A softening of the housing market, falling dairy prices and potential weakening of the Chinese economy do not bode well for New Zealand

There were knowing smiles among economists when earlier this year John Key set the election date a couple of months early. He told us it was because there were various international gatherings that the prime minister had to attend. But it also seemed possible that economy growth would be weakening at the end of 2014. The main forecasts – the ones reported – did not show it, but the downside of a weaker economy was more likely than the expansionary upside. Better, a political strategist would advise, to go early.

And, yes, economic growth is slowing down. Whether that will be evident in the statistics by the end of the year is not certain, although some people are already feeling it. One spluttering driver is that of the softening housing market; a reminder of just how dependent we have been on it for domestic economic stimulation.

Perhaps even more depressing is the falling dairy prices. Accountant Pita Alexander has published estimates of the resulting change in dairy farmer incomes. If they cannot increase production he suggests that farmers would have to cut their consumption by a quarter together with reducing working expenses and investment, and yet they would still be borrowing. Their reductions flow into the whole economy.

The downsides which economists had been thinking about earlier in the year included a weaker Chinese economy. There is no sign of a financial crash there but lower dairy and timber prices and less speculative house purchases may well arise from an economic weakening there. We can overlook how dependent New Zealand has become on the Chinese economy and the surrounding Asian economies. That Chinese economy remained strong during the world recession that followed the Global Financial Crisis protected us from the recession’s worst effects.

But there was a second reason for our relative success – Michael Cullen’s earlier stewardship as Minister of Finance, especially his paying off government debt. That gave the Key-English government the room to cut income taxes, thereby sustaining economic demand and employment through the world downturn. Unfortunately there was only so much in the kitty, and it has all gone. During the election campaign, Key was desperate to promise further income tax cuts, but Bill English must have told him they were not affordable; Key ended up with a mealy-mouthed conditional promise.

English must have been very aware that while the government's accounts are near the point where there will be no net new borrowing, the current statement of financial position (what we used to call ‘the balance sheet’) of the government is not as strong as it was when he took over. A comprehensive comparison is a report in itself but a simple one is that Net Core Government Debt was near $13.7b in September 2008 and is expected to be about $62.1b now (only some of which is due to the Canterbury Earthquakes). There is no expectation of significant improvement as far out as the Treasury can see.

It matters for two reasons. First, even when government debt is not increasing, each year a chunk has to be rolled-over (i.e. re-paid and re-borrowed). While our debt ratios are not high compared to those of some economies, overseas lenders are likely to look askance and raise our interest rates (including on private borrowings) if there is not some expectation of long-term improvement. Second, if the world economy staggers again – or ours does – we will have less room to borrow after six years of the Key-English government – in contrast with nine years of the Clark-Cullen one. As the latter demonstrated, prudence has its merits. True, its political enemies were the beneficiaries but so were the people of New Zealand.

One cannot be sure how great the growth slowdown will be. I know of no economist expecting stagnation – not in their main forecasts anyway. But they must still think the downside risks are greater than the upside ones. Despite an election campaign predicated – by all parties – on the economy doing well, economic management is not going to get any easier.

Comments (7)

by Steve F on September 22, 2014
Steve F

For those who want a bit more depth than the doom and gloom fairfax reporters have a look at this;


Our economy has a solid outlook for the years ahead. Its easy to pick out bullet points and scaremonger but the deeper one drills down then the true picket emerges. 

As Roger Douglas put it, " if you're a socialist in the heart then you'd better be a capatilist in the head to find the money you want to redistribute"

by Draco T Bastard on September 22, 2014
Draco T Bastard

 That gave the Key-English government the room to cut income taxes, thereby sustaining economic demand and employment through the world downturn.

Well, that was the theory but it didn't happen. All that tax cuts really do is increase the accumulation of wealth in the hands of the few and thus, over time, decreases financial activity as the wealth available to the many decreases. The way that governments have been using since WWII to counter that is government borrowing and spending to get the accumulated money back into the system. The other way is for the government to just create the money and spend it into the economy and thus making those accumulated billions worthless. I'm in favour of the latter method.

There is no expectation of significant improvement as far out as the Treasury can see. 

And yet the RWNJs aren't screaming about decades of deficits.

 I know of no economist expecting stagnation – not in their main forecasts anyway.

That would be mainstream economists  - you know, the ones that failed to predict the GFC while heterodox economists did. Steve Keen, one of those that did predict the GFC, is expecting Anglo economies such as ours to continue not fail. Personally, I'm expecting NZ to drop into depression over the next few years under National's careful guidance.

by Draco T Bastard on September 22, 2014
Draco T Bastard

Goddamn lack of edit function. That should say:

…continue to fail.

by Brian Easton on September 23, 2014
Brian Easton

Steve Fon

The ANZ report you cite exactly agrees with what I was saying. "the cycle is simply maturing from strong growth off lows, to moderate growth off good levels."

Did Roger Douglas actually say that? It would be useful to have a source, thankyou.

Draco T Bastard

The claim that mainstream economists failed to predict the GFC simply reflects their modesty. As Paul Krugman said recently:

"I’ve been getting some mail in response to today’s column from people saying (by and large politely) that they predicted the crisis — by which, it turns out, they mean that they correctly diagnosed a housing bubble. Well, so did I — but I nonetheless don’t consider myself to have predicted the crisis, because I had no idea that the consequences of a burst bubble would be as cataclysmic as they were."

He was not the only one. It is a very long list and includes such luminaries as Joe Stiglitz and Larry Summers. Even I can, modestly, claim to have ‘predicted’ the GFC as a reading of my ‘Listener’ columns before it would demonstrate. I expressed concerns about the burgeoning credit bubble as early as 2002;. By 2007 my readers would have been well aware that there was a crisis underway.

In order to defend the position you could say that Krugman, Stiglitz, Summers and even Easton are heterodox economists, although perhaps they are too modest to be described as such. . 

by Katharine Moody on September 23, 2014
Katharine Moody

There were knowing smiles among economists when earlier this year John Key set the election date a couple of months early.

Winston Peters thought it would be called early as far back as Oct 2013 (although he predicted a snap election for April 2014 due to the resignations of Ministers from both the support parites) but nonetheless he also saw the economy as very unstable at that time as well;


I'm surprised things hung in there as long as they did - or did they? Point was TSY forecasts for tax revenue were constantly missed (thank goodness for increased excise tax on smokes, eh?) as were growth rates. But to my mind, MSM were quite kind in terms of reporting - and TSY managed a fair few slight-of-hands that either weren't spotted and investigated further, or simply weren't reported as a means to keep the lid on.

Many Votes were going backwards in terms of funding once inflation and other creative distribution was factored in, yet the Government kept up a line about increasing these budgets.

I find some of the better commentators on interest.co.nz dig deeper and hence look to be far more informed than the media - which is a concern.

by Katharine Moody on September 24, 2014
Katharine Moody

Here's an example from an article on interest.co.nz today regarding Fonterra reporting headlined:

Fonterra cuts milk payout forecast for 2014/15 to NZ$5.30/kg from NZ$6/kg, but lifts dividend range forecast; 'reflects medium term rebound view'

Some good news some bad news, it seems - based on the headline.

But look through the comments and there are some important additional understandings:

From the financial statements, statement of changes in equity includes the dividend paid out:
Page 5 (7 out of 72).
And the farmgate milk price includes dividend per share on page 3 of this one you put up:

Fonterra's financials show the lowest equity, highest debt, worst debt equity ratio and lowest return on assets for four years.


by Katharine Moody on September 24, 2014
Katharine Moody

NBR's reporting on it - not paywalled;

UPDATED: Reduced Fonterra payout forecast depends on 30% recovery in dairy product prices


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