The Hoon

TLDR: This week the Reserve Bank warned of a rise in mortgage rates to 6% and a peak-to-trough fall in house prices of 15%, but said the economy and homeowners could handle it without forcing the economy into recession. It also rejected Opposition claims that Labour’s fiscal policy and employment mandate had forced the Reserve Bank’s faster move to higher interest rates.

Elsewhere, China launched an aggressive push for much deeper trade and security deals in the Pacific to add to the one it already has with the Solomon Islands. In response, the United States opened a new Indo-Pacific Economic Framework that it hopes will contain China, even though it doesn’t offer extra trade access into the world’s largest economy. Aotearoa-NZ and Fiji joined it.

In this week’s live hoon webinar for paid subscribers, which is in recorded form above, Peter Bale and I talk with special guests Professor Robert Patman from the University of Otago about the latest geo-political news and Green Finance Spokesperson Julie Anne Genter about monetary and fiscal policy.

This is my weekly summary and sampler of the big news of the week I’ve covered on The Kaka for both free and paid subscribers. The public interest journalism I do daily on housing unaffordability, climate change inaction and poverty reduction is possible with the support of paid subscribers. It has allowed us to make it all free for students, teachers and those working for advocacy groups and political parties in these areas. Anyone in these groups should just sign up with their work, school, university, polytechnic or advocacy group emails and we’ll convert to the full paid tier behind the scenes.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier using their ‘school’ or ‘ac’ email addresses to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who are reliant on NZ Superannuation.

The five things that changed this week

The Reserve Bank turned more hawkish

The Reserve Bank hiked its Official Cash Rate 50 basis points to a six-year high of 2.0% this week. That was an unprecedented second ‘double-whammy’ 50 point hike in succession, but that wasn’t the surprise. The central bank also raised and steepened its forecast track for the OCR in a way that would see mortgage rates rise to around 6% by early next year and help drive house prices down 15% from the peak in November last year to a trough late next year.

The Reserve Bank described its approach as “briskly” raising interest rates to get annual inflation down from 6.9% in the March quarter to under 3% late next year, and that it was “resolute” about getting back into its 1-3% target band.

Here’s my preview on the day and my report on the next day.

China went fishing for friends in the Pacific

China’s Foreign Minister Wang Yi embarked on a series of visits to nine Pacific Island nations this week, offering a series of deeply integrated trade, security, data sharing and police cooperation deals similar to the one it has just signed with the Solomon Islands. The depth and breadth of the proposals surprised many and alarmed the ‘western’ powers in the Pacific.

In response to China’s latest push for influence in the Pacific, the United States announced a widening of its ‘Quad’ security alliance with India, Japan and Australia to a new Indo-Pacific Economic Framework (IPEF), which Aotearoa-NZ and Fiji immediately joined. IPEF is the US-driven alternative to the Trans-Pacific Partnership, which was originally designed to include the United States in a grouping that excluded China and created a massive free trade block. But Donald Trump pulled the United States out and Joe Biden does not have domestic support for an easing of trade access to the world’s largest economy.

IPEF is largely about writing the rules for and securing supply chains and services trading arrangements that don’t include China.

Here’s what I wrote about IPEF this week.

Global recession warnings flashed red

Fresh data was reported this week showing the US and Japanese economies contracted in the March quarter because of Covid supply chain disruptions and weak consumer spending due to demand destruction from real wage deflation.

China also warned its strict lockdowns to maintain Covid elimination had reduced output in the world’s second largest economy, and Aotearoa-NZ’s largest trading partner. Here’s what I wrote about that this week.

Britain announced a 25% windfall tax

Britain’s Conservative Government made a U-turn and decided to go ahead with a 25% windfall profit tax on oil, gas and electricity companies to raise £15b to paid for energy discounts for households.

I talked in Friday’s Chorus about the prospects for a windfall tax here to claw back some of the $20b in cash payments to businesses that are now stored in company bank accounts or being paid out as dividends.

Fresh quake shocks for Wellington’s CBD

The Ministry of Education moved 1,000 staff out of its relative-new head office building on Bowen St in Wellington after it was found to have hollow-core pre-cast concrete floors that are now deemed quake prone. Another 150 buildings in Wellington’s CBD use the same flawed construction system, delivering another blow to the capital city’s economy after an awful few years dominated by Covid lockdowns, protest blockades at Parliament and brutally high rents and house prices.

I talked about this in Friday’s Chorus too.

Chart of the week

Real wages deflated, but real household incomes still rose

Here’s the Reserve Bank’s summary from its MPS this week:

“A strong labour market and higher costs of living have driven wages higher in recent quarters. The share of annual wage increases greater than 5 percent is near its peak prior to the global financial crisis (GFC). Despite this, wage growth for those staying in the same job has not generally kept up with inflation.

Overall, household incomes have been supported by workers switching jobs for higher pay, promotions with the same employer, and working longer hours (figure 2.10). Once these factors are taken into account, aggregate labour income growth has been stronger than consumer price inflation over the course of the pandemic – albeit to a much lesser extent in the past year.” Reserve Bank May 25 MPS

Have a great weekend

Ka kite ano

Bernard

TLDR: This week the Government released a tame Emissions Reduction Budget and presented a tighter Budget, while overseas, the United Nations warned 47m more people will starve within months if the war in Ukraine continues and Australian PM Scott Morrison faces an election loss this week.

I discussed these events and more in our weekly ‘hoon’ live webinar for paid subscribers to The Kākā, which is in recorded podcast form above for all to listen to. This is our weekly ‘sampler’ email for both free and paid subscribers.

The public interest journalism I do daily on housing unaffordability, climate change inaction and poverty reduction is possible with the support of paid subscribers. It has allowed us to make it all free for students, teachers and those working for advocacy groups and political parties in these areas. Anyone in these groups should just sign up with their work, school, university, polytechnic or advocacy group emails and we’ll convert to the full paid tier behind the scenes.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier using their ‘school’ or ‘ac’ email addresses to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who are reliant on NZ Superannuation.

Five big things this week

Is that it?

On Monday the Deputy PM Grant Robertson and Climate Change Minister James Shaw released the long-awaited Emissions Reduction Plan, which is the Government’s roadmap to achieve the emissions reductions budgets set by the Climate Commission.

The $2.9b of spending over four years listed in the plan is being paid for by $4.5b of receipts from the Emissions Trading Scheme (ETS), which has been cordoned off into an Climate Emergency Response Fund (CERF) . It disappointed those hoping for faster and more aggressive action to shift people out of cars and onto bikes, buses, trains, footpaths, electric cars, e-bikes and scooters. It also did not include details of how to bring Agriculture into the ETS. That is due later this year.

Here’s what I wrote from the ‘lockup’ presenting the plan.

The 12 blocks of Tasty Cheese Budget

On Thursday, Robertson tabled his fifth Budget, including a $27-a-week-for-three-months one-off cost of living support payment for people not already getting the winter energy payment or a benefit. The price of a block of ts The Opposition criticised the Budget as profligate, although it actually represented a slight tightening of fiscal policy over the next four years.

Here’s what I wrote on Wednesday, Thursday and Friday about the background to Budget 2022 and the details announced on the day.

A looming global food crisis

The UN warned on Thursday night that another 47m people faced starvation within a few months if the war in Ukraine and Russian blockades of grain shipments from Black Sea ports continued, adding to the 276m already hungry because of climate change and civil wars. Wheat prices rose another 6% on Wednesday night after India, the world’s second largest grain grower after China, banned exports.

The Economist-$$$ reported yesterday that Russia and Ukraine usually provide 12% of the world’s traded calories.

They supply 28% of globally traded wheat, 29% of the barley, 15% of the maize and 75% of the sunflower oil. Russia and Ukraine contribute about half the cereals imported by Lebanon and Tunisia; for Libya and Egypt the figure is two-thirds. Ukraine’s food exports provide the calories to feed 400m people. The war is disrupting these supplies because Ukraine has mined its waters to deter an assault, and Russia is blockading the port of Odessa. The Economist-$$$

The United States is considering sending long-range anti-ship missiles to Ukraine to destroy Russian vessels enforcing the blockade and accused Russia of holding the food security of tens of millions hostage.

The UN’s World Food Programme also called for the blockade to end.

Scott Morrison is set to lose power this weekend

The Opposition Labor Party is ahead of the governing Liberal/National coalition by around five percentage points in the last polls before this weekend’s Federal election. PM Scott Morrison looks set to lose because women see him as sexist and his Government has taken little action to address climate change.

Stocks slumped on fresh recession fears

US stocks briefly fell into bear market territory overnight, taking their falls from their peaks in January to over 20%. Here’s what I wrote on Tuesday.

TLDR: The Kākā’s hoon about the week that was in the podcast above included Peter Bale and me talking with special guest Professor Robert Patman about the latest geo-political and economic fallout from Russia’s war on Ukraine, along with closer looks at Budget 2022 on Thursday, the week’s crypto-crash and double-digit house price deflation.

This is our weekly sampler email for both free and paid subscribers.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier using their ‘school’ or ‘ac’ email addresses to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who are reliant on NZ Superannuation.

Five things of note this week

War in Ukraine generates more inflation

Gas supplies cut - Russia cut off one gas pipeline through Ukraine and Poland to the rest of Europe, forcing European gas futures prices up more than 20%. Russia also cut off its electricity supplies to Finland after Finland indicated it would formally apply early in the coming week to join NATO. The European Union is close to agreeing a Europe-wide ban on imports of Russian oil by the end of the year.

Sweden is also on the verge of joining NATO, which Russia said it would respond to with measures of a “military-technical” nature. Meanwhile, US howitzers are already being used in eastern Ukraine by Ukrainian forces. The M777 155mm howitzer can fire a GPS-guided shell 40km with pinpoint accuracy. Patman talked in the podcast above about these howitzers being reported to have hit targets inside Russian territory.

Here, petrol prices rose over $3/litre and all eyes will be on the Government’s Emissions Trading Plan this coming week as to whether it is extended beyond three months.

The Emissions Reduction Plan and Health Budget

The Government will release its Emissions Reduction Plan in a two-hour ‘lockup’ in The Beehive that ends at midday on Monday. I’ll be inside and do a special email as it is released. It is speculated to include an extension of the current half-price discount for public transport and a congestion charge for Auckland. There’s also talk of a congestion charge. I welcome the suggestions for queries in the comments below from paid subscribers.

In the Budget itself on Thursday, the Government is expected to focus the bulk of its $6b operating allowance (unchanged from what was announced in December) on funding the Health system restructuring (and tidying up DHB debts and deficits) and leaving the multi-year capital allowance unchanged from December at $9.8b.

Double-digit house price deflation

The crypto-crash

This week the algorithmic stable coin Terra-USD collapsed, taking the Luna digital currency with it. The most-used fiat-backed stablecoin Tether also ‘broke the buck’ briefly on Thursday night, although was back at US$1 this morning.

I was asked to talk about the collapse on TVNZ’s Q+A yesterday and spoke in a panel discussion with Jack Tame and Rebecca Stevenson. Here’s the full panel sesssion resulting video report:

The migration ‘rebalancing’

Ka kite ano

Bernard

TDLR: This is a podcast of the live weekly ‘hoon’ webinar I do with Peter Bale most Friday afternoons for paid subscribers. This week we spoke about the wealth tax debate, National’s rise above Labour in the polls, the scale of our infrastructure deficit and what’s being done about it, what a higher debt ceiling means and how the war in Ukraine is going.

Here’s more detail on what we talked about here:

* Te Waihanga’s estimate of our infrastructure deficit and how much more we’d need to build to cope with future population growth, improve our water quality and prepare for climate change ($1t in today’s money over 30 years or a doubling of investment to 10%/GDP per year);

* Finance Minister Grant Robertson’s response that such a doubling was not financially or politically possible, and that we can’t build our way out of our infrastructure deficit;

* Robertson’s unveiling of a new 30% of GDP debt ceiling, which is effectively 30 percentage points higher than the last one, but that he doesn’t want to use the spare fiscal headroom, yet;

* The Government’s decision to freeze new capital spending and leave its $6b operating allowance unchanged in the May 19 Budget to avoid adding to inflation;

* Reserve Bank Governor Adrian Orr’s comments that a 30% fall in house prices was feasible and that our banking system could cope with that just fine, along with an estimate that sustainable house prices were 5-20% below current levels in his select committee clashes with Green MP Chloe Swarbrick and National MP Nicola Willis; and,

* PM Jacinda Ardern’s painful prevarications and eventual capitulation on whether she would propose a wealth tax in her political lifetime.

Enjoy, although please accept my apologies for my poor sound quality this week. I was stuck in my car. And many thanks to the paid subscribers to The Kākā who support this sort of work I do reporting on and analysing issues around the political economy, in particular housing unaffordability, climate change inaction and child poverty.

This is a regular recorded podcast open for all subscribers in which I talk with Peter Bale and sometimes guests. The live webinar currently on from 5pm to 6pm on Fridays is open to paid subscribers.

A reminder too that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who are reliant on NZ Superannuation.