Over the horizon
What will the economy look like in 2023 and 2030? If we don’t have uncomfortable discussions on affordable housing, climate change, household debt, migration and productivity, we might be no better off, writes Tom Pullar-Strecker.
New Zealand has plenty to be grateful for, of course. Strong exports mean the country is continuing to pay its way in the world, with government debt and unemployment still relatively low.
But take away the Covid crisis and our biggest economic worries appear stuck in a loop.
Low productivity growth, unaffordable housing – and, of course, fears over climate change and our ageing population – appear intractable.
Are these the problems that we will still be facing in three or 10 years’ time, or perhaps something worse?
Ganesh Nana, research director of Berl, believes three years – our parliamentary term – is too short to effect much change.
‘‘The challenges have been with us for a while and really haven’t changed that much despite the Covid situation.
‘‘The two big ones I’d put out there are the response to climate change, and inequality which is clearly related to the housing crisis or situation – call it what you like.’’
Like many, Nana is concerned that the monetary response to Covid, including the
$100 billion targeted at quantitative easing, has exacerbated the housing problem by pushing asset prices even higher.
‘‘The challenge for the next three years is to take the housing issue a lot more urgently and head-on, rather than tinkering at the edge,’’ he says.
‘‘We have done the tinkering for the last 10 to 15 years and that hasn’t worked, so I think we are going to have to look at policies that are not conventional.’’
That could involve the Reserve Bank directly funding government expenditure ‘‘whether that be to lift productivity or put roofs over people’’, he believes.
‘‘It has got to be direct intervention in a lot of things; in building houses, in ensuring developers are building houses across the market spectrum and not just at the top end, and intervention in the rental market – whether that means direct controls I don’t know.’’
Rents are clearly out of kilter with incomes and subsidised by the taxpayer through the accommodation supplement which reinforces inequality, he says.
One way or another something is simply going to have to give within the next 10 years.
‘‘Either we do it in a measured way or we go down a path none of us want,’’ he says.
‘‘From an economic perspective, the current economic situation when you are looking at house price to income ratios that are well in excess of six, is just unsustainable.’’
If there is a ‘‘business as usual’’ administration for the next three years, we will be in a worse situation at the end of it, he says.
But in regard to climate change as well as housing, it is not just what interventions take place over those three years that matter, but the ‘‘signal about what has got to happen over the next 10 years and beyond’’.
ANZ chief economist Sharon Zollner says you could take ‘‘a glass half full’’ view that if we have the same problems in three years’ time, we might not be in such a bad place.
Looking at what might be thrown up by Covid, deglobalisation, climate change, geopolitics and geological instability, if we are still talking about the same problems in three years, Zollner says she would take that as a ‘‘win’’.
‘‘You have got to be careful what you wish for with housing,’’ she says.
‘‘On balance, you don’t really want prices to go up or down.’’
A key question over the three to 10-year timeframe is what tourism will look like, she says.
‘‘Some people are saying it will bounce back incredibly fast because of pent-up demand and some people are saying it is never going to be the same again.
‘‘And there are those who say we shouldn’t want it to because of climate change.’’
If New Zealand was going to be looking for ‘‘nice to have’’ problems it would be how we could curb tourism volumes and get the most value out of it, she says.
Nana can’t see inflation making the list of New Zealand’s top economic problems in either three or 10 years.
But Zollner says that at some point the assumption that inflation isn’t a worry is going to be wrong, and it is not clear how well-placed the world will be to cope when that happens, given the levels of debt.
‘‘There is also the question of all of the cans that have been kicked down the road. What is going to happen when we drive into that pile of cans?’’
Overseas, the mess under the carpet is building up in the form of ‘‘zombie companies’’ that are limping along for now but which have no prospects of servicing their debts in the long run.
‘‘In the worst-case scenario they all fall over at once when interest rates rise, and then you have got a real recession on your hands,’’ Zollner says.
In New Zealand, the issue has more been people continuing to funnel money into housing rather than productive investments, she says.
‘‘What we know is we are seeing people taking risks they don’t understand with extremely elevated house prices and extremely elevated levels of debt, and we know those things can get you into trouble down the track.
‘‘There is no question that the short-term fix for what we are facing at the moment is increasing some long-term risks.
‘‘At some point, central banks will no longer have the ability to keep interest rates low beyond the very near term and then all that debt is going to be a problem.’’
Some countries, including the United States, already have the highest levels of inequality since the 1920s and the Covid crisis has made that worse ‘‘at a rate of knots’’, Zollner says.
‘‘The poorest, most vulnerable people have been absolutely smacked. They are the ones who work in retail and hospitality and who have tenuous job security anyway and they are the ones bearing the brunt of it.
‘‘So inequality is expanding even more rapidly than it normally does in a recession.’’
New Zealand hasn’t had quite the same growth in income inequality because of Working for Families, but wealth inequality has become more extreme, she says.
The extent to which economic and political stability go hand-in-hand might have been forgotten, Zollner says.
‘‘That is why some commentators are saying we have to get the fiscal stimulus delivered promptly.
‘‘At some point you end up in the South African situation, but you can’t keep building a bigger and bigger fence with more and more barbed wire.
‘‘No matter how much money you have got, we are all in this together to some extent.’’
Infometrics economist Brad Olsen agrees productivity growth, unaffordable housing, climate change and our ageing population will still
be ‘‘front and centre’’ in three years’ time.
‘‘The question is whether we will have actually made any progress,’’ he says.
‘‘Housing is an interesting one because although consent numbers have gone well, the Government’s ability to support and intervene in the market has been woefully inadequate.
‘‘The challenge is going to remain whether we keep talking about some of the inequalities that exist in New Zealand or make some change on them.’’
Talk so far had failed shift the dial, and in three years’ time New Zealand would either be in the exact same position or more unequal, he forecast.
Given the likelihood of higher unemployment, another of the big questions facing New Zealand in three years will be the country’s skills and migration settings, he says.
‘‘That is going to be probably quite an uncomfortable conversation because we always try and put it off.
‘‘But we need to have a serious conversation about who is coming into New Zealand, what skills they are bringing and what support needs to be provided to get Kiwis into work.’’
In three years and maybe even in 10 years, New Zealand would be fretting about debt; ‘‘where it is, what we are spending, what we want to achieve and how we claw it back’’, he says.
If we make the books add up, we can still expect a wider conversation about New Zealand’s place in the world in 10 years, Olsen forecasts.
‘‘Over that time we are going to see massive changes in the geopolitical scene and the wider global economy.
‘‘But by that stage the importance of Asia will be well-cemented and you may well be seeing signs of Africa really starting to move ahead, so we will want to keep our eyes wide open.’’
By 2030, New Zealand will have had to address the issues surrounding an ageing population.
‘‘Or we will have buried our heads in the sand to such as extent that we are just going to have to pay through the nose for it.’’
Is there anything we can do to speed up the development of policies to deal with issues that we know aren’t going away?
Olsen notes governments often shy away from sharing free and frank advice from officials.
‘‘Perhaps we need to flip that on its head and say, ‘we as a country need to have some free and frank discussions’ – not about the small policies but about those larger and more long-term shifts.’’
‘‘The poorest, most vulnerable people have been absolutely smacked.’’ Sharon Zollner ANZ chief economist