Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up to my weekly newsletter, just click here, select “Inside Economics” and then save your preferences. For a step-by-step guide, click here.
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
I hear these sorts of questions a lot these days. Some blame the news headlines, some blame the Reserve Bank (RBNZ) and some blame a Government intent on ensuring the blame sits surely with their predecessors.
It’s not like things aren’t tough. We’ve been in recession, we’re still waiting for inflation to fall and paying high interest rates until it does.
And those are just the cyclical economic problems. There are plenty of structural worries as well, from big current account deficits and Crown debt to things like infrastructure, power supply and even the disrupting effect of AI.
But for all that, there remains a serious risk we are overdoing the negativity. New Zealanders are resilient and have been through plenty of economic ups and downs throughout their history. There’s no reason to think we can’t manage this time.
Confidence is crucial to an economy and it seems to be a missing ingredient, not just here but around the world, as a pandemic-battered public struggles to cope with the last part of the great rebalancing act.
American blues
Nearly three in five Americans wrongly believe the US is in an economic recession and the majority blame the Biden administration, according to a Harris poll conducted for the Guardian newspaper recently.
For the record, the US is not in recession. Its economy has outperformed expectations and it grew by 2.5 per cent in 2023. It slowed to 1.6 per cent (annualised) in the first quarter as higher interest rates started to bite.
The poll found that 49 per cent believed the S&P 500 stock market index is down for the year, even though the index went up about 24 per cent in 2023 and is up more than 12 per cent this year.
That is a startling disconnect. The US stock market is booming and if there’s one bright spot for Kiwis this year, it is that their KiwiSaver accounts are rising on the back of Wall Street (it is certainly not down to our own lacklustre NZX50).
The poll found that 49 per cent believed that unemployment was at a 50-year high, though the unemployment rate was under 4 per cent, a near 50-year low.
Q: “I wonder how a random survey of NZ respondents would compare,” writes reader Mark F.
A: Well, it wasn’t devised as a matcher for the US poll but a new Ipsos survey of public attitudes to the economy goes pretty close.
More New Zealanders are pessimistic about the state of the economy and their finances than are optimistic, according to the Ipsos Cost of Living Monitor.
It surveyed 1000 Kiwis as part of a 32-country global survey on a range of topics from inflation and interest rates to finances.
More than half (56 per cent) of Kiwis say the rate of inflation – now 4 per cent annually – will rise in the next year, compared with 20 per cent who believe it will fall and 22 per cent who think it will stay the same.
The RBNZ sees inflation returning to its 1 to 3 per cent target range by the end of 2024.
Did people misunderstand the question perhaps?
Even the gloomiest economists don’t expect inflation to rise in the next year. However, prices will mostly keep rising. A lower inflation rate is called disinflation and just means a lower rate of price increases. We’d need deflation to drop prices. As mentioned in a previous column, that would be a very bad thing.
Meanwhile, 44 per cent of New Zealanders think interest rates will increase over the next 12 months, compared to 24 per cent who say they will fall and 26 per cent who believe they will stay the same.
It is still possible they will rise. But the odds, even after last week’s hawkish Monetary Policy Statement, are still very much against.
The Ipsos Cost of Living Monitor also found a higher proportion of Kiwis say they will have less money to spend in the next year – with 38 per cent saying they think their disposable income will fall, compared to those who think it will rise (26 per cent) or stay the same (33 per cent).
Twenty-four per cent of New Zealanders said they are finding it difficult to manage financially, compared with 26 per cent in February 2023.
Wait, what? The number of Kiwis who said they were personally struggling has dropped! Well, I guess unless you have actually lost your job, there is no reason why this year should be worse than last.
Unemployment remains below the historic average and wage growth has gone very close to keeping up with inflation... which is coming down slowly but steadily.
What’s jarring is that the number of Kiwis struggling was lower than the 32-country global average of 26 per cent. Maybe things aren’t so bad here after all.
Last week I ran some numbers on the Aussie banks’ net interest margins (NIMs) supplied by Sam Stubbs – founder of fund manager Simplicity and ardent banking critic.
He and others have argued they are unreasonably higher here than in Australia.
In response, ANZ has asked to clarify this comparison.
“The comparison is made between the NIM for NZ v Australia and the claims that ANZ’s net interest margin (NIM) in New Zealand for the first half of our financial year was materially higher than ANZ’s NIM in Australia,” ANZ said.
“What is being used as the “Australia” margin of 1.56 per cent was for ANZ’s global operations including Australia and New Zealand, plus around 30 other countries, and importantly included our global Markets business, which has a large and fluctuating negative impact on overall NIM.
“The New Zealand NIM of 2.56 per cent is for our New Zealand retail and commercial businesses.”
The accurate comparison to that New Zealand NIM is the combined margin of ANZ’s retail and commercial businesses in Australia, which is 2.52 per cent.
So, that is a four-basis-point difference, which is more than explained by the higher levels of capital we must hold in New Zealand, ANZ said.
For the record, Stubbs is unconvinced.
“What we know to be true (because the ANZ reported it in their press release) is that the NZ business was much more profitable than the overall ANZ Group’s and that that profit is in an overall low-risk business, dominated by residential mortgage lending,” he said. “Is anything else really relevant to NZ customers?”
Meanwhile, the Reserve Bank Governor has taken exception to banks blaming the higher net interest margins on the higher capital requirements here.
In a letter to the editor, published in the NZ Herald, last week he argued that higher NIMs pre-date the increased capital requirements.
“The large four Australian-owned retail banks in New Zealand have for years posted the highest risk-adjusted returns on capital amongst their peers globally. They continue to do so even after the Reserve Bank’s insistence they hold more capital,” he wrote.
Orr puts the blame squarely on the lack of competition.
“These banks must have pricing power beyond what would be observed in a competitive market. In large part, their low cost-to-income ratios, relative to their New Zealand competitors, affords them market dominance. Not capital levels or risk weights.
“Competition will only be enhanced by enabling and empowering discerning customers through more choice and innovation. For example, by ‘open banking’ and improved access to retail banking systems.”
Orr has since doubled down by sending a similar letter directly to the “big four” banks, leaving them in no doubt about what the central bank’s view is.
I’m keen to stay out of the thick of this scrap. But I can’t help but think, even if we concede higher capital requirements have added extra costs, that it seems that the Aussie banks have opted to pass those on to customers rather than shareholders.
They’ve been able to do that because they don’t face enough competition to prevent them.
I also agree with Stubbs’ proposed solution:
“The solution? Open banking ASAP (New Zealand is seven years behind other developed countries) and for Kiwibank to be listed and owned by the Government and KiwiSaver funds.
“With KiwiSaver money behind it, Kiwibank could grow much faster.”
For what it is worth, the Commerce Commission (which went out of its way to allow ANZ to buy the National Bank in 2003) also concluded that “the personal banking sector in New Zealand lacks competition” in the draft of its market study released in March.
It will deliver the final report in August.
Like many economists and politicians, this column has leaned on Singapore’s success as a case study for how New Zealand might look to boost its productivity.
For example, a few weeks ago I cited economic analyst Leonard Hong who looked at sovereign wealth funds – such as our New Zealand Super Fund (sometimes called the Cullen Fund) and Singapore’s Temasek and Government Investment Corporation (GIC). He also looked at state-sponsored superannuation savings schemes – our KiwiSaver and Singapore’s Central Provident Fund.
“Singapore’s sovereign wealth funds together comprise around 227 per cent of Singapore’s GDP and the CPF is 91 per cent of GDP,” he writes. By comparison despite the relative success of both the New Zealand Super Fund and KiwiSaver, they represent just 18 per cent and 25 per cent of GDP.
But a recent opinion piece in the Financial Times (via NZ Herald) has warned against taking too literal an approach to mimicking Singapore’s success and warns of contradictions that complicate enthusiasm for the model.
Columnist Janan Ganesh argues: “Singapore is too particular, too sui generis [unique] in both its assets and liabilities, to constitute a template. It has but one universal lesson: the importance of an open economy.
“Conservatives in Britain and America have tended to regard the island as proof of concept: look what stern laws and low taxes can do. (It was under President Reagan that LKY addressed the US Congress.) But the government involves itself in matters of identity to an extent that would make the same people flinch,” he says.
“The Singaporean “method” has been to come at each question afresh. The result is a lack of pattern: a libertarian nanny state,” he says.
Ganesh makes the point that public debate has become far too binary and tribal. He says it has become all too easy to extrapolate from one issue what a person views will be on another.
“This is what we might call irrational coherence. Singapore is a lesson in what can be done when this mental trap is avoided,” he says.
I agree. But I still think New Zealanders need to save more... and that Singapore offers a good example of why that pays off!
If you missed them, or (let’s be realistic) if you only get interested in it the day before, here is a handy wrap of Budget previews.
For those who just want to get “the vibe of the thing” without worrying about bond issuance and the Obegal then my Sunday column might be a good primer for Thursday’s show:
“If we take a binary approach and split the general vibe of Budgets into two categories, expansionary and contractionary, this year’s is the latter.
In other words, it should be filed on the same side of the ledger as the Black Budgets of 1931 and 1958 or Ruth Richardson’s Mother of All Budgets in 1991.”
But...”you can’t call a Budget that delivers tax cuts austere.”
“Willis, to the annoyance of those on the right, has made it clear that the document she will unveil on Thursday is not designed to be an austerity Budget.”
For a deeper dive into that general “vibe” check out Political Editor Claire Trevett’s pre-Budget interview with Willis and Luxon... and her analysis of said interview.
Trevett reckons Willis and Luxon will no doubt be hoping that the pennies side – those tax cuts – will be the hero on the day.
“They certainly need something to be, but if Willis has done her pre-Budget sales job right it won’t be the tax cuts.
“It will be the medicine that the tax cuts are supposed to sweeten: the measures being taken to try to resolve the economic buffeting facing New Zealanders.
“National has missed its post-election honeymoon and Willis will not necessarily be expecting the Budget to deliver her one, although she wouldn’t turn it down. Tax cuts are a short-lived sugar hit. Willis will be hoping the Budget delivers something a lot longer-lasting: trust in her economic management.”
If you do like big numbers and are keen to worry about how much more debt we’ll be taking on to fund those tax cuts, check out what New Zealand’s bank economists are picking: What the economists expect to see in Thursday’s big reveal.
Or read political reporter Derek Cheng’s breakdown of all the cuts that, the Government says, will fund the tax cuts.
There’s no question that Crown debt soared through the pandemic years with questions now being asked about where all the borrowed billions went and what we have to show for them. Finance Minister Nicola Willis has a long road ahead to bring the balance back. But if it’s any comfort New Zealand has done it before. Net core crown debt as a percentage of GDP hit a record in 1992. It’s one that hopefully we won’t beat.
If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz... or leave a message in the comments section. He’ll try to answer in Inside Economics, published every Wednesday.
Nearly 90% of new mortgage lending in October was floating or fixed for a year or less.