It’s Ours. Fiscally sound and seeking growth …we need more infrastructure Jarrod Kerr Connect with KiwiEconomics on: Chief Economist @kiwieconomics inner.kiwi/commentary/ kiwieconomics@kiwibank.co.nz
We are growing well, with a boost to come. Keeping our finger on the impulse, we get a good lift from the Budget(s). Annual average % change 5 Forecast 4 3 2 Impulse is delayed but still large 1 0 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly Treasury Budget Update RBNZ May MPS Kiwibank 2
Keeping your finger on the impulse. We get a good, delayed, lift from the Budget(s). % of GDP % of GDP 10 4 Forecast Forecast 5 2 0 0 -5 -2 -10 -4 2009 2011 2013 2015 2017 2019 2021 2023 Year ending 30 June Fiscal impulse (RHS) OBEGAL CAB 3
Inflation is coming, we hope. The Treasury is most conservative, even behind the RBNZ, and the mighty Kiwibank. Annual % change CPI I Inflat ation 3.0 Forecast Treasury has the strongest profile 2.5 2.0 RBNZ: June 1.5 2021! 1.0 0.5 0.0 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly Treasury Budget 2019 RBNZ May MPS Kiwibank 4
Govt net debt has peaked, already. But why are we so obsessed with 20% (of GDP)? We don’t need to be… % of GDP $billions 80 32 Forecast The 20% target 70 28 already reached 60 24 50 20 40 16 30 12 20 8 10 4 0 0 2009 2011 2013 2015 2017 2019 2021 2023 Year ending 30 June Net core Crown debt % of nominal GDP (RHS) 5
Everything we need to know… Interest rates are low, very low, and will remain very low for a very long time. Interest Rate Curves % (Swap Rates) 3.0 Rate cuts We’re well are priced below 2%! 2.5 US US+1 2.0 NZD AUD 1.5 GBP 1.0 0.5 EUR JPY 0.0 -0.5 3m 1yr 2yr 3yr 4yr 5yr 6yr 7yr 8yr 9yr 10yr 6
Term interest rates are falling… … as central banks turn dovish to protect asset values (inflation). InterestRate on 10-year Goverment Bonds % 9 Kiwi 10s Aussie 10s 8 US 10s 7 GER 10s US rates are JPY 10s now above ours. 6 That’s a first! 5 4 3 2 1 0 -1 99 01 03 05 07 09 11 13 15 17 19 7
We have interest rates going back 5000 years… … we haven't seen lower levels ever, even when the Egyptians leveraged their pyramids. % Fall of Rome WWI WWII Jesus 2020 1970 25 World Population Growth 20 Average Interest Rate 15 1920-40 spike 10 1800s ~5% 1985 5 1950 0 Black Death -5 8
The RBNZ are likely to cut again, and maybe again… Market traders always look to the next move, and the next. RBNZ OCR and Market Pricing % 2.00 RBNZ central forecast May'19 Current market pricing Kiwibank 1.75 Market pricing downside The RBNZ have given Kiwibank DOWNside risk 1.50 us a 55% probability of another cut to 1.25% 1.25 Market traders will play the risk of more. 1.00 0.75 0.50 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 9
So policy remains cleverly accommodative… RBNZ Policy Stance and Interest Rate Curve RBNZ OCR versus Neutral Estimate % Bps Bps, inverted -300 250 Easy policy, steepens 9.0 the curve. 200 -200 8.0 150 -100 100 0 7.0 50 100 0 6.0 200 -50 RBNZ policy stance (lhs) 5.0 Tightening policy 300 -100 above neutral, NZ 2s10s swap curve (rhs) flattens the curve. 400 -150 4.0 00 02 04 06 08 10 12 14 16 18 3.0 RBNZ Forecast Output Gap Neutral rate 2.0 3.0 3.0 OCR RBNZ May'19 1.0 (f) 2.0 2.0 May'18 00 02 04 06 08 10 12 14 16 18 Feb'17 1.0 1.0 … and the RBNZ continues to 0.0 0.0 forecast a move above potential (trend) growth. -1.0 -1.0 -2.0 -2.0 10 -3.0 -3.0 00 02 04 06 08 10 12 14 16 18 20 22
Labour pains: firms are complaining of labour costs/shortages, and Labour policies 38869 38930 38991 39052 39114 39173 39234 39295 39356 39417 39479 39539 39600 39661 39722 39783 39845 39904 39965 40026 40087 40148 40210 40269 40330 40391 40452 40513 40575 40634 40695 40756 40817 40878 40940 41000 41061 41122 41183 41244 41306 41365 41426 41487 41548 41609 41671 41730 41791 41852 41913 41974 42036 42095 42156 42217 42278 42339 42401 42461 42522 42583 42644 42705 42767 42826 42887 42948 43009 43070 43132 43191 43252 Business Confidence Net % Net % 80 80 ANZ general confidence 60 NZIER's QSBO general business conditions 60 40 40 20 20 0 0 Labour, and Labour -20 -20 -40 -40 -60 -60 Source: ANZ, NZIER -80 -80 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Source: NZIER Agriculture, or Wellingtonians? GDP and expected own activity % yoy Net % 8 60 50 6 40 30 4 Business confidence should be supported by: 20 10 2 Abolition of CGT, and nothing unheard-of 0 -10 0 in the tax group. -20 -30 -2 GDP production (lhs) Lower interest rates. -40 Own activity expected (rhs, adv 1 qtr) Source: Statistics NZ, NZIER QSBO -4 -50 11 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
The labour market is tight. The nominal economy is bigger, wages are starting to rise, and unemployment payments are fewer. More tax in and less welfare out, means a better budget position. Employment and GDP Labour Force Participation and % % % change yoy Unemployment 12 72 8 8 70 6 6 10 4 4 68 8 66 2 2 6 64 0 0 4 -2 -2 62 GDP Unemployment (lhs) 2 -4 -4 60 Employment Participation (rhs) Source: Datastream, Kiwibank Source: Statistics NZ 0 -6 -6 58 1994 1998 2002 2006 2010 2014 2018 1988 1992 1996 2000 2004 2008 2012 2016 13
We need to see wage growth first… … because inflation has been too tame for too long. Private Sector Labour Cost Index % YoY 4.0 Kiwibank 3.5 Forecast 3.0 Minimum wage hikes 2.5 2.0 1.5 Source: Statistics NZ, Kiwibank 1.0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 14
There are 3 Ps to Property: Population Preference Policy
Our housing market is well supported. The 3 P’s of property are: Population – we’ve had a massive migration boom, that hasn’t ended. Policy – the RBNZ has tightened lending standards with one hand, and lowered interest rates with the other. Bank capital hikes are forthcoming. But CGT is gone (under Jacinda Ardern). Preference – our dreams for housing have adapted to undersupply, and moved towards high(er) density. 16
Population: we’ve had a mammoth migration boom. % 000s 60 30 Net Inflow RBNZ (F) HP KiwiBank (f) 40 20 20 10 0 0 -20 -10 00 06 12 18 17
Population: does not peak. Contribution to population growth (annual %) 2.5 Natural increase Migration (other) 2.0 Migration (30-49 years) Migration (15-29 years) 1.5 Population 1.0 Our population estimates do not peak, in our 0.5 lifetimes. 0.0 Source: RBNZ -0.5 Mar 00 Dec 00 Sep 01 Jun 02 Mar 03 Dec 03 Sep 04 Jun 05 Mar 06 Dec 06 Sep 07 Jun 08 Mar 09 Dec 09 Sep 10 Jun 11 Mar 12 Dec 12 Sep 13 Jun 14 Mar 15 Dec 15 Sep 16 18
Policy: Macropru policy has restrained investors Residential investor mortgage lending share “We find that the LVR restrictions have % of total residential lending 40% significantly improved the resilience of the Oct 2016: Property Investor Oct/Nov 2015: Auckland banking system.” RBNZ LVR Review 2019 LVRs rolled out nationwide Investor LVRs begin (30% (40% deposit) deposit) 35% Lending was a little too aggressive over 30% Jan 2018: Property Investor LVRs eased a touch (35% deposit) 2014-16. 25% Now lending is safer, but slower. Source: RBNZ 20% 14 15 16 17 Residential mortgage lending share by borrower % of total residential lending 60% 20% Investor 55% 18% Other owner occupier 50% First home buyer (RHS) 16% First home buyers have increased as a 45% percentage of total. 40% 14% 35% 12% 30% 10% 25% Source: RBNZ 20% 8% 19 14 15 16 17
Perference: is moving to higher density (globally) 20
Auckland benefited from foreign interest. Foreign buying comes and goes, and then comes back again. REINZ house price index 3-mth annual % change 35 35 New Zealand 30 30 Hawkes Bay 25 25 Southland Auckland 20 20 Manawatu-Whanganui 15 15 10 10 5 5 0 0 -5 -5 -10 -10 Source: REINZ -15 -15 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Chinese buying had a large impact on Auckland, as well as Sydney, Melbourne, Vancouver, Singapore and London. English Property Rights 21
The regions are playing catch up… As some Aucklanders leave. House Price Index: Regions play catch-up Dec 2009 = 1000 2,300 Auckland 2,100 Hawke's Bay/Gisborne 1,900 Wellington Southland 1,700 Manawatū-Whanganui 1,500 1,300 1,100 900 700 Source: REINZ 500 2009 2010 2011 2012 2013 2014 2015 2016 2017 22
We like playing with models. Here’s ours… Change in Housing Demand and Supply Number of Dwellings 45,000 40,000 Demand Supply 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Sources: StatsticsNZ, Kiwibank 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 23
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