1. The things that mattered this week

The key events in our political economy this week included still-low inflation figures keeping interest rates on hold for at least another year, house price inflation bubbling along outside of Auckland and Christchurch and worsening a productivity problem, the re-emergence of a debate over whether councils should collect and spend income and consumption taxes, and Donald Trump's tearing up of the American-led post-war order that is forcing Europe and others, including ourselves, to look for alternative trade and security partners.

Rates on hold until late 2019

Inflation figures out this week gave neither the hawks nor the doves much extra ammunition to push Reserve Bank Governor Adrian Orr off his neutral fence.

Annual inflation in the June quarter of 1.5 percent was a touch below the market's expectations and in line with the Reserve Bank's forecast in May. But it remains at the low end of the Reserve Bank's one to three percent target band.

The figures have not resolved the debate about whether the Reserve Bank should drop its current neutral stance and opt for either a tightening or loosening bias at its Monetary Policy Statement on August 9. For now, most expect the Official Cash Rate to stay on hold at 1.75 percent until well into the second half of calendar 2019.

However, the case for an easing bias has mounted in recent weeks as early signs of a cooling economy have filtered through. There are also still 330,000 people (11.9 percent of the workforce) who are either unemployed or under-employed, and wage inflation remains mired near record lows, despite all the reports of skills shortages. The Reserve Bank has regularly under-estimated the capacity of the economy to grow without causing inflation over the last five years. It could afford to cut it some slack and wait for inflation evidence to emerge, rather than pre-empting it with rate hikes.

Elsewhere, there were fresh signs that the economy is slowing. The services sector, which accounts for about two-thirds of the economy, slowed in June to its smallest expansion since December 2012, the BNZ-BusinessNZ PSI survey found.

We also saw more detail this week about the mayhem unleashed inside the construction industry by the sale of Hawkins. Upwards of 900 contractors look like being left $44 million out of pocket because many of Hawkins' businesses are being liquidated. No wonder construction sector business confidence has collapsed. It's not just about Fletcher Building's withdrawal from vertical construction.

Still rising fast outside Auckland

House price inflation has receded from the political debate because it has gone in Auckland, but it's still racing ahead everywhere else except Christchurch, which has solved its housing shortage.

The Real Estate Institute published its sales volumes and prices figures for June this week. They showed inflation still bubbling along nicely outside of Auckland.

Its House Price Index measure, which strips out of the skew to medians from changes in the makeup of sales, rose 0.1 percent nationally and 0.3 percent outside of Auckland in the month of June. House price inflation was 3.8 percent nationally in the year to June and 6.7 percent outside of Auckland.

Auckland prices were flat in June, but were still up 0.9 percent from a year ago.

Many based in Auckland view the entire housing market has stagnant for the last 18 months since the Reserve Bank tightened rules on lending to landlords and the election result signaled tougher rules for foreign buyers. But outside of Auckland prices are still racing to catch up, with prices in most areas except Christchurch growing at around five to 10 percent per annum. Some, including Napier and Rotorua are growing at closer to 20 percent per annum.

While the Government and councils muck around arguing about who should pay for housing infrastructure in the wake of an historic population shock, housing demand continues to rise faster than supply and housing costs continue to rise faster than inflation generally. Stress on renters is building and the prospect of home ownership is receding even further into the distance for new generations of young (non) voters.

Housing cost inflation made up almost half of the inflation seen in the June quarter. Rents rose 2.5 percent from a year ago, while housing construction costs rose 3.9 percent.

ANZ's team of economists made the excellent point in their Property Focus this week that New Zealand's housing affordability is one of the factors holding back productivity growth.

Solving it could unleash our productive potential, but the vested interests blocking the potential solutions (land taxes, RMA reform, capital gains taxes, debt funded infrastructure) are already wealthy and see no need to clear the path for younger generations of renters to become home owners at income multiples closer to four than 10.

"High house prices make it more difficult for younger households to invest in businesses, limiting the entrepreneurial endeavours of younger people," ANZ's economists said.

"They also create barriers to labour mobility and social mobility, both of which matter for achieving our productive potential. And to the degree that high house prices are a symptom of excess domestic demand pressure, they will be associated with upward pressure on the real exchange rate, stifling exporting and import-competing activity," they said.

"The challenges of low productivity growth and housing unaffordability are both complex and difficult to solve, but in our view these issues are inextricably linked."

Too right.

'Give us a chance'

The battle over which type of Government should be able to collect taxes and spend them bubbled back to the surface this week when the Government released the long-awaited terms of reference into the Productivity Commission's Inquiry into local government funding.

No doubt not coincidentally, Local Government New Zealand launched its own inquiry into whether councils should be given tax revenues or the power to tax to fund expensive local infrastructure at its annual conference.

Local Government New Zealand and The New Zealand Initiative jointly launched their Localism project at the LGNZ annual conference on Sunday evening. They called for devolution and decentralisation in the way New Zealand was run and detailed a schedule for the release of a discussion paper, accepting submissions and preparing a final report for March 2020. They jointly said decentralisation of services would be accompanied by "financial resources commensurate with the cost of providing those services."

The problem for LGNZ in trying to revive this debate is that surveys show voters trust local Government significantly less than central Government and are much less engaged through the democratic process of voting.

Changes to an Australian-style system where GST is shared with councils or where income taxes are also shared have been rejected many times before, especially given central Government would have to elect to give up the income raising and spending powers. is pushing for the devolution of revenue raising and spending powers to council levels. The Government is open to a review of funding tools, but is cool on the idea of sharing GST and incomes taxes.

Local Government Minister Nanaia Mahuta was cautious not to signal which way the Government was leaning, but did suggest the Government could itself take over some of the services offered by councils, including water infrastructure. Councils may want devolution, but the Government, which still holds the purse strings, wants centralisation. Sadly the arguing will go on when someone needs to be investing heavily in the infrastructure needed for new housing.

The fallout around Trump's treason

In the global political economy, Donald Trump's disastrous news conference standing next to a smirking Vladimir Putin dominated the debate.

Trump decision to accept Putin's word that he did not meddle in the 2016 election over the evidence of his own intelligence establishment astonished the world. It was Trump's biggest move yet to destabilise the rules-based post-war alliance of western democracies against Russia and China.

Trump was also again quoted as saying he did not think Nato rules requiring all members to defend a fellow member when under attack meant America had to defend its Nato partners. He specifically cited the case of Montenegro, a new Nato member that Putin has repeatedly pointed to as a sign of western expansionism on Russia's borders.

Then Trump tried to soften the damage by saying he 'mis-spoke'. He said he meant to say 'why wouldn't Russia' hack the elections, when he actually asked why would Russia hack the elections. The 'clarification' was ridiculed by most, but was enough to stop most fellow Republicans up for re-election from criticising him.

One former Pentagon and CIA Chief of Staff, Jeremy Bash, told MSNBC: "Ronald Reagan won the Cold War. Today Donald Trump lost the post-Cold War for the United States of America." Republican Senator John McCain said: "No prior president has ever abased himself more abjectly before a tyrant."

Trump's latest antics tied everyone in knots, including here.

Acting Prime Minister Winston Peters said Donald Trump’s latest comments about Russia were “horribly confusing”, but Peters himself appears to be confusing matters regarding allegations of Russian interference in US politics, as Sam Sachdeva writes below.

Peters' comments in a Monday morning radio interview with Guyon Espiner were less than condemnatory of Russia's actions in the US elections and far less robust than those of his own Defence Minister Ron Mark in the Strategic Review released less than 10 days ago.

Meanwhile, Europe scouted around for others to trade with and lean on, now that a Trump-led America is much less reliable. Europe struck a trade deal with Japan. Uncertainty abounds around Europe, given the tensions from mass migration from North Africa and the Middle East, and the impending departure of Britain. UK Prime Minister Theresa May barely surived the week after three of her senior Brexiteer ministers resigned.

New Zealand is also trying to diversify as quickly as it can, given the risks inherent in having China as its largest trading partner and America as its main defence ally alongside Australia. David Parker announced he would start talks with the Pacific Alliance in Mexico next week about forming a free trade agreement with the four-nation grouping of Chile, Colombia, Mexico, and Peru. As a group, they represent the world’s sixth largest economy with over 220 million people.

This was a momentous week for global politics and will force many to reassess the bedrock of their thinking around trade and security that has underpinned the global economy since 1945.