The Government cannot deny any more that the economy is slowing and that it's not doing enough to stimulate investment and reassure the construction sector in particular, Bernard Hickey argues.
Comment: The big news in the political economy this morning is a concerning slide in business confidence in July to the lowest levels since May 2009, and signs that house values are now falling nationally. This is turning into an economic winter of discontent for the Government, or at least a period of seasonal grumpiness that it should accept and react to.
It's too early to be sure, but the drumbeat of poor leading indicators over the last three months suggests growth is slowing in a substantial way.
ANZ published its monthly business confidence survey for July, which showed confidence by businesses in their own activity fell to net 3.8 percent from net 9.4 percent in June. That is the lowest level since May 2009 and indicates economic growth is slowing in mid-2018 to around or just under two percent (from over three percent last year). That is also lower than Treasury and Reserve Bank forecasts in May for GDP growth of just over three percent in the next two fiscal years.
Confidence about the wider economy, which is more closely linked to which political party is in power than GDP growth, fell to net 44.9 percent negative from net 39 percent negative in June. This was the lowest reading since the beginning of the GFC in May 2008.
Until the last couple of months, the Government could rightly argue the slump in business confidence after the election and change of Government was a temporary and political reaction from National-aligned business leaders. There was a rebound in early 2018 that suggested it was temporary, but the slide back to beyond the worst post-election lows going into the winter shows something more substantial is going on.
Finance Minister Grant Robertson pointed yesterday to headwinds from economies overseas that former Prime Minister John Key himself cited during National's conference over the weekend.
But that is just a small part of the story, especially when the IMF is still forecasting global economic growth of 3.9 percent this year and next year, albeit with mounting risks and some signs that growth has peaked in the major economies. Donald Trump's trade war rhetoric, Europe's political dramas and some signs of slower Chinese growth are fueling those risks.
The Labour-New Zealand First coalition's plan to increase the minimum wage by 35 percent to $20 an hour by 2021 has clearly hit confidence among small to medium employers and retailers in particular, while a collapse in commercial construction sector confidence linked to worker shortages and high profile project cost blowouts is also weighing on the outlook.
Fletcher Building's withdrawal from commercial building construction, the liquidation of 14 Hawkins companies and the collapse reported this morning by RNZ of Ebert Construction is hammering confidence there. Tougher lending rules to developers by the big four Australian-owned banks is also a factor. That is driven mostly by the Australian banking regulator's tougher approach, along with local fears the Reserve Bank will soon impose higher capital rules.
The cooling of house price inflation in Auckland caused by the Reserve Bank's tougher LVR rules for landlords, the slowdown in bank lending and expectations of a slowing of foreign buying have also softened consumer spending growth.
Simon Bridges yesterday laid the blame wholly at the feet of the Government, saying its policies on employment, migration, foreign buying and housing were the sole reasons for lower confidence.
In my view, that doesn't reflect the full picture in both the global and local economies, but some of the Government's policies are partly responsible for the slump, and it is responsible for any response.
'Nothing to see here, move along'
So far, the Government is denying there is a major problem and denying there needs to be a response. It says it is already doing enough.
I asked Grant Robertson yesterday if the Government needed to respond with more stimulus, or if it was time for the Reserve Bank to loosen monetary policy. He would not comment on monetary policy and said the Government was already stimulating with extra capital spending and the bigger families spending package, which will start to flow through to GDP figures in the September and December quarter. He denied the Government was to blame or that it was was not doing enough.
But it's worth challenging the claim that the Government is already stimulating heavily, or that the Reserve Bank is also doing as much as it can.
Treasury's own figures from Budget 2018 (Table 2.7) show a 'fiscal impulse' or Government addition to economic growth of a net 0.4 percent of GDP over the four years to 2022, including a 1.9 percent of GDP addition in 2018 and 2019, followed by contractions totaling 1.5 percent in the following three years.
Hardly any extra investment
Robertson's claim the Government is investing much more in capital is also worth checking. Budget 2018 figures (Table 2.8) show new capital spending (vs the previous Government) totaling $8.1 billion over the six years to 2021/22, including an extra $7.7 billion worth of contributions to the New Zealand Superannuation fund. Most of that will be invested offshore.
The Government's contortions to get the private sector to pay for Auckland infrastructure spending, including two big new light rail lines, shows that its self-imposed debt funding constraints are holding back development at a time when the construction sector desperately needs reassurance.
A self fulfilling slowdown
The Government's determination to stick to its 20 percent net debt target is stopping it responding to the slow-down in the economy, which may in turn also make it harder to achieve that 20 percent debt target.
Treasury has already acknowledged the risks of a slower economy dragging on the Government's surplus debt reduction track forecasts. It said in its July 2 Economic Indicators commentary that there were 'downside' risks to its Budget forecasts for growth of over three percent this fiscal year and next fiscal year.
"Tax revenue is only tracking slightly below forecast. GST has come in slightly under, reflecting weaker consumption and residential investment, but source deductions (such as PAYE) have provided an offset," Treasury wrote.
"While indicators for exports look positive for the June quarter, the soft consumption indicators and fall in business own activity outlook suggest there is less momentum in the economy, and pose some downside risk to our near-term GDP outlook."
Former ANZ economist Cameron Bagrie , who has spent years conducting the business confidence survey, described the results as showing the economy was at "stall speed."
He wrote today in NZ Herald that the economy should brace for 'grump-flation'
"The New Zealand economy is not stagnant, though the latest ANZ Business Outlook survey showed an economy dangerously close to stalling. Yes, growth has slowed and signs of caution are clear but the economy has positive momentum. The kind of growth we have at the moment could be described as mediocre and grumpy, based largely on population growth," he wrote.
"Meanwhile, productivity growth remains weak and firms are more reluctant to invest."
Current ANZ Chief Economist Sharon Zollner said the economy was delicately placed.
"Fiscal stimulus and the high terms of trade will provide impetus to growth, and the external environment remains favourable. But with businesses in a funk, it’s fair to say that the road ahead is looking less assured, and risks of a stall have increased," Zollner wrote with the survey results.
Signs point to lower interest rates
Now the political economy moves on to labour force figures at 10.45 am today, which could add extra pressure onto the Government and the Reserve Bank to add further stimulus to the economy.
The data includes employment, unemployment, under-employment and wage growth figures. Economists expect jobs growth to dip to around 0.4-0.5 percent for the June quarter from 0.6 percent in the March quarter. That would match growth in the size of the available labour force through natural population growth and migration. Therefore unemployment is expected to be stable around 4.4 percent, assuming an unchanged participation rate.
The main focus will be on wage growth, given the quarter includes the April 1 increase in the minimum wage to $16.50 an hour from $15.75 an hour. This is the first of four increases scheduled to go to $20 an hour under the Labour-New Zealand First coalition agreement. Growth in the Labour Cost Index measure of private sector wages is expected to double to around 0.6 percent in the June quarter from the March quarter's 0.3 percent, which would increase the annual rate from 1.9 percent to 2.1 percent. That previous 1.9 percent was boosted by a 0.2 percent increase from the pay equity deal for aged care workers. The key question is whether this surge is temporary, or starting to filter through into wage inflation more widely.
Currently the Reserve Bank is not expected to hike interest rates until the second half of 2019. Faster-than-expected wage growth may shift that view forward, or vice-versa. Yesterday's business confidence figures, along with the NZIER June quarter figures, will have nudged the Reserve Bank's OCR thinking closer to a cut than a hike.
We'll get a better view on August 9 (next Thursday) when the Reserve Bank publishes its latest forecasts in a monetary policy statement and holds a fresh news conference. The chances are growing that it will adopt an easing bias.
- This piece was published first in Newsroom Pro's '8 Things' email for subscribers earlier today.