record-high migration and spending linked to rising prices in the housing market. The main difference from previous years is that banks have been forced to tighten lending standards to stop the tax-free equity growth from being leveraged up and injected back into the economy.

That will be a theme in the coming years as the Reserve Bank continues to apply the pressure, along with other banking regulators.

ANZ forecast this week that house prices in Sydney and Melbourne were likely to fall 10 percent this year because banks are being stopped from lending heavily to rental property investors, who now face refinancing A$380 billion worth of interest-only loans with more expensive interest and capital repayment loans over the next year.

In truth, our economy's structure and fundamental performance is unlikely to change much when the incentives for investment are unchanged. The Government has ruled out any form of taxation on the family home into the foreseeable future, and a capital gains tax or wealth tax of even a limited sort is well off the agenda for at least another five years.

The Goverment's hopes of transforming the productivity and output of the building sector are being frustrated by its own self-imposed balance sheet constraints and the similarly-self imposed constraints of councils, who face voters who don't want more debt and the resulting rates increases. No changes to the RMA are planned, which will also constrain the ability to transform the economic performance of the key golden triangle cities of Auckland, Hamilton and Tauranga, and the only other growth areas of Wellington, Christchurch and Queenstown -- the big six.

Now we also have had the first Budget and we have seen the details of monetary policy reform, it is clear that the change of Government has not changed either the level or operation of fiscal and monetary policy in any substantial way, or is going to change the underlying structure of the economy for at least another five years. Until that happens, productivity growth is unlikely to rebound from its three-decade long slide because of weak business investment and a weak export sector.

That's the guts of it. Voting property owners quite like the current arrangements, which deliver leveraged, tax-free growth in household equity that can be used to disguise weak wages and prop up poorly performing small businesses. Renters don't vote in large enough numbers yet to change that political landscape, and mostly don't understand that they will have to vote in their own interests to change the situation.

Unless there is a 'youth-quake' of some sort, the outlook for New Zealand's long term economic performance is unchanged.

5. Rates on hold to 2020?

For those who think further property price gains seem unlikely because interest rates are bound to rise and housing supply is bound to increase, yesterday's GDP figures showed a fall in building activity and still-very-low inflationary pressures.

Capital Economics extended its flat interest rate forecast out to the beginning of 2020 this week and the recent GDP and inflation figures suggest the Reserve Bank should actually be cutting interest rates next, rather than raising them. If the Reserve Bank is serious about its inflation target and its new 'supporting maximum employment' target, it would be looking at cutting rates or changing to an easing bias.

New Governor Adrian Orr will be announcing the bank's next monetary policy decision next Thursday morning. Most expect him to leave the Official Cash Rate at a record-low 1.75 percent for an 11th time. The focus will be on whether he changes the bank's current neutral bias (ie just as likely to hike rates as cut them).

These continued low rates explain why the pressure will remain on the Reserve Bank to keep the banks' rental property mortgage lending well shackled. Australia's Hayne Commission into banking misconduct and moves by APRA to clamp down on rental property lending will also help stop the low rates turning into faster lending.

6. A climate change change

The other change to the bigger picture for the political economy was a shift in approach by the opposition on climate change.

National called for a bi-partisan approach on climate change, but stopped short of endorsing the carbon neutral by 2050 end target and has talked down any measures that might hurt the economy or jobs.

Opposition Leader Simon Bridges announced in a speech at Fieldays last Friday that he had written to Prime Minister Jacinda Ardern offering to help establish an "independent, non-political Climate Change Commission which would support emissions reductions by both advising on carbon budgets and publishing progress reports on emissions."

There was no mention in the speech of agreeing to the Government's carbon neutral target by 2050 and Bridges repeated his opposition to the Government's decision not to issue new offshore oil and gas drilling licenses.

Peter Dunne analysed the change in his column for Newsroom Pro this week, pointing out that National has a long history of embracing change after the fact to remove a politically difficult land mine from its path back into government.

7. The farm buyers are spooked

We learned this week via Jonathan Underhill's reporting through BusinessDesk and published on Newsroom Pro that rural estate agents report a Grant Robertson directive to LINZ on December 15 has chilled foreign buying interest in farms to the bone.

See more here on the initial report and then details here of a tripling in the number of applications by foreigners to buy land through the Overseas Investment Office.

8. Embracing the Europeans

The big name in Wellington this week was European Union Trade Commissioner Cecilia Malmstrom , who was interviewed by Newsroom's Sam Sachdeva ahead of meetings with David Parker and Winston Peters in Wellington.

See more on that from Sam last night after after yesterday's meeting.

Malmstrom was all smiles at a meeting with Parker, and equally sunny when it came to EU-New Zealand relations.

“New Zealand is a friend and an ally: together, we stand up for common values...the values of sustainable trade, open trade, transparent trade, and trade that is done in compliance with international rules in the multilateral system.”

She highlighted economic as well as strategic benefits, saying bilateral trade in goods could increase by approximately 50 percent under a deal.

Parker offered praise for the EU, already our third-largest trading partner, and the views it shared with New Zealand on issues like human rights, labour standards, and the environment.

“Those countries in the world that really do walk the talk include the countries of Europe, and New Zealand.”

Given America is now a rogue state and China's model has yet to embrace democracy, Europe seems the great power with most in common with New Zealand at the moment, especially given Britain's spiral into a Brexit void.