by Nick Clark, National Manager General Policy
The election’s (nearly) over, what next for the economic policy?
The 2023 General Election has delivered a change in government, with National and ACT narrowly able to form a majority government on votes counted on the night.
But the election is not yet over. The final number of seats for each party won’t be known until 3 November when the more than half a million special votes are counted. With NZ First in the mix, negotiations for the incoming government could take a while. Previous attempts to form an MMP government have ranged from a rapid 11 days in 2008 to a torturous 65 days in 1996. 2017’s took 33 days.
Regardless of its eventual make-up, the incoming government needs to address pressing issues facing the agricultural sector to boost its dire lack of confidence. At this early stage it’s encouraging that all three parties have a stated commitment to reducing regulations, lowering costs, and providing support to agriculture and farmers.
Farmers have long rated containing government spending and reducing government debt as high priorities for any government. Over recent years government spending has surged and with tax revenue unable to keep pace, operating deficits have become the norm and debt has been on the rise. Effective fiscal policy also makes the Reserve Bank’s job easier in undertaking monetary policy, but loose fiscal policy since 2019 has helped drive up inflation.
New Zealand’s ‘broad-base-low-rate’ tax system is simple and non-distorting, and it raises sufficient revenue with recent shortfalls due to excessive government spending. Most farmers, like most businesspeople, want a lower tax burden and a simpler tax system. It’s good that all three parties agree and that none of them want new taxes on water, livestock emissions, fertiliser, wealth, land, or capital gains.
High inflation has driven up farmers’ costs and squeezed profitability. Changes in interest rates from tighter monetary policy also have a direct and material cost impact for farmers with debt. Monetary policy was very loose during the pandemic but while the initial response was appropriate it remained too loose for too long, fuelling a surge in house prices and then inflation generally – to a peak of 7.3% in mid-2022. Monetary policy tightened dramatically from late 2021 but two years on from the first hike headline inflation is still running at 5.6%.
In August 2023 agricultural sector debt was $63 billion. This means that a one percentage point change in agricultural lending rates will have a $630 million financial impact. More generally, banks’ decisions have huge impacts on farm businesses and farming families’ economic and social well-being. Recent Federated Farmers banking surveys have shown big increases in farmers’ interest rates and slipping satisfaction with bank relationships.
Regulation and compliance is a perennial concern for farmers. Over recent years the default seems to have been to impose ever more regulation, too much of it poor quality, threatening to reduce farm production and incomes and increase farmers’ costs, both financial and time. Improvement in the quality of regulation is desperately needed.
Bearing all this in mind, below are key economic policy decisions I’d like to see from the incoming government.
Fiscal Policy and Tax Policy
- Prudent fiscal policy that delivers operating surpluses, keeps government spending below 30% of GDP and allows debt to be reduced below 20% of GDP.
- Establish an independent Parliamentary Budget Office to better scrutinise fiscal policy.
- A lower tax burden, including adjustment of income tax thresholds for inflation and, once fiscal conditions permit, cuts in personal income and company tax rates.
Monetary Policy and Banking Policy
- Independent Reserve Bank undertaking orthodox monetary policy that has a sole target for price stability, with repeal of the ‘dual mandate’ employment objective.
- Inquiry into rural banking, including its competitiveness and impact of regulation.
- Retention of the Farm Debt Mediation Service.
- Better quality regulation and less regulation. Quality regulation should be based on evidence, be proportionate to risk, and minimise unintended consequences.
- Strengthen processes for regulatory impact analysis.
- Pass a Regulatory Standards Act to allow greater scrutiny of regulation.
Like everyone, we’ll have to wait and see what comes of the next few weeks. The challenging economic climate makes it important to get a cohesive government in place so it can advance policies that will restore confidence and get agriculture and the wider economy humming.
Surprise easing in inflation
The annual rate of inflation eased to 5.6% in the September 2023 quarter, measured by Statistics NZ’s Consumer Price Index.
This was down from the previous quarter’s annual rate of 6.0% and it was also lower than the Reserve Bank’s forecast of 6.0% and market expectations ranging from 5.8 to 6.1%.
The quarterly inflation rate was 1.8%, which was higher than the previous quarter’s 1.1%. By far the biggest upward driver was the transport group, up 7.1% on the back of sharply higher petrol prices, which were up 15-17%. The housing and household utilities group was up 1.7%, mainly due to a 9.8% increase for local authority rates and payments. Food prices were up a more modest 0.9% for the quarter, while there were declines for the household contents and services group (down 1.4%) and the health group (down 1.0%)
There was little difference between the quarterly rates for non-tradable inflation (1.7%) versus tradable inflation (1.8%). Various trimmed mean measures for core inflation were between 1.1% and 1.7%. This shows inflation is still relatively broad-based.
The 5.6% annual inflation rate was driven mainly by an 8.8% increase for food prices, and there were also increases of more than 5% for alcoholic beverages and tobacco (up 7.4%), recreation and culture (up 6.1%), and housing and household utilities (up 5.3%). Although most groups saw price increases moderate, no CPI group had an annual decline.
Annual non-tradable inflation was 6.3% (down from 6.6% for the June quarter) while tradable inflation was 4.7% (down from 5.2%). Trimmed-mean measures ranged from 5.5% to 5.7%, a little lower than the June quarter’s range of 5.7% to 6.0%.
What will this mean for the OCR when the Reserve Bank next reviews it on 29 November? Although headline inflation came in lower than the Reserve Bank’s forecast, no change is still the most likely outcome. Non-tradable and trimmed mean inflation are still far too high and seem persistent. They need to reduce too before anyone can declare victory.
The next major data for the Reserve Bank’s thinking is June quarter labour market statistics to be released on 1 November, followed by the results of its quarterly survey of expectations. It will want to see further easing in the labour market and a fall in inflationary expectations.
Monthly inflation data on the way
Stats NZ also announced this week that new monthly price index data will be released in mid-November. The new data will allow for timely analysis into more price changes that households experience and allow for more accurate forecasting for the quarterly CPI.
New Zealand’s CPI is quarterly, but many countries produce their CPIs on a monthly basis. Although what Stats NZ is moving to is not a monthly CPI it is still a good move, especially when there is so much concern about inflation and the cost-of-living.
GDT up again
Good news that this week’s Global Dairy Trade auction posted another solid increase.
After three increases since the start of September, the GDT Price Index made it four in a row with a 4.3% rise. All commodities had higher prices. Whole milk powder was up 4.2%, skim milk powder up 6.3%, anhydrous milk fat up 7.1%, butter up 2.9%, cheddar up 0.2%, and lactose up 0.2%.
Overall, the average selling price was US$3,202 per tonne and 35,974 tonnes were sold.
The recent increases in the GDT Price Index have taken it back to where it was at the start of July. They have also moderated the year-on-year decline to 11% (from 14% at the previous auction).
Performance of Manufacturing Index and Performance of Services Index – September
The PMI for September was 45.3 (a PMI reading above 50 indicates that manufacturing is generally expanding; below 50 that it is contracting). This was down 0.8 points from August, keeping manufacturing in contraction for seven consecutive months, and well below the long-term average of 52.9. The New Orders, Production, Deliveries, and New Orders sub-indexes all hovered around 44-45, while Finished Stocks was again the only sub-index in positive territory. 69% of respondent comments were negative, up from 67% in August.
Meanwhile, the PSI for August was 50.7, up 3.0 points from August. This breaks a three-month run of contractions, although the PSI is still below its long-term average of 53.5. Activity/Sales (50.9) and New Orders/Sales (54.9) both bounced back into expansion, while employment (50.6) remained marginally so. The percentage of negative comments fell slightly from 64% to 62%.
No spring flowering for retail spending
Statistics NZ’s monthly Electronic Card Transactions has shown a seasonally adjusted 0.1% decrease in spending in September compared to August.
Taking off non-retail industries the decline was a larger 0.8%. Spending was down for all the retail sectors. Apparel was down 2.8%, durables down 1.2%, vehicles down 1.1%, fuel down 1.0%, and consumables down 0.2%.
On an annual basis, comparing September 2023 with September 2022, unadjusted card spending of $8.8 billion was up by 2.6%. Taking off non-retail industries spending growth was a more modest 1.6% and adjusting for inflation real spending growth will have been negative.
Of the retail industries, there were increases for consumables (up 5.9%), vehicles (up 2.2%), and hospitality (up 1.4%), but declines for apparel (down 5.4%), fuel (down 2.3%), and durables (down 1.8%).
Statistics NZ’s National Accounts (income, saving, assets, and liabilities) for the June 2023 quarter has shown further falls in household net worth but an in increase in saving.
Household net worth – the value of assets owned by households less the value of liabilities – fell by $33.5 billion (or 1.5%) in the quarter. There were falls for both non-financial assets (e.g., land and buildings) and financial assets (e.g., shares) and a rise in household debt.
Household net worth has now fallen for six consecutive quarters. Annually, comparing the year ended June 2023 with the year ended June 2022, it was down by $126 billion, or 5.5%.
Meanwhile, household saving was $1.4 billion in the March 2023 quarter, up $122 million from the March 2023 quarter, with the household saving ratio up from 2.3% to 2.4%.
Households feeling poorer will be a factor behind weak consumer confidence and retail sales, not to mention the election result.
Greenhouse gas emissions edging up
Stats NZ’s Greenhouse Gas Emissions data have shown small increases in emissions in each of the March and June quarters but an annual decrease.
Total emissions increased by a seasonally adjusted 0.2% in the June 2023 quarter compared to the March 2023 quarter. Increases in emissions from transport, postal, and warehousing industry and the manufacturing industry were offset by a large decrease in emissions from the electricity, gas, water, and waste services industry (due to a reduction in fossil fuel electricity generation and increase in hydroelectricity generation). There was also a 0.1% fall in emissions from agriculture, fishing, and forestry industry.
For the year ended June 2023, total GHG emissions fell 1.8%. This was mainly due to falls for electricity, gas, water, and waste services (down 21%) and manufacturing (down 12%). The agriculture, fishing, and forestry industry also had an annual drop of 1.7%.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 19 October) show drier than usual soil conditions in Hauraki, Western Bay of Plenty, East Cape, North Taranaki, in the North Island and around Kaikoura in the South Island. In contrast conditions are wetter than usual in Gisborne-Wairoa and coastal Wairarapa in the North Island, and in the South Island most of the Canterbury and Otago regions.
The NZ Dollar was down 2.3% for the week against the Trade Weighted Index. It was down against all our major trading partners.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was down 2 points to 5.66%, but the 10-year Government Bond yield was up 20 points to 5.55%.
The OCR is next reviewed on 29 November.
|This Week (19/10/23)||Last Week (12/10/23)||Last Month (19/9/23)||Last Year (19/10/22)|
|90 Day Bank Bill||5.66%||5.68%||5.67%||4.10%|
|10 Year Government Bond||5.55%||5.35%||5.01%||4.58%|
Source: Reserve Bank of NZ