Ruthlessly productive
Inflation stands at the crossroads and lifting our game is the solution, Cameron Bagrie writes.
The good news is that the economic expansion is eight years old, unemployment is falling and the Government coffers are allowing some redistribution of the economic spoils.
The bad news is that New Zealand – and the global economy – is statistically due to hit a pothole, and the expansion has been a lot about more bums on seats in the country, as opposed to driving wealth through productivity.
If the current economic expansion is going to endure and redistributive aims met, if progress on issues such as housing are to be achieved, inflation remain tame, and the benefit of growth accrue via incomes, productivity growth needs to lift – a lot.
Economic expansions come to an end for a number of reasons. A nasty build-up of imbalances (high debt, valuation excesses, poor investment decisions) can require a visit from the Grim Reaper.
Being slain by policymakers is another. New Zealand got slaughtered in 1997 and 2007.
Global events have had a big say too, and have tended to be the coup-de-gras on a clean out in New Zealand every 10 years: 1978, 1988, 1998, and 2008 were all bad years.
We experienced an oil shock, equities shakeout, the Asian crisis and the global financial crisis (GFC).
Those who have been around for a few cycles know that New Zealand, and the global scene, is due for a correction. It doesn’t mean it’s inevitable, but we’re on notice.
Too much attention is paid to cyclical (near-term momentum) indicators as opposed to the structural ones. The structural ones need close attention: balance sheets, excesses, valuations. Whether the kitty jar is empty or has a buffer.
Households have more debt now than they had prior to the GFC. Rent yields have fallen – and in many regions are below the cost of capital.
Productivity growth is lacklustre. Household savings are poor.
Dumb stuff happens late in the business cycle. Firms make mistakes as complacency sets in.
We have some red lights flashing but it’s a long way from the smorgasbord we’ve seen in previous cycles.
Net external debt as a share of GDP has fallen, from 85 per cent to 53 per cent of gross domestic product. That’s moving from dreadful to poor but it’s still progress.
Credit growth has slowed, as has house price growth, at least in the most heated market. Bank balance sheets have improved. The punchbowl was taken away just as the party started to really rock.
That’s a good thing. It lowers the risk of a shakeout. Volatility is not business friendly.
A lot will now depend on the trajectory for inflation. Where inflation goes, interest rates will follow.
With the housing market going nowhere as investors weigh up prospects for shifts in government policy, yields incredibly low and debt high, a material push higher in interest rates would be lethal.
We’re not running the economy hot enough to get inflation up sharply. Subdued house price gains and credit growth are incongruous with a hot economy.
The coming years are shaping up as a battle royal between two contrasting pressures on inflation.
Will disinflationary forces from technology and the global scene continue to keep inflation low? Or will shifts in economic direction quicken the inflationary pulse?
Protectionist policy – with real fears globally of trade wars - is inflationary. Who pays? The end consumer. Reducing barriers may have offshored jobs but cheaper goods put money in pockets.
Domestic inflationary pressures have historically been correlated to labour costs. Wage pressures are building as skill shortages mount.
Wages should be accelerating at this juncture of the cycle. It’s natural and a positive. The desire to push wages up is admirable too. Teachers especially deserve a lot more.
But there is no free lunch. If productivity does not match, we’re going to see pressures on inflation (higher interest rates), margins pressured and more cost in the delivery of public services.
For the economic expansion to endure under the new policy prescription, New Zealand needs a ruthless obsession with lifting productivity.
You need to generate a productivity earned dollar before you can redistribute one.
Cameron Bagrie is the managing director of Bagrie Economics. He is a former ANZ chief economist.
''We're not running the economy hot enough to get inflation up sharply.''