A year ago, ANZ chief economist Sharon Zollner told the Waikato Business Summit: “It’s getting really scary out there.”
This year, she told them: “Lamborghinis are sold out.” During that 15 month period, after staring at the brink, New Zealand has returned to something approaching normality, albeit with a major impact on tourism. The Reserve Bank was picking a deflationary shock as recently as November, when it thought people and machinery would be underutilised in the style of the GFC, Zollner said. By February, “they had decided it’s more like 2014, which was halfway through a business cycle”.
“It is very clear this is a much less deflationary shock than the Global Financial Crisis was. It’s more like a war in that it’s had really negative impacts on supply as well as on demand, but central banks globally have just doubled down when that became apparent.”
When asked, households say this is not a good time to be buying a major household item. However, they are actually out there “buying cars and e-bikes and jetskis” – along with Lamborghinis.
“We are seeing a bit of a ‘risk, schmisk’ attitude out there – not just in New Zealand, globally – towards investment and that’s what happens when you cut interest rates to record lows. It’s designed to encourage people to take risks, and people are doing that with gusto.”
In comments echoed later by Finance Minister Grant Robertson, she said firms are saying they’ve got the same problems as before Covid, including not being able to find staff.
Grant Robertson at Union Square- “It’s busy in the Waikato at the moment.”
“Covid appears to have brought about the living wage on a number of occasions,” she said, citing an anecdote about a hotel paying $27 an hour rather than $20 in order to get staff. The labour market is tight and, because the economy is distorted, workers tend not to be in the right places or with the right skills. “You can’t turn an unemployed barista from Te Anau into a plumber in Napier quickly.”
She said the Government is doing what it can to help, including the apprenticeship scheme, but school leavers have a range of options. “So we would expect more wage inflation than that unemployment rate would normally suggest.”
Meanwhile, house prices “absolutely” could fall, Zollner said. “The house price index is up 26.7 percent in the last 12 months and this is in a year when migration is zero and household incomes have taken a hit, so you’ve got to question the sustainability or sanity of that.”
The housing investment tax changes raise the odds on investors selling when mortgage rates rise. “The incentive to borrow up to the hilt if you are an investor has now reduced significantly. We have seen investors step back a little bit in the auctions but not much sign that millennials are stepping back. They are, I think, a bit brainwashed by this story that New Zealand has a housing shortage and is never going to fix it, which is a valid viewpoint, but they’ve incorrectly taken from that that means house prices can’t fall and they’ll just keep going up, and that is not true.”
Supply constraints are affecting the construction industry, which accounts for about 10 percent of employment, she told the audience at Wintec’s Atrium. “The construction cost inflation is going to be spectacular over the next six months.”
Robertson, whose trip to Hamilton also took in visits to Ruakura and Union Square, addressed the audience the week following the Budget, which he said continued to be based on the wellbeing approach.
“One of the good pieces of news out of the Budget is that New Zealand’s wellbeing overall survived pretty well through Covid. And I think one of the significant reasons for that was our stocks of social capital, the trust there was in one another, and the trust that we have in institutions of governance.”
He said wellbeing was still significantly challenged among some New Zealanders, particularly sole parents, the unemployed and those with sickness or disability. Barriers around health and education continue to be an issue for Māori and Pacific people.
Sharon Zollner presents at the summit
“What we do know is that New Zealand has come through Covid-19 remarkably well, when we compare ourselves to the rest of the world.” That includes unemployment lower than the OECD and Australia.
“It is an interesting time to now be here when people are back to their pre-Covid number one issue they raised with me, which is access to skilled labour. That’s not where we thought we would be a year ago; we thought we’d be having a discussion about who they’d lay off rather than who they could take on.”
He said in the face of volatility, the Government would take a balanced approach to the management of the economy. “Investing money, making sure that we’re putting it where it’s needed the most, but also being aware that we want to bring our levels of debt back down, and we want to work our way back into surplus, in order to manage our way through that uncertainty and volatility.
“I do think and I’ve been saying this publicly over the last few weeks that we do need a conversation in New Zealand about public debt, and what public debt is for.” He said New Zealand had traditionally targeted a much lower percentage of net core crown debt than the current levels. “And that is because New Zealand is a small country, we’re prone to natural disasters, we’re prone to the effects of economic shocks. But when we are investing in the productive economy, when we are investing in the infrastructure that we need, managing that against our very strong balance sheet is okay, so long as the trend continues to be downward.”
Robertson said the result of changes in housing, including $3.8 billion towards infrastructure and changes to interest deductibility, would see house price inflation drop to around 1 percent in a year.
“New Zealand needs to get itself away from growth being based on selling houses to each other and the growing population, and this Budget is set up to try to do that.”
In a return to the theme of the year since the last Business Summit, Robertson said nothing is more important this year than rolling out the Covid vaccination programme. “And so here’s my plea to you as business owners and those who lead in your business. Please be a part of that vaccination programme, support your workers to be vaccinated. From July onwards, we’re moving into the mass vaccination process. That will require a high level of cooperation and collaboration. We have never done a campaign like this before. And so we are very, very keen to get your help in making sure it happens.”
Robertson also visited Ruakura and office building Union Square, which is rapidly taking shape in central Hamilton, and commented on the level of activity in the region. “It’s pretty busy in the Waikato at the moment, which is a fantastic sign for this region and for Hamilton as well, to see so much activity, so much interest in both the good quality developments here in the CBD, but also in the surrounding areas.”
