Of Interest

Paul Conway, the Reserve Bank's Chief Economist and former Economics and Research Director at the Productivity Commission, is optimistic that better times may be ahead for New Zealand's lagging productivity performance.

Speaking in the latest episode of interest.co.nz's Of Interest Podcast, Conway says New Zealanders work about 10% more hours per person, but produce about 20% less output than workers in the average OECD economy, which is why average incomes and wealth in NZ are both significantly below the OECD average.

Whilst NZ's productivity performance hasn't been great for several decades, in part at least because we're "a small economy that's the last bus stop on the planet," Conway sees optimism for improvement ahead.

"The reason I'm optimistic about productivity is because technology is changing everything. In the digital realm geography becomes less of an issue. It becomes less of a handbrake. So it's like technology is eroding those economic forces that have kept productivity growth low in New Zealand for so long," Conway says.

He does acknowledge, however, that there's a long way to go.

In the podcast Conway also talks about what productivity is, why it matters, what the transition to a zero carbon economy may mean for productivity, the concept of degrowth, how NZ can improve productivity and more.

Figure 3 below comes from the Productivity Commission. Also see Conway's 2020 article on a pro-productivity policy agenda for New Zealand here.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

China is far and away New Zealand's key export market. But this comes with risks.

China is an authoritarian one-party state. Its human rights record came under fire from the United Nations this week, and China's growing international assertiveness is seeing it butt heads with the United States and increase its influence in the South Pacific.

Against this backdrop, is it possible that NZ is too dependent on China as a destination for our exports? What are the risk to this relationship? And could we diversify by exporting more of our key products to other countries? 

To discuss this I am joined by Stephen Jacobi, Executive Director of the New Zealand International Business Forum, for the latest episode of interest.co.nz's Of Interest Podcast.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

Against the backdrop of a sweltering summer, China's Covid-zero policy rumbles on, the country's commercial property sector teeters, and youth unemployment soars.

To talk about all these issues and more, I spoke to Beijing-based David Mahon, Managing Director of Mahon China Investment Management, for the latest episode of interest.co.nz's Of Interest Podcast.

On the weather Mahon says it's China's hottest summer since records began in 1961, and has exceeded anything he has experienced in the almost 40 years he has lived in China.

It has also been dry leading to "a complete collapse" of key hydro-driven power from the Yangtze River and its tributaries. This has led to factory closures and limited electricity supplies to some cities, with the impact stretching from Sichuan province to Shanghai.

"It's having major ramifications on the economy," Mahon says. "This year's weather means the harvest in general will also be poor."

In terms of the battle against Covid-19, Mahon describes the experience of being tested every three days, the challenges of business travel, clients in lockdown running out of food, and when and how he thinks the Government will start to loosen the Covid-zero policy.

"The Covid policies are baffling at the moment. I think China knows that whatever happens there'll be a death toll once they begin to relax as New Zealand is finding," says Mahon.

In the podcast he also talks about how China's strategic reserves are helping it combat inflation, interest rates, supply chains, problems in the commercial property sector, high youth unemployment and general demographic challenges, plus what recent clashes between bank depositors and the police were about.

"The longer-term issue is that in general China won't have enough workers in industry, and they're going to have to look at a migrant worker programme, something which to date they never would've even begun to conceive of," Mahon says of China's demographic challenges.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

In 2015 when he and his wife Selena published Generation Rent Rethinking New Zealand’s Priorities, economist Shamubeel Eaqub admits he was pessimistic about the housing market. That has now changed. 

Speaking in interest.co.nz's Of Interest Podcast, Eaqub, now of economic consultancy Sense Partners, explains why he's now optimistic about the housing market.

"I think there is a consensus across the political spectrum that there is a problem, and now we're fighting about what the solutions are. To me that's a really optimistic place to be when it comes to the housing market," Eaqub says.

"We've seen changes in the Auckland Unitary Plan which has led to significant increase in supply, diversity of types of supply in terms of more medium density [housing], high density, places that are infills, places that are greenfield. So we're seeing really good progress. We've seen changes in the Residential Tenancies Act, it's not perfect but it's heading in the right direction. Recently we saw an announcement for build to rent. Again it's not perfect, [but is] heading in the right direction. We're building more state houses, [which is] very, very good because we have a massive wait list of over 25,000 households that are waiting for social housing."

"So I think we are heading in the right direction in that the balance has moved from apathy towards action, and we are arguing about what are the best solutions," Eaqub says.

In the podcast he also talks about why a land tax - a "pseudo wealth tax" - is top of his housing market wish list, the psychology of the housing market, pressure on the Reserve Bank after it "misdiagnosed the [Covid-19] problem and flooded the housing market with money with predictable results," and perhaps what it should've done, outdated thinking in the public service, the needs of renters and requirements for affordable housing, consenting, the current difficulties for borrowers in attracting mortgages and how and when this might change, and much more.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

New Zealand is poised to end its role as an international outlier when it comes to deposit insurance.

The Deposit Takers Bill is expected to be introduced to Parliament in the third quarter of this year. Included within it are proposals for a depositor compensation scheme to cover bank depositors in the event of bank, or non-bank deposit taker such as a building society, failing. Depositors will be covered for a total of $100,000 per institution, per depositor.

Speaking in interest.co.nz's Of Interest Podcast, Geof Mortlock explains what deposit insurance is and what its objectives are.

Mortlock is an international financial regulatory consultant who undertakes work for the International Monetary Fund and World Bank, specialising in financial system stability, resolution of bank failures, deposit insurance and related matters. 

Mortlock also explains why it has taken NZ so long to adopt deposit insurance. According to the International Association of Deposit Insurers, at least 145 jurisdictions have some form of explicit deposit insurance.

Additionally he talks about the $100,000 limit, how the deposit insurance fund will be established including how much this will cost and what this is likely to mean for the interest rates depositors are paid.

Mortlock also talks about which products are likely to be insured, or covered by the scheme, and which are unlikely to be, whether a depositor preference regime should be introduced in the event of a bank failure, how the Crown's deposit insurer should operate, and more.

The Reserve Bank expects the Deposit Takers Bill to be passed into law in mid-to-late 2023, with a depositor compensation scheme expected to be up and running in early 2024.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

The Reserve Bank's response to the Covid-19 pandemic followed a misdiagnosis of the problem, and we ought to use an inquiry to develop a blueprint for managing future challenges, says The Opportunities Party (TOP) Leader Raf Manji.

Speaking in interest.co.nz's Of Interest Podcast, Manji says any inquiry into the Reserve Bank's response to the Covid-19 pandemic should be as apolitical as possible.

"Let's look at what we did, could we have done things differently, what were the impacts of what we did, and could we have changed that response at an earlier stage? And I think clearly the answer to that is yes," Manji says.

"One of the first focus points was the misdiagnosis of what was happening. And I think for me when I go back, and it's important that we all reflect on what we said at the time, I was very, very clear that this was a liquidity crisis. It wasn't particularly a credit crisis, it was not a business cycle recession or depression, yet that's how it was being treated."

In terms of quantitative easing, or the Reserve Bank buying up tens of billions of dollars worth of government and local government bonds in the secondary market from banks, Manji says he'd have preferred Treasury and the Reserve Bank to deal directly with each other rather than "providing huge amounts of profit for the banks."

"New Zealand's problem, which is always our problem, is the huge focus on the property market and the impact that has. And there's no doubt that probably, whichever data you look at, probably a third of our inflationary impulse was from the housing market and the follow on effects of that, the renovations, the squeeze in capacity, and just the extraordinary rise in property prices," says Manji.

"I think if the Reserve Bank had looked a little bit more carefully at the outcomes of its policy towards the end of 2020 they might have gone 'okay everyone, let's get in a room, what has happened here, do we need to change our policy'?"

"We're in a position that could've been avoided to some extent," Manji says.

In the podcast Manji also talks in depth about interest rates, inflation, government debt, overt monetary financing, the Government's fiscal policy response to Covid-19 and more.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

The labour market remains tight with an official unemployment rate of just 3.3%, and good pay rises for some workers with private sector hourly earnings up 7.1% in the June year, almost matching the highest inflation in 32 years of 7.3%.

It seems as if every business you visit, and every business owner you talk to no matter what industry they're in, is looking for staff. Speaking in the latest episode of interest.co.nz's Of Interest Podcast, Shannon Barlow, the Managing Director of recruitment agency Frog Recruitment, says this does indeed appear the case.

"Definitely finding staff, or retaining talent, is the number one problem for businesses across New Zealand," she says.

In the podcast Barlow talks about which industries are especially feeling the staffing squeeze, where workers are getting 20% to 30% pay rises, the Great Resignation, and how 2021 was the year of wellbeing with businesses recognising the importance of workers' mental health and wellbeing, but in 2022 cash is king.

She also talks about how the Covid-19 pandemic added new factors and supercharged existing factors affecting labour shortages, and how towards the end of last year the balance of power shifted to employees from employers, and whether there's any circuit breaker on the horizon.

"With that shift in the balance of power job seekers are really using the market conditions as a bargaining chip to be able to secure better conditions, definitely including pay. And with increased living costs, I guess a lot of people are in a situation where they can't afford not to do that, and why wouldn't you take that opportunity," Barlow says.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

Markets and prices for a number of asset classes are currently behaving as they tend to around the time of a recession, says BNZ Interest Rate Strategist Nick Smyth.

Speaking in the latest episode of interest.co.nz's Of Interest Podcast, Smyth also says financial markets pricing in Federal Reserve rate cuts as soon as next year, despite the Fed's current aggressive hiking and US Consumer Price Index (CPI) inflation of more than 9%, suggests markets are worried about recession risk. 

"The market has got circa 90 basis points of rate hikes over the remaining three [Fed] meetings this year, so still got the Fed hiking quite aggressively over the remainder of this year. And then next year it's pricing just over 50 basis points of rate cuts with the first rate cut fully priced by June," Smyth says.

"So why is that?"

"The logical way to interpret it would be to say markets are worried about recession risk. And I guess you can kind of see evidence of that in various parts of the financial markets," says Smyth.

"So for instance the S&P 500 is down more than 20%. That's that definition of a bear market. Bear markets are often, but let's be clear not always, associated with a recession. The US yield curve is inverted, which historically has been quite a reliable leading indicator of recession."

"We've got industrial commodity prices like copper, and copper's kind of used in lots of different things [and] historically that has been quite a good barometer of the strength of global demand. And that had fallen more than 30% from its peak," Smyth says.

"So you've got a number of asset classes that are behaving in a way they normally would in the lead up to, or around recessions. And this is taking place in the context of central banks really aggressively lifting interest rates over a short period of time, and in quite a synchronized manner."

Excluding China, which has its challenges around zero-Covid, and Japan which still has relatively low inflation, Smyth notes even the European Central Bank is raising interest rates, having not done so for 10 years.

"So a synchronized global tightening cycle will certainly slow [economic] growth. And then we've got these other contributing factors that are giving markets concern about the rising risk of recession including the risk of lockdowns and restrictions in China, and the situation in Europe where you've got potential gas shortages and power rationing later this year."

"So I think asset markets are kind of telling you that there's at least a reasonable, if not a high chance, of recession next year. And historically during recessions the Fed cuts interest rates."

The Fed increased the Federal Funds Rate, its equivalent of the Official Cash Rate (OCR), by 75 basis points to a range of 2.25% to 2.50% on July 27.Smyth says markets see it peaking at between 3.25% to 3.50% in the current tightening cycle. And they see the OCR, currently at 2.5%, peaking at between 3.75% and 4%.

"And the New Zealand market now is reflecting that same profile as what the US is, so there are some rate cuts, albeit not as much as in the US, that are priced in to the short-end of our curve as well," says Smyth.

Meanwhile, Smyth says markets see US CPI inflation, currently running at a "staggeringly high" annual rate of 9.1%, dropping to about 7.5% by the end of the year, and then down to about 2.7% by the end of 2023.

"So that is a really big fall. And again that's consistent with the market thinking there'll be a recession or some kind of miracle with global supply chains," says Smyth.

In the podcast Smyth also talks in detail about this week's market reaction to the Fed's rate hike, what the yield curve is telling us at the moment, Reserve Bank and Fed quantitative tightening, or moves to decrease liquidity, or money supply in the economy, and expectations for Wednesday's Household Labour Force Survey from Statistics NZ, and what this will say about the labour/job market.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

We've heard a lot over recent years about jobs and professions where people could be replaced by machines and other forms of technology. Accounting features prominently in this.

In the 2017 television programme What Next?, psychologist Nigel Latta suggested that over 20 years the number of accountants in New Zealand would plummet from 17,669 to just 19, with humans being replaced by robots and algorithms.

Rick Jones, the New Zealand Country Head for accounting industry body CPA Australia, experienced a prompt response to the Latta programme from CPA members.

"It feels like yesterday that that show was on," Jones told interest.co.nz in the latest episode of our Of Interest Podcast. 

"I remember watching it on a Sunday evening. And then I got to work on Monday morning and had a couple of phone calls, quite early from new members who had just joined CPA Australia as an accounting professional body member. They referenced that programme, and they said, 'look, I'm not sure this is the right path for me' [as] a direct result of the Nigel Latta shows. So it was really interesting that immediately there was a short-term response," said Jones.

Jones fielded additional enquiries that week from people "genuinely worried about accounting as a viable profession," wondering whether they were on the right path, and whether automation would take over their role. The TV programme certainly created a stir in the accounting industry. Some hit back at Latta, including Xero Chief Product Officer Anna Curzon via this Linkedin post.

But in the time since concerns about automation haven't gone away.

"It still gets talked about on a daily basis with employers and with the profession. There are some roles that automation and software have taken over, but what we have seen is a whole lot of new roles have been created. So the demand for accountants and accounting roles has never been greater, but the role of the accountant is evolving and technology is actually an enabler," Jones said.

He speaks about this at length in the podcast, as well as about the challenges of attracting young people to the accounting profession in a dynamic, and changing world.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

Fresh from meeting with international reinsurers, Tower CEO Blair Turnbull says they are "questioning whether they want to be down under."

Turnbull spoke to interest.co.nz for the latest episode of our Of Interest Podcast about insurance and climate change.

Reinsurers are highlighting they've taken losses for several years in a row, Turnbull said.

"And they are looking very closely, as you would expect, about where they want to have insurance for insurers. And especially more recently with the floods in Australia, which are record $4 [billion] to $5 billion events, they are questioning whether they want to be down under. And that's a concern for us because we rely on that capacity. In our case we have category cover up to just below $1 billion, and we need that cover."

Reinsurance is often described as insurance for insurance companies like Tower, allowing them to transfer some of the financial risk they assume when issuing insurance policies to a reinsurer.

Turnbull said Tower's highlighting to reinsurers that New Zealand is not Australia. Although we too have floods, they're typically alluvial and eluvial, and not on the scale of Australia's inland river flooding where there are huge catchment areas.

"So what we're saying to reinsurers is 'please don't join us together and say you're the same. We're quite different and the nature of those storm events are quite different.' I think also in the case of Tower what reinsurers do like is things like risk-based pricing because we are working with customers and communities to really understand it, and to help mitigate it, and to also price appropriately for it."

Turnbull also spoke about the Government's draft national adaptation plan, which is currently open for consultation. When the draft plan was released in April, Climate Change Minister James Shaw said it was designed to help communities across New Zealand "adapt to the unavoidable impacts of climate change." The draft plan includes discussion of managed retreat, or moving people, property and infrastructure away from areas at high risk.

"We don't have uninsurable pockets at the moment, but if we look forward and these trends continue, that is a risk. So plans like the national adaptation plan, those discussions, the Natural Hazards Bill that's going through [parliament], that's really, really important to now start informing ourselves and responding," Turnbull said.

In the podcast he also talks about wanting councils to stop issuing consents that enable building in flood prone areas, on top of "a lot of newer subdivisions that are [already] in areas prone to flooding and that is causing problems."

He also talks about the impact of climate change on businesses and rural areas, what Tower's data tells it about the  frequency and severity of major weather events, Westport and Buller's efforts to improve flood resilience, the recent floods in Canterbury and Kumeu, the UK's reinsurance scheme Flood Re, and much more.

"Today we don't have uninsurable areas but we want to make sure we don't have them in the future and that's the reason we must take action," Turnbull said. "The key thing about the national adaptation plan is we're round the table talking about it."

The final version of the adaptation plan is scheduled to be published in August, with a Climate Adaptation Act set to follow.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI