Businesses' confidence about their 'own activity', as opposed to the wider economy, fell to a five year low. Construction sector confidence crashed. It's time the Government and the Reserve Bank looked at stimulating the economy to fix our infrastructure deficits, lift inflation and keep unemployment falling. Phil Twyford set the upper threshold for couples bidding for KiwiBuild homes at $180,000, which sparked outrage but was needed to ensure enough demand for the 100,000 homes. It highlighted how unaffordable the $650,000 cost of KiwiBuild homes in Auckland has become, and why land price falls are needed to improve affordability. Dame Margaret Bazley's report into sexual assaults and bullying at Russell McVeagh revealed a toxic culture for women. The IMF encouraged the Government to use its balance sheet to fix infrastructure deficits. Donald Trump is set to ramp up his trade rhetoric in meetings with Nato, the Queen and Vladimir Putin over the next 10 days.
1. A business confidence problem
Businesses confidence about their 'own activity' fell to a five year low in the June quarter, while QV's measure of house values fell across the country in the quarter.
Dairy prices also fell sharply on Tuesday night and ANZ reported on Wednesday that job advertisements fell 1.2 percent over the quarter. This week, it became clear economic growth slipped back towards two percent through early to mid 2018 from three percent through 2017. Unemployment is not expected to fall much further, the construction sector is in the doledrums and retailers are worried about the fast-rising minimum wage.
Until this week, the Government could comfortably write off the fall in headline business confidence as the political bias of business leaders.
Now it's more than just a political bias. NZIER's business confidence survey for the June quarter confirmed the trend seen in the ANZ monthly surveys that business' 'own activity' measures of business confidence have fallen to five year lows.
Unlike the measures of how businesses think the economy is doing, the measures of 'own activity' are much more closely correlated to GDP growth. The fall in the June quarter suggested growth was softening towards two percent from over three percent. Both the Reserve Bank and Treasury had been forecasting three percent plus as recently as May.
The survey of seasonally adjusted experienced domestic trading activity found a net seven percent saw improvement, down from 15 percent the previous quarter to the lowest level since 2013. Expectations for own activity in the next three months also deteriorated, falling to a net 13 percent from a net 16 percent, which was the lowest since 2016.
NZIER reported profitability expectations fell sharply, particularly in retail and construction because of rising cost pressures from wages and shortages of workers and materials. The Government's plan to increase the minimum wage by more than 20 percent over the next three years and cost pressures in construction were cited. Retail sector profitability expectations fell to their lowest level since March 2009.
A net four percent of businesses expected to reduce investment in buildings, the lowest level since December 2011 despite residential and commercial construction being near record highs and the Government promising to ramp up KiwiBuild and infrastructure investment. Many report slumps in profitability and Fletcher Building's heavy losses on big projects is an indication of the problems some are having controlling costs. Fletcher's decision to pull out of vertical construction has also hammered confidence.
Architects' work in commercial and Government construction fell to a seven year low. This seems counter-intuitive, given the $100 billion pipeline of infrastructure work identified over the next decade by Treasury, but that is no bigger than under the previous Government. The Government has promised $42 billion of capital spending in coming years, which it argues is $10 billion more than the previous Government, but most of that is increased contributions to the New Zealand Superannuation fund.
The Government's 20 percent net debt target, which is the same as the previous Government's target, is constraining the Government's response to a five percent population increase over the last three years that is straining transport, hospital and schooling infrastructure to breaking point, particularly in the top half of the North Island.
2. It's time to stimulate
In my view, it's now time for the Government to drop its 20 percent net debt target and to use its balance sheet strength to ramp up infrastructure spending to deal with an unexpected population shock that is now hurting business confidence and economic growth. The population surge in the last five years in the top half of the North Island was largely unexpected and the infrastructure needed to cope was not built, and is still not being built at a fast enough pace and scale to cope.
This Government should treat this population shock in the same way the previous government treated the GFC and the Christchurch earthquakes -- by using its balance sheet to invest in infrastructure that will last for 100 years to come. That would reverse the plunge in construction sector confidence and unleash productivity growth in the Golden Triangle of Auckland-Hamilton-Tauranga.
Until the last week, Finance Minister Grant Robertson could successfully argue that the slump in headline business confidence since the election had more to do with the political biases of the respondents than their actual experiences as business managers, or the predictive power of the surveys for GDP growth.
But two business confidence surveys seen over the last week should be ringing alarm bells for both the Government and the Reserve Bank. They show the actual experiences of the managers fell back to multi-year lows as the winter began, suggesting growth is slowing towards two percent from the levels over three percent that both Treasury and the Reserve Bank were forecasting in May.
Business confidence has deteriorated for a variety of reasons beyond the Government's control, including staff shortages and rising costs in construction. But one or two factors were caused by the coalition Government's actions, including the planned 25 percent hike in the minimum wage and a long period of uncertainty over migration policy for construction workers.
It's about time Robertson, Prime Minister Jacinda Ardern, acting Prime Minister Winston Peters and new Reserve Bank Governor Adrian Orr revisited their approach to both the Government's 20 percent debt target and the outlook for flat interest rates. A construction spending stimulus funded by Government borrowing and a Reserve Bank rate cut should now be considered.
2. 'That's too expensive'
Talkback lines and social media ran hot this week with outrage over the $180,000 income threshold for couples bidding for KiwiBuild homes, but the Government needed it to be that high to avoid dumping houses into the market and driving down land prices.
The dirty little secret is that house prices are too high for most first home buyers to afford and the only way to solve that any time soon would be to drive land prices significantly lower, which would be politically unacceptable for those who vote. Older property owners vote at much higher rates than younger renters, even though the number of young renters is becoming demographically and politically significant. While they don't vote in large enough numbers, the political calculus of lower land prices is too difficult, sadly.
As Thomas Couglan reported for Newsroom Pro on Wednesday, data from Statistics NZ’s Household Incomes Survey shows there are just 79,100 two-person households with an income between $97,600 and $188,899 living in homes they do not currently own. These are three of the top four income deciles in New Zealand. A full 174,500 two-person households not currently in their own home will miss out.
If Twyford chose to strip out those earning $142,800 to $180,000, which roughly equates to the second highest decile of household incomes, he would reduce the cohort by a third to just 52,500 households, potentially leaving nearly half of his 100,000 proposed builds struggling to find buyers (although a number of single-person dwellings will also be built).
This is all because the Government will not sell land to developers for less than market value. In fact, its current Treasury-driven rules for land sales say the Government must maximise its sales price. Sources close to the development community tell me Treasury is driving a very hard bargain that is actually driving up land prices even higher in the Northcote development currently being marketed.
The irony of a Government programme aimed at improving affordability becoming the vehicle for the Government to drive up land prices in Auckland cannot be lost on anyone.
The brutal truth of the political economy is that no politician wants to say they want land prices to fall, and even if they did the current rules on maximising land sale prices make it difficult for the Government to engineer a land price fall. Essentially, this stalemate can only be broken when young renters vote for parties and policies that have an avowed policy of driving down land prices.
The policy mix for that would include a land tax across all residential land that would drive down prices immediately, a Government intervention to fund infrastructure that councils won't fund for their own political reasons and changes to the Resource Management Act to free up development in cities. None of the major or minor parties support that. Young renters are set to have to wait for up to 100 years in Auckland for their wage growth to catch up with the flat prices that today's politicians say they want.
Meanwhile, Nearly 6,000 buyers applied for the KiwiBuild ballot on the first day, which would soak up three years of production. By late on Thursday 17,000 people had registered an interest.
4. Russell McVeagh's awful culture
Dame Margaret Bazley, the toughest reviewer of problem ministries, published her 89 page report into sexual assault and bullying at Russell McVeagh on Thursday.
The cases were first reported extensively by Newsroom in February and the report is the culmination of an increasingly intense #metoo debate on sexual harassment and bullying at the big end of town.
The details were devastating and painted an awful picture of over-work, harassment, bullying and a churn and burn culture that made Russell McVeagh a toxic place for many women.
The report is a must-read for anyone in corporate or government life who manages staff and is trying to build a sustainable culture. It's a picture of what not to do.
Helen Clark called on the board of Russell McVeagh to resign in this piece on Newsroom this morning.
Steph Dyhrberg's piece for Newsroom is a pithy and trenchant summary of the report and what has gone wrong, which I'd recommend as a must read if you don't have time for the full report.
5. Challenging the airport monopolies
The debate over whether airport prices and fees are regulated hard enough heated up this week. Air New Zealand accused the airports of behaving like monopolists.
At a select committee hearing on Thursday, Air New Zealand head of government and industry affairs Duncan Small described airports as monopoly assets used to overcharge airlines.
“Since the 1990s corporate airport owners have seen airports as monopoly assets that greater and greater sums can be extracted from,” he said.
Small was appearing before the Transport and Infrastructure Select Committee which was hearing submissions on a proposed amendment to the Commerce Act which would put airports at greater risk of regulation. The amendment will introduce a “truncated inquiry process” to investigate whether further regulation of airports is needed to ensure they run effectively.
A study commissioned by a group representing Australian and New Zealand airlines found that the average EBITDA margin of Australian and New Zealand airports, an indicator of profitability, was far in excess of international competitors. Auckland airport’s EBITDA margin is 79 percent. The average EBITDA margin at non-Australian Airports is just 53 percent.
The airlines contend that this is too high and that airports are not incentivised to reinvest income in infrastructure. Bell argued that Auckland Airport in particular was making excessive returns to shareholders when it should be investing in infrastructure.
Airports New Zealand Chief Executive Kevin Ward disputed this measurement. He said airports costs were mainly in infrastructure, so using measurements like EBITDA did not paint an accurate picture of the airport’s profits.
Commerce Minister Kris Faafoi said he was happy with the proposals in the amendment bill, which leave the door open to more regulation if necessary.
“The bill as we’ve put it in at the moment is strengthening the regime for airports so that we have other regulatory options to make sure that pricing stays within what is a reasonable limit,” Faafoi said.
6. Already hit the target
Treasury published the Government's accounts for the 11 months to May this week. They showed an OBEGAL surplus of $5.228 billion, which was $447 million or 9.3 percent above the May budget forecast, largely due to higher than expected PAYE and GST receipts.
This meant the Goverment's net debt fell to 20.1 percent, which was lower than the May forecast of 20.4 percent. Core crown debt is actually $1.8 billion lower than year ago.
The Government has effectively reached its 20 percent net debt target, four years ahead of schedule. Yet it continues to restrain spending on meeting New Zealand's infrastructure deficit because of its concerns about reaching the 20 percent target.
Bond markets are unconcerned about New Zealand's net debt levels, despite the Government's worry that New Zealand remains vulnerable to some sort of foreign investor strike that pushes up interest rates. The New Zealand 10 year Government yield was at 2.77 percent on Friday morning, just above a one year low of 2.72 percent set in March. That is also below the US Government bond yield of 2.83 percent this morning.
What is the Government waiting for? Instead of using its strong balance sheet to borrow immediately to deal with Auckland's infrastructure deficit, it is faffing around inventing infrastructure bonds and other new off-balance sheet vehicles that will take years to be legislated for and created.
7. IMF says use the balance sheet
Even the godfather of tight budgets and neo-liberal thought, the IMF, is recommending the Government borrow to invest to fix its infrastructure deficits.
This week the IMF said New Zealand's government has a strong enough balance sheet to close the nation's infrastructure deficit sooner, which it said would generate long-term economic gains.
The global body of 189 member countries, set up to foster international monetary cooperation, gave local policymakers a pass mark, saying "prudent macroeconomic policies" led to solid economic growth with a favourable outlook, albeit with some risks on the horizon. The formal report on New Zealand, known as an Article IV Consultation, followed a visit by IMF officials earlier this year where they noted the Crown's balance sheet was strong enough to increase capital spending if a bigger tax-take than anticipated proved to be structural.
Today, IMF executive directors "encouraged using stronger structural revenues to increase spending on infrastructure, human capital development, and other public services that would raise potential output" and that the strong fiscal discipline meant there was no need to repay debt faster than planned.
New Zealand's capital spending programme warranted a separate report by the international body, which noted "it is not clear from a long-term perspective if all of New Zealand infrastructure needs will be met", with an Oxford Economics' report estimating New Zealand's infrastructure investment gap was about 0.3 percent of gross domestic product per year. If that was closed, IMF officials estimate New Zealand's long-term real GDP could gain by between 0.65 percentage points and 0.8 percentage points.
"Closing the gap has quantifiable benefits, not just because it is a short-term stimulus to aggregate demand, but because of longer-lived effects on productivity, benefiting all sectors of the economy," the report said. New Zealand has boosted infrastructure spending in recent years, and "there is scope to expand if further to reduce its (admittedly small, but probably understated) infrastructure gap to match other advanced economies, and possibly help with regional development concerns."
So what is the Government waiting for?
8. On Trump trade wars alert
The world is on tenterhooks over the next 10 days for more disruptions from Donald Trump as he ventures out to Europe to meet the Queen, Nato leaders and Vladimir Putin.
China's economy is wavering because of concerns about Trump's attempts to bully China into trade concessions, while there are ructions at home and in Europe over his anti-trade rhetoric.
There are early signs of slowing growth in China and America, along with still limp growth in Europe. The US Federal Reserve said overnight it was wary of the effects of a trade war, which weakened the US dollar.
Trump is due to meet Nato and the Queen in the coming week. He is reputed to have said at the G7 meeting that Nato was just as much of a "disaster" for America as Nafta, which shook the confidence of other leaders at the meeting.
The headwinds to New Zealand's economy are beginning to build overseas, as was evident in the five percent fall in dairy prices this week -- the eighth fall in the last 10 auctions since February.