Week in Review - Economic and Infrastructure Outlook

Business owners need certainty around when they will be able to operate or expect customers. A lack of certainty cuts to the core of confidence, and poor confidence is an economic killer.

Welcome to my monthly outlook for October 2021 on how New Zealand's economy is doing.

→ A roadmap to recovery?
→ Strong economic growth - but at what cost?
→ Official Cash Rate raised
→ Flawed Interest deductibility process
→ What is happening around the world
→ The Evergrande crisis in China
→ Running on empty




A roadmap to recovery?

 

We needed a clear roadmap to bolster New Zealand’s economy. However, on 5 October, the Government delivered a maze. The lockdown restrictions in Auckland will be eased over three confusing phases, but with no timelines or deadlines provided.

This lack of a clear pathway will seriously undermine business confidence, and not just in Auckland. What is needed is a plan.

More and more businesses, especially those unable to open their doors to customers, say they can’t go on pumping their own hard-earned personal savings into keeping their businesses afloat amid this kind of uncertainty.

If businesses fail as a result of the ongoing lockdown, we will see many more thousands of people losing their jobs with all the social and health costs that come from being unemployed. This will also mean a long-tail cost to taxpayers as a result of supporting people through the Jobseeker benefit. There are approximately 50,000 people who have stayed on the Jobseeker benefit since the first lockdown in March last year.

On the other hand, National's plan 'Opening Up' has clear and defined benchmarks for opening our economy up combined with comprehensive health measures to increase vaccination rates, address infrastructure deficits, and prepare our workforce. This is the certainty Kiwis need and deserve.

You can read more here and more on National's plan here.



Strong economic growth – but at what cost?

 

The GDP figures to June released mid-September look good on the surface, but they hide an economy where the cost of living is rising and borrowing is increasing.

The figures show that, prior to the latest lockdown, New Zealand’s economy continued to grow, despite the constraints of Covid. While 5.1 per cent annual GDP growth is strong, it’s important to remember the thief in our wallets, inflation, is also running at 3.3 per cent.

The risk is the debt-fuelled recovery continues to push up inflation and increasing the cost of living for Kiwi households.

National believes in supporting businesses to grow and innovate. That is the only way to create real jobs and grow incomes for Kiwis.

You can read more here.



Official Cash Rate raised

 

The move by the Reserve Bank (RBNZ) on 6 October to raise the Official Cash Rate to 0.5 per cent shows the bank has been forced to make the risky move, despite two major New Zealand cities still being locked down.

Obviously, the RBNZ has seen that the cost of living is rising quickly and its hand has been forced. This has been partly exacerbated by wasteful, untargeted spending from the Government on matters entirely unrelated to the Covid response.

Mortgage holders and businesses are now set to face rising interest costs at a time when they can least afford it.

You can read more here.



Flawed interest deductibility process

 

The Government has made a fundamental change to a decades-old tax policy so that owners cannot deduct interest expenses from their mortgages on residential properties. The new rules – renamed the Interest Limitation Rules – came into force on 1 October, yet an explanation as to how they would work in practice was only provided just days beforehand.

National believes the process is flawed and we’re not alone. Inland Revenue, the Government’s own tax expert, thinks it’s a terrible policy that will increase rents, cause supply to fall in the long run, increase compliance and admin costs for a quarter million taxpayers, and that it will erode the coherence of the tax system.

The Government shouldn’t be introducing fundamental changes to the tax system without going through a proper select committee process and giving the public the chance to have their say before finalising the legislation. It’s not too late to make a submission (open until 9 November).

You can read more here.



What is happening around the world?

 

In my last newsletter I talked about developments in China and the possible flow-on trade implications for our exports to both China and Australia. An important development is what has happened in respect of the Evergrande debt crisis, which I cover separately below. Debt issue is a significant issue in China, as much of it is at a local government level and hard to determine the real scale of borrowing.

The US is also grappling with the issue of debt. The result of running budget deficits is that they have to periodically raise their debt ceiling. This of course provides a significant opportunity for political wrangling. The Senate on Thursday 7 October approved a short-term deal to increase the federal government’s debt ceiling until early December. In the meantime, equity markets have been affected with this lack of agreement.

In Europe and the UK, the issue capturing most of the headlines is energy costs. The price of gas on the European market has nearly tripled since the beginning of September, although President Putin has said he may increase gas supplies into Europe. The UK petrol crisis relates to the question of immigration, which was of course partly the driver for BREXIT. With over 100,000 truck drivers required, the issue is where does the UK find them as most of the UK’s truck drivers come from Europe, and many returned home when Covid hit.

Closer to home, Prime Minister Scott Morrison made the important announcement that Australia will open up its international borders to those fully vaccinated in November. Once states get to the rate of 80 per cent fully vaccinated, then caps on arrivals will be lifted and vaccinated people/permanent residents will be able to quarantine at home for seven days.



The Evergrande crisis in China

 

Chinese property developer Evergrande Group dominated headlines in late September as it failed to make interest payments – the group owes US$305 billion. Financial markets have been preparing for its possible collapse, with some calling it a ‘Lehman moment’, referring to the American bank whose collapse kicked off the 2008 Financial Crisis.

If not resolved, it threatens to become the largest debt default by a company in Asia, which could jolt investor confidence across markets globally.

China has relied on investment in property and infrastructure for decades to drive its economy. Every year it builds nearly 15 million new homes, along with thousands of kilometres of roads and railways – a need driven by the largest population migration of workers in history (500 million people from rural to urban China over the past three decades). The property sector accounts for 30 per cent of China’s GDP, compared to 6.7 per cent here in New Zealand.

Despite this, China appears to have over-invested in property and infrastructure: an estimated 20 per cent of housing remains vacant and many ‘ghost cities’ have arisen across the country.

You can read more here.



Running on empty

 

Transporting NZ (formerly the Road Transport Forum NZ) has been watching the mayhem in the UK as petrol stations and supermarkets run low on supplies, and says this could be the situation here before too long. How does this relate to NZ? We too are running on empty with a dire shortage of skilled workers, and not just truck drivers.

I am aware of multinational companies saying our environment is too difficult to work in due to the restrictive border settings and requirements for MIQ. Many are considering closing down their NZ operations and running them from Australia instead.

Other companies, including those in our tech sector, are telling me they are planning to relocate some of their operations offshore, simply because they cannot get the skilled staff they need here, nor through MIQ.

A further example is the NZ bloodstock industry which is at serious risk if buyers cannot come here in January and February next year on buying trips. Their normal business practice is to come and view the horses for two days, attend the one-day sale, place their orders, then leave.

I am also hearing from engineering businesses that are losing customers and contracts as they cannot meet their commitments to deliver components on time as a result of staff shortages.

The rest of the world is not sitting around, waiting to reopen its borders and re-establish trade, as New Zealand is doing.

Kind regards

Andrew

 

Andrew Bayly
MP for Port Waikato
National Party Shadow Treasurer
Spokesperson for Revenue, Infrastructure and Statistics

You can contact me here.