It wasn’t exactly Winston Churchill rallying the nation in 1940, but Prime Minister John Key chose to open his post-Cabinet press conference yesterday with a curious little pep talk about the resilience of the New Zealand people. Through the Global Financial Crisis and the Christchurch earthquake, we had kept on being resilient, and now we were ‘needing to back ourselves against the latest challenges.’ As for the economy, well…. construction in Christchurch and some exporters were doing OK. It was a picture of respectable growth, bloodied but unbowed. Better than some. Despite dairy prices and uncertainties in China and Greece, we needed “not to talk ourselves into a gloomy mindset.”
Hmmm. If things were really doing OK to pretty good, thanks… one has to wonder why the Reserve Bank is poised to cut interest rates again on Thursday morning – some are predicting by as much as 50 basis points – in order to stimulate a faltering economy. Let’s not talk each other into a gloomy mindset – but we do have the worst dairy prices for a decade, business and consumer confidence is falling, the currency has lost 25% against the US dollar since last year… gosh, remember how only a few months ago Key was touting the strong dollar as evidence of the world’s faith in our strong economy? Well, yesterday he was saying how good a weakened dollar was for our exporters. Clearly, the Reserve Bank’s imminent interest rate cut – which will almost certainly push our currency down further, to a point where it is going to really start hurting at the petrol pump and for Kiwi travellers – was the main reason for Key’s pep talk.
Elsewhere in the world, the likes of Bloomberg News are tying New Zealand’s current misfortunes to the deteriorating situation in China. In the immediate wake of the GFC, it had been demand from China – rather than our native resilience – that had kept our economy afloat. Now the reverse conditions apply. According to Bloomberg columnist William Pesek a couple of days ago:
That dynamic [of slowing growth in China] explains why commodity-currency nations Australia and New Zealand are under pressure to slash interest rates. Both the Aussie dollar and the kiwi tumbled to multi-year lows Thursday after fellow commodity exporter Canada eased monetary policy. Meanwhile, waning Chinese demand has resulted in falling global prices for everything from oil to metals to milk. Those problems will be amplified if China begins exporting deflation to the region.
In the face of such problems, our fragile dollar has fallen further, faster against the greenback than the Mexican peso or the Canadian loonie. And uh-oh, some analysts are even predicting there may be de-leveraging among assets, such as housing:
New Zealand’s currency declined to its lowest in five years after prices at an auction of milk — the nation’s major export — fell. Weaker prospects for dairy prices are an economic headwind, the nation’s central bank said when it cut rates last month.
“Growth momentum across commodity economies remains weak, and outright growth is likely to slow further,” said Atul Lele, who manages $2 billion as the chief investment officer of Deltec International Group from Nassau, Bahamas. “That may ultimately lead to de-leveraging across housing and other asset classes, all necessitating increasing monetary stimulus.”
So, rather than treating it as fuel for further house price hikes in Auckland, one could just as easily see the Reserve Bank’s interest rate cuts as being a stabilising action – a means of keeping up economic demand and growth in order to stave off the hard landing for house prices that (as it was warning only a few months ago) could well de-stabilise our entire economy. Not that one wants to talk oneself into a gloomy mindset.
As an export nation, New Zealand is now unhealthily dependent on the economic fortunes of China – not as much as we used to be dependent on Britain, before its entry to the European Common market, but close to it. Again, this explains why Key’s other odd little pep talk at yesterday’s press conference was about economic conditions in China. Why, Finance Minister Bill English had just returned from China and things over there looked better to him when he left, Key said, than they had before he arrived! China too, had its problems with its sharemarket and with slowdown in growth but hey, English had found many reasons to be positive. Consumer demand for our kiwifruit was still good. There was unused capacity here and there.
Good for English, because positivity about China is pretty thin on the ground. As William Pesek of Bloomberg News also pointed out the numbers behind China’s claimed 7 percent GDP growth rate, rising middle-class incomes and a pickup in credit are deceiving.
For starters, China’s second-quarter performance was pumped up by a stock bubble that’s now losing air. Financial-sector growth combined with government stimulus (and some creative accounting, of course) to boost gross domestic product. Financial services alone surged 17.4 percent in the first six months of 2015, a dynamic that helped offset a weak real estate market. But, given the recent stock rout that wiped out almost $4 trillion in market value, it should be obvious this isn’t a durable source of growth. Meanwhile, China’s housing slowdown is a major deflationary event. Real estate has been China’s biggest growth engine since the 2008 global crisis. Now, it’s in negative-growth territory. And that’s having knock-on effects for local-government finances and vital sectors like manufacturing.
Yikes. And it gets worse.
But there’s another deflationary force confronting President Xi Jinping: the fading of China’s credit super-cycle, in which people and businesses tried to borrow their way out of debt problems….Let’s say China actually did grow 7 percent between April and June. That’s still markedly slower than the 12 percent jump in corporate and household borrowing last month. All that borrowing limits the ability of companies to increase employment and consumers to spend. Outstanding loans for companies and households are now a record 207 percent of GDP (and growing fast), compared with 125 percent in 2008.
While the government is sure to do more to stabilize growth, “we are far from certain that China is about to exit the deflationary dynamic of recent years,” says Andrew Batson, the China research director at consulting firm Gavekal Dragonomics. While China’s consumer prices rose 1.4 percent in June, producer prices plunged 4.8 percent.
This is the real and worrying global backdrop for the Reserve Bank rate cut on Thursday. The Reserve Bank is looking at the systemic reasons for China’s slowdown in growth, and the capacity of that slowdown to weigh on the entire Asia –Pacific region. Deflation, not inflation, is now uppermost on the region’s mind. Finally, and with that in mind, I asked Key yesterday, whether he had any general worries about the demand side of the New Zealand economy. [The question is at about 28.25 here]
No, Key wasn’t. Demand in many areas still looks “pretty strong”. He then spent most of the rest of his answer talking about demand within the Chinese economy – a telling sign of just how much the fortunes of China and New Zealand are now entwined. Tourism demand out of China, Key concluded hopefully is still one of the areas where demand is still ‘quite strong.’ Then dangers of basing a modern economy on dairy powder and a construction boom created by a natural disaster are now coming home to roost.
Susanne Sundfør, Delirious
At 29, Susanne Sundfør has become one of Norway’s finest singer-songwriters, and “Delirious” is a highlight of her fifth album Ten Love Songs,that she released in February. While the immediate comparison is with Sweden’s beloved Robyn – and both artists have recorded albums with the Norwegian band Royksopp – Sundfor has her own distinctive voice. On “Delirious” she’s offering a giddily chilly vision of romance : ‘I love the game/I love the pain/ come into my arms / delirious…” Not that we sturdy, sensible, resilient types here in New Zealand would normally have much truck with that gloomy Scandinavian mindset…