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OPINION
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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.
Q: Do people need to keep spending for the economy to get out of a recession?
- Maryana G
A: Good question. Short and sweet! The answer is normally yes. But unfortunately, these are not normal times. The inflation fight has complicated the formula for getting through this recession.
If the country was in a recession because of a huge crash in export prices or a global financial meltdown (or even when the pandemic hit in 2020) then yes, you’d likely hear the Reserve Bank Governor Adrian Orr and politicians talking up public confidence to try and keep people spending. Getting people to spend rather than save their money can help keep businesses ticking over and push back against a recession.
Right now though the economy is still recovering from the after-effects of too much spending. The stimulus (low interest rates and government subsidies) that got us through the pandemic kept everyone in jobs and businesses afloat but it put excess cash into the economy. Inflation rose dangerously high.
You can blame the Reserve Bank for too much stimulus or the last Government, the Ukraine war and an ill-timed spike in commodity prices... or a mix of the three. I would note that Australia, the US, the UK and many other countries are facing the same issues we are right now.
But regardless, here we are. Interest rates have been lifted and government spending cut back. These measures are reducing the amount of cash in the economy and bringing inflation down.
While we wait for inflation to fall to manageable levels (below 3 per cent) you won’t hear the Reserve Bank Governor encouraging people to spend.
The healthiest way to beat inflation is for people to save more and spend less. Higher interest rates encourage that by making saving more lucrative and borrowing more expensive.
That’s why you’ll sometimes hear people suggesting that this recession has been engineered by the Reserve Bank. I don’t know that they actually wanted a recession, but they did deliberately cool the economy.
The upside is that we can expect the economy to bounce back once inflation falls because the Reserve Bank will be able to start cutting rates. At that point, it might be time to get out and spend to help get the economy moving again.
But when...?
That is the million-dollar question in economics right now. Actually, given the weight of market expectations around rate cuts, it is a multi-trillion-dollar question!
You’ll read plenty of forecasts and predictions from economists and commentators. Don’t bet your house on it would be my advice. By that I mean be wary of making any calls on fixed interest rates that rely too heavily on forecasts.
Trying to pick when inflation will finally fall to levels that make central banks comfortable to cut rates is highly speculative. Inflation is falling. But the rate at which it is falling changes month to and it is very difficult to extrapolate out very far from the data (which is often out of date by the time we get it). That’s because there are so many variables that make up the magic number - global commodity prices, local wages, rents and the value of the Kiwi dollar, to name a few.
Since the beginning of the year, we’ve seen predictions for another two rate hikes through to rate cuts as soon as August. Right now the odds are shifting back towards the first cut being either in November or early next year. But those odds will likely move again before we get there.
Worldwide problem
As usual, it’s worth taking a look around the world before assuming that New Zealand is some sort of unique basket case.
A new note from London-based Capital Economics notes that markets have given up on any hope of a rate cut across the Tasman this year. In fact, the Reserve Bank of Australia is now more likely to hike than cut this year, argues Economist Abhijit Surya.
“While we agree that policy loosening is a distant prospect, we think investors are under-pricing the likelihood of a rate hike. Given the material upside surprise in the CPI figures, we think there’s a solid case for the Bank to flip the switch and resume its tightening cycle,” he wrote after last week’s surprisingly strong Aussie inflation data.
For the record, it landed at 3.76 per cent for the year to March 31. That’s lower than our rate for the same period - 4 per cent. Markets still like our odds of a rate cut this year, largely because it looks like our economy is slowing faster (ie in recession).
In America hopes of as many as three rate cuts this year have dwindled as the economy has continued to run strong. Current market pricing still has strong odds of one rate cut this year. But some commentators are also talking about the US Federal Reserve keeping them on hold all year or even hiking once more.
It is important to remember that market pricing serves a specific purpose for bond and currency traders. It is often very specific but also changes every day.
Q: I read your Inside Economics column on productivity and agree with the points you made - and I wonder if our tax treatment of international investments is another thing that discourages New Zealanders and our fund managers from investing in international shares and other overseas investments.
You may know that there is effectively an unrealised capital gains tax on some international investments. The whole ‘international tax regime’ is a carryover from the bad old days of the mid to late 80s when the Government was desperately trying to raise revenue and prevent money flowing overseas to both legitimate investments and for tax avoidance reasons. Remember the Winebox?
I was around when Treasury dreamt up that international tax regime, and for some reason, no one has really looked closely at it since! Probably most of it could be scrapped nowadays.
- Anthony
A: I agree. If you look at the high saving and investment rates that make countries like Australia and Singapore much wealthier than us, you’ll see that much of the capital is directed offshore. That means dividends flow back in, boosting the current account position.
Encouraging more investment doesn’t have to be a nationalistic thing. Back in 1975 when Sir Robert Muldoon used the infamous “dancing cossacks” cartoon to attack Labour’s compulsory superannuation scheme (which he later killed), he argued that the fund would grow too big for New Zealand and would eventually own everything in the country (which he equated with Communism). In hindsight, the inability to see that a fund like this would invest around the world (as the New Zealand Super Fund and our KiwiSaver funds do) seems weirdly provincial.
So yes I’d like to see the tax regime geared towards encouraging investment in international shares and funds. Of course, I’d like to see it geared toward encouraging local investment in infrastructure and tech and all sorts of things that would boost productivity (as opposed to residential housing).
Q: Years ago I was taught that a country’s productivity is the total of wages & salaries, profits, and royalty income from such as patents and the like, adjusted for inflation. When profits generated here are transferred overseas surely an element of productivity must go with them? (as per Ernie Newman’s question in your column). A further issue in this context though, is what happens when those profits are concealed partly or wholly through transfer pricing.
-Gilbert Peterson
A: I’m no expert in this complex debate. But I’d assume the drain of profits heading offshore via big tech firms doesn’t help our cause. This is something local media is acutely aware of. Tax battles are being fought with the tech giants all over the world, including multilateral efforts. While I’m in favour of big companies paying their fair share of local tax it is worth noting that any tightening of rules might also affect Fonterra - our only true multinational. But on that note, wouldn’t it be nice if we also had a few New Zealand multinational tech firms in the gun too?
Building high-tech firms takes a lot of investment in Research & Development (R&D) and New Zealand consistently ranks low on the OECD league table of R&D investment as a percentage of GDP.
It doesn’t take a rocket scientist to tell you that the level of investment in R&D is one of the key indicators of a country’s productivity. (Although, full credit to Peter Beck, a self-taught rocket scientist who has boosted New Zealand’s productivity with RocketLab.) But in a rare bright spot on the productivity news front, it appears New Zealand businesses made a big leap forward in R&D investment in 2023.
In 2023, the business sector spent a total of $3.7 billion on R&D, an increase of 17 per cent from 2022, new Stats NZ figures show. This annual percentage increase is the largest since 2018. The average R&D expenditure per business increased by $268,000 (20 per cent), reaching $1.6 million in 2023. And the number of fulltime equivalent (FTE) staff working on R&D rose by 3.9 per cent to reach 21,000.
Business investment in R&D as a proportion of gross domestic product (GDP) rose from 0.87 per cent in 2022 to 0.95 per cent in 2023.
In 2023, the survey was conducted for the business sector only. The government and higher education sectors are surveyed every two years and will be included in the 2024 survey.
Last year’s full survey showed total R&D spend (across all sectors), as at the end of 2022, was $5.25 billion or around 1.5 per cent for GDP - still well below the target if we want to match other more productive nations.
By comparison, South Korea invests nearly 5 per cent of its GDP, and Taiwan nearly 4 per cent. The OECD average is 2.7 per cent.
Why the improvement?
Stats NZ doesn’t offer any reasons for the improvement last year - other than to note that many firms were seeking to boost export opportunities. But I’ll throw this out there as a possibility. The research by NZIER economist Peter Wilson and Julia Fry which informed Labour’s original immigration policy made the case that a tighter supply of low-skilled workers would force businesses to invest in R&D and new technology.
Maybe the data reflects just that. Coming off the back of a period of labour shortages we’ve seen a big lift in R&D investment. If that’s right then we’d expect to see the level of investment fall now as open borders and policy changes have allowed a record-breaking wave of migrant workers.
Nobel Laureate economist Joseph Stiglitz thinks so.
In a feature-length interview with the Financial Times’ Henry Mance, the 81-year-old neo-Keynesian and champion of left-leaning economics reflects on how the world has unfolded since he shared the Nobel prize in 2001.
He won the prestigious award for work on how imperfect information affects markets, but says that at the time he had not thought this applied to people deliberately creating misinformation, writes Mance.
“We hadn’t fully contemplated how evil people could be! I might know something, I would keep it for myself, but there were laws against fraud and we had scientific principles, you couldn’t just lie.”
How things have changed in the online world of social media, fake news and alternative facts.
Promoting his new book, The Road to Freedom, Stiglitz says he seeks to reclaim the idea of freedom from ideological right.
Freedom is not something that can be easily maximised, as libertarians would like, he argues.
It involves trade-offs: a person’s freedom to carry a gun constrains many children’s freedom to go to school; a pharmaceutical company’s freedom to charge what it likes conflicts with disease sufferers’ freedom to live. The right’s failure to grasp such trade-offs is its “fundamental philosophical flaw”, writes Stiglitz.
It has created an unequal, dishonest society, he says.
Populism is stronger in countries such as Brazil, the US and Hungary, which have not addressed inequality, Stiglitz argues. Stalling living standards, and the resultant loss of hope, creates “a fertile field for [a] demagogue like Trump... He is what neoliberalism produces.”
Consumer confidence has finally started to fall again. This will no doubt be a relief to the Reserve Bank (as per the first question this week).
The latest ANZ-Roy Morgan survey showed consumer confidence is now close to lows seen during the Global Financial Crisis, but still slightly above the more recent pandemic lows.
Looking at the graph, what is interesting is the extent to which consumer confidence was disrupted by the pandemic - from which it has never recovered.
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.
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, a new column published every Wednesday.
Stats NZ has revealed its latest Retail Trade Survey for the September quarter.