Notes for Radio NZ Nights with Brian Crump: 11 August, 2014

The indications are that economic growth is slowing down from the boom rates of the last few years. The slowdown may turn into a contraction – that is, output may fall. There is a view that the contraction began in the middle of 2015. (It is not possible to be sure. All the data is not in and is subject to measurement error. Last week’s labour force statistics gave mixed results with unemployment up, employment up and labour force participation down.)

The main reasons for the slowdown are:

            The private sector Christchurch rebuild has peaked; the public sector is still muddling along.

            Chinese economic growth is slowing down. This is probably structural. The productivity gains which enabled the 10-plus percent annual growth have been exhausted. The expectation is a future growth rate of around 5 percent. Still pretty good. However the worry about the Chinese financial situation continues.

            Added to China’s slowdown is that other economies important to us in South-east Asia and Australia have benefited from the Chinese growth and our export markets there may not expand as fast..

            There are mixed views about the Auckland housing market. It may have peaked, it may be about to peak. (The imponderables include any impact from the Chinese financial troubles; investors from there may have a marginal involvement but probably add to a speculative boom. The direct impact of the loan-to-value restrictions may be small but may take the top off the market.) Any reduction in the housing boom will impact on employment in a host of industries – real estate, surveyors, valuers, movers, builders, refurbishers, solicitors – as well as on house prices.

            The dairy price downturn.

Why have dairy prices slumped? Actually they are back to where they were about ten years ago. Perhaps a better question is why were they so high in between. It would seem that the opening up of the Chinese market following the FTA led to a surge in dairy prices because the world dairy industry could not keep up with demand increase in the short run. As time went on, though, the industry geared up for increased supply and is now in oversupply, depressing the international price. The oversupply arises because farmers invested on the assumption that the high prices would continue indefinitely. Perhaps the long-run price for dairy products is $4 to $5 a kilogram; it seems that much of the investment has been on the basis of a long-run price of $5 to $6 a kilogram. Critically that investment was debt financed.

So many farmers are carrying too much debt. The consequence is that they are struggling with negative cash flows after debt servicing. They will have to cut back spending, which will impact on their suppliers, on rural communities and ultimately the whole of New Zealand. Especially heavily indebted farmers will go under – I’m told that particularly includes share-milkers. We don’t know how long it will take before milk prices return to ‘normal’.

What to do? In some respects we’ve blown it. Market economies swing up and down as a matter of course. We’ve had a number of years in which conditions have been very favourable. We’ve treated them as ‘normal’ and while there have been some positive developments – say the broadband rollout – we’ve been borrowing for consumption rather than preparing for a more moderate future.

The Reserve Bank will probably continue to ease up, with an even lower floor interest rate (OCR). It will not be enough to offset the forces driving the downturn, nor the bad decisions of the past. The international evidence is that monetary policy by itself hardly lifts a contracting economy or if it does so it does so slowly. There is a need for fiscal policy.

There will be calls for austerity, cutting back government spending, say on the poor. Overseas experience shows austerity does not work.

Tax cuts which stimulate consumption are not easily reversible. Arguably the 2009 tax cuts should have been temporary, eased back as the economy expanded. But they were not.

I’ve argued for increased public spending on infrastructure although I don’t know whether there are projects ready to go ahead quickly. The mucking around in Christchurch shows how slow it can be to get things underway. Amongst the infrastructural spending worth bringing forward might be upgrading of poor quality housing, better connecting struggling regions to growth hubs, making more effort to meet realistic greenhouse emission targets, perhaps a bit more on conservation and heritage, more spending on health prevention and early detection and taking leaky school buildings seriously.

When asked what should be done I am reminded of the person told that he has lung cancer who demands his doctor do something about it. The doctor patiently explains she did. Whenever he came for a checkup she told him to give up smoking. He ignored her. His doctor may be able to help him through the next stage if he listens, but she cant reverse his past decisions.

Ultimately, we have to accept we have been making bad decisions – spending when we should have been saving; speculating rather than investing on realistic assessments of future outcomes; accumulating debt when we should be have been paying it down. We cannot easily reverse those mistakes. Anyone who says we can, hasnt understood the problem. In the past they were probably advocating the sort of advice that got us into the current uncomfortable situation.

Comments (3)

by Murray Grimwood on August 14, 2015
Murray Grimwood

I mostly agree with this.

The problem, at its core, is that we tramsferred the mental idea of wealth from the desired item, to the proxy. This has been near-universal, and it worked in the growth period while there was ever-more planet to extract stuff from.

That process had to peak (roughly at the 50%-depleted point, or at the start of the last possible 'doubling time') and I suggest it has. The supply of global bits, delivered by more global bits (copper by fossil oil, for example) is at or near peak possible. Currently-held debt probably outflanks future income potential by an order of magnitude. Adding yet more infrastructure - more of the same, when the same brought the problem on - is what every global Empire has done as it overran its resource base. The Romans tried devaluation too.

Didn't work. The problem is that you have never had more infrastructure (a trusim every year you grow) and it's all aging into ever-more-maintenance-required territory. You actually have to triage your infrastructure beyond Peak, as we are seeing. Aging hospitals, Americam roads/bridges, global dams, etc etc.

The real yardstick is whether things are sustainable or not sustainable. (Growth is never sustainable) The rules are 3; Finite resources can only be used at 100% recycling, or not at all. Renewable resources can be used at no more than the rate of renewal. And pollution/impacts have to be mitigated 100%, real-time now.

Then you organise a trading system to fit. Has to be Steady-State. Given those 3 prerequisites in place, anything can go; under them we can have our left/right/whatever debates as to who gets what.

by Draco T Bastard on August 17, 2015
Draco T Bastard

There is a view that the contraction began in the middle of 2015.

I'm reasonably certain that the contraction actually started in ~2009 and that the only thing keeping the economy 'growing' has been the housing bubble.

There will be calls for austerity, cutting back government spending, say on the poor. Overseas experience shows austerity does not work.

But the rich become soooo much better off...

Arguably the 2009 tax cuts should have been temporary, eased back as the economy expanded. But they were not.

Actually, the tax cuts of 2009 should have been tax increases with a corrosponding increase in government spending especially in R&D and infrastructure to build a tech capability.

Ultimately, we have to accept we have been making bad decisions

And the reason why we've been doing that is because we, IMO, have a bad idea as to what the economy is. We treat finances as the economy rather than money as the tool used to get the economy moving.

by Brian Easton on August 31, 2015
Brian Easton

The New Zealand economy began to turn down in late 2007 before the GFC struck.Until 2009 it was treated as a typical business cycle wobble. But then the economy contracted sharply and was stagnant until the end of 2010, after which it began growing again (‘hooray’) from a much lower base (‘boo’). The per capita production level returned to the late 2007 level in early 2013 so the ‘wobble’ proved to be a five-year one. The total (per capita) contraction from end 2007 to early 2009 was over 4 percent, five times greater that the Asian crisis wobble of 1998. Even so, the New Zealand economy was hit less than many other rich countries and it recovered earlier.


Since early 2013 the economy has been growing quite quickly but there is a consensus that there has been a slowdown from about the middle of this year. As I say above, we are not sure if it has, or will contract.


Other countries have had different patterns of course. Some have not yet recovered from the GFC. .

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