New Zealanders are buying more goods from online companies such as Temu. Photo / FT montage, Getty Images
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.
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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: Hello Liam,
I always enjoy your articles. The inflation/ stagflation situation is interesting. Some of the questions I have/bits of economic analysis I have are:
1) The Reserve Bank talks about tradeable and non-tradeable inflation. Can we make sense of this more in layman’s terms – thinking textbook economics how much inflation is driven by:
- Prices in markets where competition exists – including supermarkets and telcos etc.
- Prices in markets where there are oligopolies with over-arching industry structures that connect the institutions around risk and pricing e.g. insurance.
- Prices in markets with monopolies – central and local govt / ACC etc.
2) House prices – is there time series data showing the changes in the cost of building houses across the key inputs:
A: These are great questions, Don. I don’t have answers to all of those points. But they do raise some interesting discussion topics. So I’ll have a go...
Let’s start with housing.
If we could break down the overall cost of housing into these four component parts and record them all over a long period, then we’d have good insight into how to address affordability issues. We might be able to settle some debates about how much of the issue is due to supply and how much is due to demand.
Unfortunately, at this stage, I’ve only got a partial answer for you. Your top two costs (labour and materials) are effectively captured as one in the Consumers Price Index (CPI) that we use to measure inflation.
The CPI has a long-running time series for the cost of new homes (excluding land costs). That in itself is quite shocking. It has nearly tripled in the last 20 years (and it really takes off as global inflation spikes in 2021).
I’m not aware of an index purely for land prices – outside of the overall residential house price index or possible rural land sales. If anyone has any suggestions on how to break that out, feel free to get in touch. Undeveloped land prices tend to vary greatly based on location, proximity to infrastructure, and zoning.
Breaking down what part of all these costs (labour, materials, and land) is caused by legislation and regulation is even more difficult. I suspect regulatory costs bleed into the price of materials, labour and land. Working out what regulation costs is likely to involve subjective judgments but perhaps someone has done some qualitative research by surveying building firms for their opinions. If so it would be great to hear from them too.
And yes, bad legislation also costs us. The Building Act 1991 ushered in a decade of poor-quality new builds – something now described as the leaky building crisis.
A PwC report for the Government in 2009 concluded that the debacle cost the country about $12 billion. It likely also significantly slowed the pipeline of new building as resources went to fixing up the leaky homes, something that may have contributed to the housing shortage through the next 10 years.
Tradeables v non-tradeables
Back to your first question. Given how much we’re talking about the different components these days, any opportunity to reiterate the definitions is welcome.
New Zealand’s annual inflation rate is sitting at 4%. But that is comprised of the two important categories of inflation you refer to – tradeable and non-tradeable.
Stats NZ defines these terms like this:
Non-tradeable inflation measures final goods and services that do not face foreign competition and is an indicator of domestic demand and supply conditions.
Tradeable inflation measures final goods and services that are influenced by foreign markets.
Tradeable inflation was just 1.6% in the 12 months to the March 2024 quarter (compared with 3% in the 12 months to the December 2023 quarter), driven by higher petrol and international accommodation prices.
Non-tradeable inflation was 5.8% in the 12 months to the March 2024 quarter (compared with 5.9% in the 12 months to the December 2023 quarter), driven by rent, construction of new houses and cigarettes and tobacco.
Broadly, tradeable stuff includes raw food and petrol and basic goods like that. Non-tradeable stuff tends to involve the service sector and local, added value goods influenced by wages and rental costs.
Stats NZ also notes that the inputs for non-tradeable goods and services can be influenced by foreign competition. For example, petrol prices will affect local business costs and push up prices for non-tradeable services – like getting a plumber round.
Stats NZ produces a breakdown of which side of the ledger everything in the CPI sits on – including its weighting as a component of the CPI.
I won’t go through all of them here because it gets very complex, as we can see if we just look at the food category as an example.
Overall food represents about 19% of the CPI. Of that, the tradeable component makes up about 12%. The non-tradeable component of the food category accounts for 7% of the weighting.
Some foods – like food and vegetables – sit fully in the tradeable category.
Others are a mixture. “Meat, poultry and fish”, for example, is given a tradeable weighting of 2.10% and a non-tradeable weighting of 0.7%.
Then there is the food we consume at restaurants as takeaways – which is classified as fully non-tradeable – even though the tradeable raw ingredients must have an influence.
Those kinds of subtle distinctions are made all through the hundreds of goods and services included in the CPI basket.
For all that complexity though, we can see a very clear divide in the two types of inflation across time.
As the graph below shows, historically we have tended to get away with slightly higher (than Reserve Banktarget) non-tradeable inflation by running lower (than target) tradeable inflation.
Right now, we want both to come down – but non-tradeable is the bigger concern.
If you want a sobering reminder of how seriously central banks are taking the risk of sticky non-tradeable inflation, just look at the United Kingdom. Topline CPI inflation there finally hit the magic number of 2% (the midpoint target for most central banks) on Wednesday last week.
Any celebrations were short-lived as the next day the Bank of England delivered its latest monetary policy statement and left interest rates on hold. The incumbent (and embattled) Tory Government was quite unhappy as they won’t now see any pre-election payoff for winning the inflation fight.
The general election is due to be held on July 4 (Friday next week NZT).
The trouble was that services inflation was higher than expected at 5.7%. That’s loosely the non-tradeable stuff as discussed above.
In New Zealand (as the above graph shows) we are in a similar boat – albeit a bit further behind on topline inflation.
Will our central bank be as cautious as the Bank of England? Or could they cut as soon as they see topline inflation below 3% (the outside band of the legally mandated target)?
Right now the consensus of economists is towards the latter with a cut in February. The Reserve Bank (RBNZ) says it expects topline inflation below 3% by the end of the year.
But the RBNZ is more cautious and doesn’t forecast the first cut until September. In a recent speech, RBNZ chief economist Paul Conway warned inflation is likely to stay “sticky” for a year or two more.
That goes to one of the big issues economists are debating right now: will non-tradeable continue to ease slowly – making for a painful long grind back to lower interest rates?
Or will the economy get so bad that it will hit a tipping point and fall sharply away?
Unfortunately, neither prospect sounds particularly appealing!
Last week’s GDP data – showing New Zealand is out of recession – was all about the detail. No one focused much on the 0.2% rise in the first quarter.
It was marginal, underpinned by population growth, and we all know the downturn has a way to run. One of the most interesting details was an uptick in a specific area of consumer spending which helped boost the top line.
Consumer spending in New Zealand (including both residents and visitors) rose by 0.8% for the second consecutive quarter, led by a rise in online shopping.
As Westpac senior economist Michael Gordon put it:
“There was one detail of interest: consumer imports of low-value goods have skyrocketed in recent times, up 50% in the last year and up 20% in the March quarter alone. This probably reflects the impact of new entrants to the New Zealand market, and provides a counter to the weakness that we’re seeing in retail stores.”
Gordon doesn’t stray into speculation about retail market trends. But it sounds suspiciously like the Temu effect. The Chinese online shopping giant has seen enormous worldwide growth in the past year. According to the website Techreport, the Temu app had been downloaded 235 million times (as of last October).
It did sales of US$18b ($29b) last year and is targeting US$60b. Temu effectively cuts out that middleman and allows people to buy cheap Chinese goods directly from suppliers.
That’s got to be a worry for low-cost retailers like The Warehouse. The NZX-listed company has blamed tough economic conditions for its recent woes. But when people look to cut costs, that often means buying cheaper goods. In the past, The Warehouse has done quite well in recessions. At the peak of the GFC, from September 2008 to October 2009, its shares rose 37%.
I’m sure the issues at The Warehouse are complex but this big structural change in the way people are shopping for cheap Chinese-made goods can’t be helping things.
This will be an interesting piece of GDP data to watch in the next year or so.
Exports hit new high but China worries
We could probably do with importing a bit less of that cheap consumer junk. New trade data released on Monday showed New Zealand’s exports push beyond $7b in May, a new record for any month.
The trade balance for May was a surplus of $204 million, Stats NZ said. The previous record for any month’s total exports was $6.95b, in May 2023.
This is pretty good news, although with the currency account deficit stretched to worrying levels (6.6% of GDP), we needed it.
Unfortunately, the exports were undercut by a 0.6% rise in imports to $6.95b.
The export record was underpinned by strong growth in the United States, particularly for wine and beef, reflecting the strong economy there. And we got there despite a fall in exports to China – down $231m or 12%, with the biggest falls in meat and edible offal.
Beef exports to China were down 45% on the year before but were up 21% to the US.
Imports from China were up $36m or 2.6%.
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.
To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. 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.
Fonterra’s shares and units have performed strongly over the past 12 months.