The puzzling problem with the NZ economy
The only times the Reserve Bank has slashed interest rates by half a per cent or more: after 9/11; during the GFC; after the Canterbury earthquakes; and now with Labour/ NZ First/ Greens running the economy, at a time when our export prices are at historically high levels and we should be doing well.
It is puzzling and makes most sense only if the Reserve Bank sees a bleak picture ahead. I hope they are being overly pessimistic.
The Government continues to add costs to business, it’s created massive uncertainty in many areas of the economy and has demonstrated incompetence in its management of projects.
The Reserve Bank Governor’s talk of negative interest rates and potential unconventional monetary policy — read: Printing money, “watering the milk” or quantitative easing — is deeply concerning. One or the other have been employed for a while now in Europe, Japan and the US and we have been fortunate to avoid them, with the deep
complications and distortions they cause. We should strive to keep it that way.
One thing the Government can do in these circumstances is have a clear focus on economic growth. Our primary criticism of the Government’s economic approach is there is no clear growth plan. Budget 2019 was primarily focused on spreading the wealth, lots of new spending, much with very poorly defined outcomes, but it said very little about how we make more of it.
The main Budget initiative under the headline of Transforming the Economy was a $1 billion subsidy for rail. Truly bizarre.
The Governor has mentioned increased investment in infrastructure, while money is cheap. Cheap money does mean more can be done, sooner. But the quality of spending remains the key.
The Government’s primary action in the transport infrastructure space has been to cancel or postpone a dozen major projects, several of which were ready to go, and to replace them with projects that won’t be ready to go for some time.
So, less investment in infrastructure will occur in the next couple of years. Budget 2019 showed more than $3 billion has been shaved off projected infrastructure spending, since predictions only six months earlier.
This has been driven by ideology: a point blank refusal to build new roads. Phil Twyford, the Transport Minister, believes the country has “over invested” in roads; his associate Julie Anne Genter talks of not giving in to “car fascists”.
The number of people on the benefit has increased by more than 15,000 since the election. I genuinely worry for the future of our workers who have been working on our transport infrastructure. What will they do now that there’s no work in the pipeline for them?
Business confidence is the other critical area. A big cut in interest rates reduces incomes for savers, especially retirees. But lower interest rates, in theory, also lead to increased investment and spending, because money is cheaper. The expectation is the increased investment outweighs the reduced incomes for savers.
Our worry is that, with business confidence through the floor, the expected increased investment might not materialise.
The drivers of low confidence are that the Government continues to add costs to business, it’s created massive uncertainty in so many areas of the economy and, finally, it has demonstrated incompetence in its management of projects, most famously KiwiBuild.
This country needs confidence restored, the economy needs to be revived, we need to get on with building infrastructure and be more aspirational.
With business confidence through the floor, the expected increased investment might not materialise.