Wednesday, 22 February 2017

Are interest rates really biting?

"Increasing mortgage interest rates", the Reserve Bank said on page 18 of its latest Monetary Policy Statement, "combined with a tightening of loan-to-value ratio (LVR) restrictions in late 2016, have contributed to a slowing in the housing market".

Moderating the heat of the housing market may be welcome - though previously low interest rates are far from being the only thing that's been inflaming the market - but otherwise I got a bit worried that higher rates might be crimping the economic outlook. If the average or marginal household is now carrying a bigger mortgage, and mortgage interest rates go up, the impact on already cramped family budgets could see unpleasant things happening (via consequent necessary cutbacks in household spending) to the currently strong state of the economy.

And then I thought, hang on a sec. Yes, it's true that some mortgage interest rates have started to increase. The chain of events is, US bond yields have risen, especially after Trump was elected; NZ bond yields and other local long term interest rates have gone up as well (they tend to track the US rates plus a credit premium); and this has fed through with a lag (via higher funding costs for the banks) to higher fixed mortgage rates. The graph below shows the past year's trends for some of these rates*. Rates bottomed out around the middle of last year and have risen a bit since.


But how much these increases have been contributing to a slower housing market (or indeed slower anything else) is debatable. The first time borrower may be finding it slightly tougher going. But for existing borrowers, most folks these days are on fixed rates - at the end of December last, there were $182 billion worth of fixed rate mortgages compared to $53 billion of floating rate - and they won't have noticed anything, because they haven't come to the end of their existing fixed rate arrangement.

And then I wondered, well, what happens when they do roll over from their existing fixed rate? Will they roll over into something that will have the household worried about how to balance its books?

Quite the reverse, actually. Here's what a borrower who took out an x-year fixed rate mortgage x years ago would pay to roll over into another x-year fixed rate mortgage today (or at least at the end of December, the  latest available RBNZ data, though today's rates are very similar).


Other than for the 1-year fixed rate, where it's effectively the same, the household with an expiring fixed rate mortgage will be rolling over into a lower borrowing cost for another mortgage of the same maturity as before. Large falls in fixed rates in recent years dominate the small increases in the last few months. For most borrowers in coming months, the mortgage rollover will boost disposable income, not restrain it.

There's also the possibility, though, that local fixed rates will keep on rising and upset the calculation. Let's suppose that US interest rates rise by 0.5% during the course of this year (roughly in line with what the latest, February, Wall Street Journal poll of US forecasters expects for US 10-year yields). And let's assume all local rates rise by the same amount. By the end of this year, 3-, 4- and 5-year fixed borrowers would still be rolling over into cheaper loans, but 1- and 2-year borrowers would be paying a bit more, as would first time borrowers. Overall, this wouldn't represent a big squeeze (or possible any squeeze) on household budgets.

So I'm inclined to think that rising mortgage rates will not be any near-term threat to the economic outlook, and somewhat unconvinced that they can have have played much part to date in a slowing housing market. There may be other reasons for a national cyclical slowdown - the latest BusinessNZ/Bank of New Zealand survey of manufacturing had a hint of the construction sector hitting capacity constraints, though on the other hand the equivalent survey of services showed there is still "swift, broad-based, growth occurring in the services sector" - but interest rates, to date, don't look like much of an actual or potential brake.

*Local fixed rate mortgage rates come from the RBNZ's site, but they're not where might think they are (you'd likely expect in 'Statistics', 'Exchange and interest rates', 'B3: Retail interest rates on lending and deposits'). However you can find the full range of fixed mortgage rates in 'Statistics, 'Registered Banks', 'S8: Banks' mortgage lending ($mn)'; they're in section E6. For the very latest rates, if you go to the bottom of the 'Mortgage Rates Table' in the 'Mortgages' part of the Good Returns website, you'll find the up to date median floating and fixed (1,2 and 3 year) rates.

Thursday, 9 February 2017

Bits and bobs from the Bank

We all know the big news from today's Monetary Policy Statement - the official cash rate stays on hold, as unanimously expected by the forecasting community, and, assuming the world pans out the RBNZ thinks it will, an eventual rate rise is a bit closer than before.

But there's always less important, but still interesting, stuff to be found in the nooks and crannies of the MPS and in the Governor's 10.00am press conference afterwards.

Here's one thing worth noting from the MPS, as a corrective to anyone who thinks our big rise in net immigration is mainly or wholly because we're being swamped by Asians.


In 2012, we had essentially a breakeven net immigration position (for the record, a small loss of 1,165 people). Since then net immigration has soared to last year's net intake of 70,588. That's a turnaround of 71,753. By far the biggest moving part in the turnaround isn't Asian at all. It's what has happened trans-Tasman, Over the same period, fewer Kiwis decided to go to Australia, and more Kiwis (and some Aussies) decided to come here, as our economic cycle picked up and theirs slowed down. As a result we moved from a net loss to Australia of 38,796 people in 2012 to a small net gain of 1,563 in 2016, a turnaround of 40,359. That's 56% of everything right there.

From the press conference, John McDermott, the Bank's Head of Economics, picked up on a question from the NBR's Rob Hosking, who had asked about the multiple references to 'uncertainty' of one kind or another, and said we should all have a look at "Nick Bloom's website".

This is what (I reckon) he meant - the Economic Policy Uncertainty website, which has some wonderful indices measuring the level of economic policy uncertainty in various economies, and globally. Here's the latest global picture, as at November 2016. No wonder people are talking about high levels of uncertainty: while the index hasn't been going forever (it starts in 1997), current global policy uncertainty is at an all-time high for the period.


Fascinating site - you can read their methodology, and download the data for quite a range of countries (sadly not including us). But the Aussies are there: here's what they look like.


And finally there was a casual reference from the Governor, responding to a question about the future track of interest rates, where he said that in the November MPS, there had been a 20% probability of an OCR cut built into the OCR forecast, but it has now been removed in this latest one.

I don't recall ever reading (or hearing) about these probabilities before. I don't have a problem with them - they would seem to be an eminently reasonable way of thinking about things - but if they are indeed an established part of the policy thinking, I'd quite like to have more detail at future Statements. Central banks seem quite comfortable these days indicating an easing or a tightening bias: sharing some probabilities around it wouldn't go amiss.

Has planning been worth it?

There was a big turnout on Tuesday night in Auckland at the latest Law and Economics Association of New Zealand (LEANZ) event - a panel discussion featuring three members of the Auckland Unitary Plan Independent Hearings Panel. In fine interdisciplinary LEANZ style, they were Judge David Kirkpatrick (the Panel chair), planner Jan Crawford, and economist Stuart Shepherd.

Chatham House rules, so I can't say anything specific about who said what, but I can safely say that all three were very good speakers - informed, persuasive, congenial, thoughtful, and able to put technical stuff into plain (or at least a good deal plainer) English. So full marks to the organisers, Richard Meade (AUT and Cognitus Advisory) and Andreas Heuser (Treasury) for putting it all together. Special thanks to Simpson Grierson who kindly hosted the event: the LEANZ caravan would be unable to travel on without these corporate oases.Though you can help, too: here's that LEANZ site again, so you can pay your $75 sub ($50 for students).

So, noting again that these are my views and not what the presenters may or may not have said, what did I take away from it?

Clearly the members of the Panel did the best they could with the machinery they had to drive, and in particular they aimed to get the availability of housing land up to where it needs to be (though there may be a developing, and less known, shortage of land for business purposes). And they had the added complexity of having to amalgamate the previous jumble of territorial authority plans into one overall plan for the new one-city Auckland, as well as being lumbered with a process not of their choosing. In the circumstances, they did a fine job.

But it's also clear that the planning process for Auckland has become enormously top-heavy and inefficient. Like other parts of our regulatory apparatus (such as the price control 'Part Four' bits of the Commerce Act) it badly needs paring back to something quicker, more targeted, cheaper, and more efficient.

In part the current clunkiness comes from importing an industrial-strength First World planning policy infrastructure, without paying enough mind to what might work for a small distant economy with not-quite-First-World incomes to pay for it. And in part it's because plans have been allowed to become voluminous grab-bags of miscellaneous agendas (price control, income redistribution, architectural design preferences). I've written previously about one bonkers 'food security' provision, where growing vegetables was prioritised over housing development.

The complexity largely speaks for itself, but here, as just one tiny example, is the legend you'll need to understand the Unitary Plan maps.


Six kinds of residential zone. Five kinds of 'open space'. Ten - ten! - kinds of business zone. Five kinds of rural zone (not counting the Waitakeres and the Hunuas, which are two more zones of their own). And seven kinds of coastal zone. 'Micromanagement' doesn't even begin to describe it.

And it's not just a matter of economic inefficiency, though the purely economic costs must surely be substantial: a fair slab of potential housing development, for example, reportedly got put on hold until the Unitary Plan finally saw the light of day at the end of a nearly three year process. It also carries social costs. The process is now so cumbersome and protracted that it is very difficult for non-experts to have their say - a level of difficulty that could threaten to undermine the perceived legitimacy of the outcome amongst the wider public. .

I'm also not sure that the planning process has fully got to grips with what you would imagine would be one of the core outputs of any plan: integrating the plan, infrastructure provision, and the intentions of owners/developers of resources. All three need to be aligned for anything significant to happen. Nor are enough people making even back of an envelope attempts to estimate the net benefits (widely defined) of plan provisions. What about those 'volcanic viewshafts', for example, which protect people's ability to see (say) Mount Wellington from their home? I wonder how Tokyo would have got on if it had to be designed so everyone could see Mount Fuji: not very well at all, I'd say. And if people were given the choice of their kids getting houses (say) $200,000 cheaper but without a view of Mount Albert, which would they pick?

Which brings me to my final point - the role of markets. Yes, we all know that plans may be needed to help address the externalities and coordination issues that can crop up in dense conurbations. But the role of markets and prices (and indeed economic analysis) hasn't been so much assisted as largely displaced. In particular, the housing market has been distorted and suppressed.

The Salvation Army's latest State of the Nation Report, for example, says (p50) that
based on an average occupancy of three people per dwelling...and given that Auckland’s population grew by an estimated 45,000 people for the year to 30 September 2016, accommodating this number of people required 15,000 additional dwellings. Consents for new dwellings over the same period lagged this number by 5000.
Over the past five years, the cumulative shortfall in new housing to cater for Auckland’s population growth is estimated to be almost 18,000 dwellings. 
The Sallies snarked that the recent level of consents (10,000 a year) "has been celebrated as proof that Auckland’s housing problems are being resolved by the market", but that "in a slightly longer context this record is, however, not remarkable". The reality isn't that the market has delivered, but inadequately. The reality is that the market has not been allowed to work properly, or, for some places and activities, not allowed at all.

In sum, on the one side, you have an uncertain quantum of planning benefits, and on the other, clearer and large costs. I wonder what the net outcome has been?

Wednesday, 1 February 2017

What should we do about 'cartels'?

I've just got back from holidays and as I'm playing myself in, I find that last week the National Business Review ran with an op-ed piece, 'Editor's Insight: Greens kick dead horse of cartel criminalisation'.

It said that the Greens were using cartel criminalisation as part of "a promising anti-business platform"; that cartels may be a non-existent problem - "In recent years, only one significant domestic cartel has been prosecuted (in wood chemicals) while the two others were in international air cargo and freight forwarding" - and that in any event "cartels are not necessarily bad news for customers or competitive business, except in cases of price fixing or blatant rigging of the market...Cartels are commonplace in certain industries where, for operational reasons, companies work together for their own benefit as well their customers’ but otherwise remain competitive entities. Shipping, airlines and similar services are examples".

I don't care about the politics of the issues, but I think the rest of the argument is debatable.

Part of it is people talking past each other. The NBR piece calls the ordinary, sometimes necessary, and as the NBR says, often beneficial cooperation between otherwise rivals in an industry a 'cartel': most people wouldn't. The arrangements that two airlines make to get your baggage to the end point of your journey with them would not normally be termed a 'cartel', and indeed most dictionary definitions don't include that sort of thing, either. Google "definition of cartel", for example, and what comes up at the head of the results is "an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition", which is the usual anti-competitive meaning of 'cartel'.

Clearly, there's never been any intention of criminalising beneficial pro-consumer cooperation, what the NBR called "bona fide commercial behaviour". The  debate has always been about those "cases of price fixing or blatant rigging of the market" the NBR also mentioned. So what should we do about those?

Are they too few to bother about? It's hard to tell: by definition, cartels are unknown unknowns until they're rumbled. I'll come back to that in a minute.

But otherwise I'm for criminalisation of the genuine, blatant - what are sometimes called 'hard core' - examples of price-fixing and bid-rigging. Last time I wrote about this, I said I endorsed criminalisation somewhat reluctantly: there are already too many redneck yobbos running around trying to jail people for this, that and the other, and not enough people taking liberal or progressive lines focussed on prevention and rehabilitation. And I've since learned that we already have a distressingly high rate of incarceration by international standards, which ought to give New Zealand lawmakers considerable pause for thought before they write yet another 'crime' onto the lawbooks.

But I'm still inclined towards a hard line. For cases that fit the classic hard core model - anti-competitive intent that is manifestly not bona fide, secrecy, collusion, persistence, materiality - it's beyond absurd that the shop assistant who pockets $25 from the till will end up in the District Court, whereas the shadowy guys who meet on the fringes of industry fairs to steal $25 million from the public won't hear the knock of the cop at their door.

And it's pro-business, pro-market people in particular who should be most concerned about this. The typical cartel is a conspiracy to rort other businesses. One good example is the Amcor/Visy stitch-up of the Australasian markets for cardboard packaging. Businesses who wanted to put their stuff in boxes and send it out the door - even the biggest (Coca Cola, Fonterra, Goodman Fielder) who can normally look after themselves - were being ripped off.

People who believe that, for most purposes, well-functioning markets are the best way to deliver national productivity and consumer satisfaction, should be equally incensed. There's nothing more brutal to the proper working of markets than a cartel that substitutes their own chicanery for the free play of demand and supply. People get less, and pay more, than they would otherwise. How'd you feel, for example, if it was the health service that was on the receiving end of one of these hard core cartels?

The only thing, frankly, that might give me pause for thought is that criminalisation might, just, be counterproductive. The idea behind it was that it would discourage cartel formation in the first place, and arguably would also strengthen the 'ratting out' regimes that competition authorities typically run to encourage cartellists to dob in their former co-conspirators. But it also could strengthen the incentives to conceal a new or ongoing cartel. I'd wondered about this, and subsequently learned that there's some evidence suggesting that today's cartellists could indeed be running deeper and quieter than before.

In short, it's never easy, for obvious reasons, to know the prevalence of (true, anti-competitive) cartels. And it's possible that criminalisation, perversely, might have led cartellists to become more adept at hiding them. We won't know that for a while, and maybe not for a long while, though it might be a straw in the wind that the first alleged criminal cartel cases are beginning to pop up in Australia (latest news here). For the time being we simply don't know how big or how small an issue might be out there.

If criminalisation meant that cartels became much harder to find, I might reconsider. But for now I'm not inclined to cut cartels any slack. They're criminal conspiracies, on the same moral level as guys in balaclavas on their way to the bank with shotguns. They should get the same treatment.

Monday, 9 January 2017

A cork in choppy seas

Every now and then I like to resurrect the Monetary Conditions Index (MCI), which was an attempt to combine both interest rates (the 90 day bank bill yield) and the exchange rate (as measured by the TWI) into a summary measure of the overall tightness of looseness of monetary conditions. It's not perfect - you could argue for including more measures or other measures (such as longer term interest rates) and for building the index differently - but it's better than a simple focus on interest rates alone.

Here's what it looked like at the end of 2016.


Yes, the Reserve Bank has set short-term interest rates on "very easy": the official cash rate (OCR), at 1.75%, is some 2.25% to 2.5% below the 4% or so that the RBNZ would regard as a neutral level. But overall monetary conditions aren't "very easy". The absolute level of the MCI doesn't translate in a straightforward way into "loose" or "tight", but given that it's currently well above its long-term average, you probably wouldn't be too wrong if you said overall monetary conditions were somewhere on the tighter side of neutral.

Focusing on the MCI is a good reminder that our overall monetary conditions are only partially under our own control: we're a small open economy in a world where the big guys' interest rate and currency policies are the ones that matter.. The RBNZ can set the OCR, but it doesn't have a lot of say about longer term interest rates (where our bond yields are set to a substantial degree by overseas yields plus a credit premium), and still less over the TWI, which is the resultant of a myriad of global variables.

Last year, for example, the NZ$ dropped a little against the yen (which strangely had become the 'safe haven du jour'), but rose a bit against the A$ (we offered higher yields and a faster growth rate), rose rather more against the euro (where the ECB is still in full negative interest rate / quantitative easing mode) and soared against the post-Brexit pound. Our ability to steer the TWI to where we'd prefer it is close to half of five-eighths of the proverbial.

It's also a reminder, as a corollary, that achieving our targetted 2% inflation rate can't be wholly under our own control, either. That doesn't mean that we shouldn't hold our RBNZ Governors accountable for making the best decisions they can under the circumstances they inherit. But sometimes - and the last year or two is one of those sometimes - I suspect that, given the macroeconomic hand they've been dealt by the overseas croupiers, there may not be any realistic setting for domestic policy that will meet the target,

Sunday, 1 January 2017

A good idea hits a snag

'Dumping'. What a good word for those wicked, wicked manufacturers overseas who 'dump' their goods here at lower-than-fair prices and drive our honest battlers to the wall. And when they've driven our fellows out, they have the market to themselves and can rip us off. Good job we've got anti-dumping laws to protect us, eh?

But hang on a minute. Let's just suppose you're in Malaysia and you make diaries. How likely is it, really, that one day you'll wake up in Kuala Lumpur and say to yourself, "I think I'll flood the New Zealand market with ultra-cheap diaries, and when I've cornered the market, I'll jack up prices and make a killing"?

Because there are two eentsy problems with that plan. One is you'll be making lower than normal profits (or even losses) in New Zealand when you could be making normal ones in New Zealand or somewhere else. And the other is that if you do indeed corner the market with temporarily low prices, the minute you try to jack up prices someone will come in and undercut you. After all, if the New Zealand market is so easy to enter and dominate, anyone can get into that game, including your mates on the other side of town when they spot what you're up to. Low profits now for high profits later doesn't look a realistic runner.

The reality is that 'predatory pricing' strategies like the Great Malaysian Cunning Diary Plan are likely to be rare and unsuccessful. If things turn up in New Zealand at unusually low prices, it's more likely that the low prices come from a genuinely cheap producer, and one who might well be sweetening the pot, if trying to break into a new market, with especially sharp pricing: nothing wrong with that. Or it could be that there's a temporary glut of something - tomatoes, peaches, steel - and producers everywhere are trying to shift what they're lumbered with for whatever it will fetch. Nothing wrong with that, either: you'd do the same. And in both cases New Zealand consumers (including businesses who use the cheap goods as industrial inputs) are the winner, and it's the effect on consumers that ought to be front of mind when we're thinking about policy issues like 'protection' from 'dumping'.

If only. At present, our anti 'dumping' legislation ignores consumers. If a Greek peach canner sells peaches in Athens for say $1 a can, and sells them in New Zealand at say 90 cents a can, a New Zealand peach canner can cry "Dumping!" and get MBIE to slap an import duty on the Greek peaches, even if consumers would have been happy to fill their trolleys with them. And our domestic monopoly peach canner, Heinz Wattie's, has indeed been protesting about those pesky Greek imports since 1998, and very successfully too. MBIE renewed the anti-'dumping' duties in July 2015 and lately there have been no Greek peach exports to New Zealand at all.

And those Malaysian diaries, by the way, are also a real life example. Malaysian diaries from a range of Malaysian makers - and from a range of Chinese ones, which proves my point about the Malaysian guy being unable to corner the market because others both in Malaysia and in China would undercut him - have been hit by anti-'dumping' duties from 2007 to 2015, as you can see on the MBIE web page listing all the completed anti-'dumping' investigations.

The anti-'dumping' law is long overdue for a fix which would allow competition and consumer benefits to be weighed in the balance, and not just the comfy position of the domestic incumbent. And it got one: it took them forever, but MBIE finally got round to it in August 2015. As I posted at the time, 'A good idea finally gets the nod', and you'll find links there to the history of the process. The guts was that there would be a new public interest test:
In future...domestic producers won't be able to have cheap peaches or tomatoes or building materials shut out of the New Zealand market unless they can show that the damage to them is more than the damage to New Zealand consumers. Which it often won't be: there's only a  few of them, and there's lots of us. A process that has been much abused for protectionist reasons, both here and abroad, is finally getting defanged
And then the politics kicked in, when the proposed legislation landed before Parliament's Commerce Select Committee. As the National Business Review reported,  'Politicians split on dumping penalties bill in run-up to Chinese steel inquiry': the National members wanted to go ahead, the Opposition members didn't. They split 5-5, deadlock: "we were unable to agree on whether to recommend that the bill be passed". The Committee's full report on their deliberations is here.

It's kind of strange how things have lined up. National might be thought of by some as in the pockets of big business, yet its members on the Commerce Committee took the pro-consumer side, while Labour, the Greens and NZ First, who some might expect to champion the consumer against the corporation, took the "protect New Zealand businesses" position.

To be fair, the Committee had to give due weight to the submissions in front of it, and the submissions were, as the Opposition members said in the report, "overwhelmingly opposed to this bill, warning that it would be likely to tilt the playing field in favour of dumped or subsidised imports rather than supporting local producers and jobs".

But of course the submissions were overwhelmingly opposed. They were overwhelmingly from the usual suspects (including Heinz Wattie's).That's precisely the problem.

As is often the case in policy matters (and overwhelmingly the case in trade policy ones) the small group of producers adversely affected by change make an unholy racket: the 99.5% of the population who'd quite like cheaper diaries or cheaper peaches don't get heard from.

This time, too, the consumer viewpoint went largely unheard, other than through The Warehouse Group's submission. True, it had its own barrow to push - it had been on the receiving end of various anti-'dumping' measures, including, as it happens, both diaries and tinned peaches - but even so it got to the right answer, that the new public interest test
is necessary to ensure that the legitimate interests of all stakeholders and the wider economy are routinely considered and balanced before punitive duties are imposed.
Yes, there will be genuine instances where domestic producers are getting unfairly shafted (overseas governments' subsidies to their exporters being an example) and we ought to have some backstop protection. Yes, we as a country resort far less to anti-'dumping' protectionism than other places do (notably Australia), so it's not a massive rort that needs a lot of fixing. And yes, you have to feel some sympathy for folks who might lose out from cheaper imports, as you will, for example, if you read the submission from people who grow the peaches for Wattie's. The solution is transitional help for people affected by policy changes, which should be part and parcel of all trade reforms but often isn't (and which has consequently helped provide the political oxygen for the protectionism of the Trumps and the Le Pens).

But for all that, the direction of reform is nonetheless right, and I'd say the same thing (just to be clear) if it were the Labour/Green/NZ First people for it and the Nats against. The process shouldn't cater solely to the "Woe is me" reactions, and it should take account of greater competition, greater choice, and lower prices.

The politics, however, is iffy, as the split on the Commerce Committee showed. Reform could conceivably be presented in a voter-friendly way - as making family budgets go further, for example, or as reducing input costs for New Zealand businesses. But the vocal views of the protected producers make it an uphill sell. Whether the government will have the bottle to keep on the right path in election year remains to be seen.

Wednesday, 21 December 2016

How strong is strong?

The economy's ticking along nicely. Tomorrow's GDP numbers for the September quarter are expected to show an 0.8% increase for the quarter, which would make it 3.6% for the year. And virtually all the recent data have been solid to robust. On the solid side, for example, there's the December quarter Westpac McDermott Miller consumer confidence index ("New Zealand households are in the mood to celebrate. However, it looks like the party will be more of a relaxing family barbeque, rather than a fullblown rager") while down the robust end we've had the latest (November) BusinessNZ/BNZ Performance of Services Index ("a picture of strength"). In per capita terms, it's not the boomer it might look like at first sight, and I'll come to that, but it's still a pretty picture.

Unsurprisingly, forecasters have been upping their estimates of what's down the track. The latest (December) quarterly consensus forecasts collated by the NZ Institute of Economic Research showed that likely GDP growth in the year to next March is now reckoned to be 3.5% (the September quarter consensus had picked 3.2%) and there has been a marked revision upwards for likely employment growth, which is now expected to be a stonking 4.8% compared with the 3.2% that seemed the best guess back in September. Forecasts for growth and employment over the three years to March '20 have been nudged a bit higher, and there isn't a single forecaster (out of the 9 polled) prepared to call a recession over that period.

But you knew that. What's my point? It's this: I reckon the short-term outlook may be even stronger than people currently expect.

Recently I've been playing around with my little Excel forecasting model, and I can't easily get the GDP growth numbers for the next year much below 4%. I've assumed there will be some kind of wealth effect on consumer spending, and I've assumed that there is enough capacity in the building trades to allow for another reasonably substantial rise in housebuilding. If that's your view of the world, numbers north of 4% start shimmering into view. Interestingly, according to the ANZ confidence surveys (for example, here), "Our confidence composite gauge (which combines business and consumer sentiment) is pointing to GDP growth accelerating to north of 4%. Capacity constraints (getting skilled labour) will put a dampener on that but we like the spirit".

I could easily be wrong. Perhaps New Zealand households have suddenly had an outbreak of financial prudence, or as RBNZ governor Graeme Wheeler put it in a recent speech, "Growth in real consumption per capita has averaged 1.6 percent pa in the current economic cycle – about ½ percentage point below the post-1993 average growth rate of 2.1 percent, despite the rapid increase in housing wealth...This more cautious consumer behaviour may reflect a reassessment of the ‘permanency’ of capital gains from household assets, and greater caution about the level and durability of future income growth".

Maybe. But I'd still be rather surprised if families, sitting on the biggest financial bonus of their lifetimes (especially in Auckland), continued to spend more slowly than usual. They may well (sensibly) discount the scale and the ultimate bankability of their winnings. But I don't see some wealth-related spendup being delayed for ever. Sure, some of it won't flow through to the GDP numbers: the new car and the trip to Melbourne go into the 'imports' box. But some of it will.

And on the capacity side, things are certainly tighter than they were: you could certainly read Stats' numbers on the recent slowdown in the growth of housebuilding (and of construction on general) as evidence that it's getting harder to assemble the crew for the next project. But on the other hand residential construction as a percentage of GDP isn't even up to past levels yet, as the chart below shows, and given the intense profit incentives to get houses onto the market, you'd expect us to go past previous peaks. My guess is that there's a dance in the old dame yet. And I also suspect (based on the technical economic methodology of Walking With Your Eyes Open Around The North Shore) that houses are going up quicker, which will help.


An economy that could well grow by 4.0% to 4.5% rather than the 3.5% that most analysts see in the cards would also part-explain a bit of an oddity - our low per capita GDP growth. In the June quarter our GDP (expenditure basis) was 3.8% up on a year earlier - but up by only 1.7% on a per capita basis. That was because the population grew by 2.1% (a natural increase of 28,200 plus net immigration of 69,100).

You look at that 1.7% per capita growth, and you could think two things. One is that it carries on our run of relatively slow productivity growth, and that's got to be right to some extent. But you could also think: hang on a sec. This isn't an economy with the look and feel of distinctly modest per capita growth. I appreciate that's an impressionistic judgement call, but I suspect the other leg to the apparently low per capita growth numbers is that they're a bit behind the actual pace of where the economy is (and is heading next).

It doesn't mean we've suddenly solved our slow-growth productivity problems. If anything, our reliance on construction in this cycle points them up: what we gonna do when the houses are up and the earthquake damage is fixed? And it doesn't mean that tomorrow's GDP number is going to be a little purler (any single quarter tends to have lumps in it). And 2016 was the year that gave us Brexit and Trump, so who knows what the next madness will be or what it might do to us.  But net net net, it wouldn't be too surprising if the next six to twelve months turned out rather better than currently expected.

Sunday, 18 December 2016

Good books - December '16

Surrounded by "isn't it awful", "the world is going to the dogs" types? Here are two antidotes: Nobel laureate Angus Deaton's The Great Escape: Health, Wealth and the Origins of Inequality and Johan Norberg's Progress: Ten Reasons to Look Forward to the Future. Both document the immense progress made in the past three hundred years by large parts of the world on multiple fronts - not just in living standards, but also in health, longevity, literacy, freedom, peace and global equality. Deaton's book in particular will remind you that a prime reason many poor countries have missed out is political: they are kleptocrat tyrannies (another reminder, if you haven't yet, to read Acemoglu and Robinson's Why Nations Fail), which is one of the reasons why Deaton is critical of foreign aid (it keeps the Mugabes going). He's got better ideas on how to help them, including making trade with the developed world easier. And Norberg is full of interesting facts, including that "285,000 more people have gained access to safe water every day for the past 25 years", and that 2,000 more people will have escaped from poverty in the time it takes you to read his first chapter.

I didn't profit from George Lakey's recent Viking Economics: How the Scandinavians Got It Right - and How We Can, Too. It's as if he went on a Seventies demo, fell asleep mid-chant - "The workers! United! Will never be.." - and woke up yesterday. And while good ideas on economic policy can and should come from anywhere and anyone, sociology isn't where I'd go looking first. It doesn't help that the "we" in the title is "the US", not "everyone", which means that when he compares Nordic health systems with America's, they're better, but then, whose isn't? So it's hard to draw conclusions about Nordic implications for everyone else. I'm pretty sure there are some good Scandinavian ideas we could pirate (particularly the Danish 'flexicurity' of jobs, and possibly the Finns' education ideas), but I wouldn't use this book as the instruction manual.

If you did want a good guide, try Helen Russell's The Year of Living Danishly: Uncovering the secrets of the world's happiest country. Great armchair travel from a very good freelance writer. One interesting fact is that by international standards Denmark is a high trust society - you can, and they do, leave your baby in the pram outside the restaurant - which is one reason they tolerate the government taking 54.6% of GDP: they trust their representatives to do the right thing with it. More than I could say about any recent New Zealand (or Aussie, British or Irish, let alone American) governments.

Speaking of Aussies, we don't get enough mainstream media coverage of their politics other than at moments of high drama (though there have been a fair few of those recently). I liked Annabel Crabb's Stop at Nothing: The Life and Adventures of Malcolm Turnbull: concise, punchy, well-informed. The back jacket summarises Turnbull as "colourful, aggressive, humorous and ruthless" in his pre-politics days, and looks at whether he's changed much since: not a lot, I'd say. He's also a good deal more interesting as a person than I'd imagined: it may not help his liberal-trapped-in-a-conservative-party day job much, but he'd make a good addition to most pub quiz teams.

Timothy Garton Ash's The File: A personal history is the story of what he finds when he reads the file the East German Stasi security service kept on him. He comes to a relatively generous conclusion about the 2% of the East German population who were informers for the Stasi - "What you find, here in the files, is how deeply our conduct is influenced by our circumstances...What you find is less malice than human weakness...when you talk to those involved, what you find is less deliberate dishonesty than our almost infinite capacity for self-deception" - without losing sight of the big point: "Yet the sum of all their actions was a great evil".

Boston must be the setting for more good thrillers per square mile than anywhere on the planet, the latest being Michael Harvey's Brighton (a Boston locality) where a Pulitzer prize winning journalist who'd escaped the poor Catholic Irish 'burb comes back to help his teenage friend, who is suspected of several murders. The blurb on the cover says "riveting and elegiac", and it is: fine writing. Harvey's also got a series about a Chicago based private eye, Michael Kelly: I've read the fifth of them, The Governor's Wife, which was also very good.

University of Wolverhampton professor Gary Sheffield has come out with Douglas Haig: From the Somme to Victory, an updated and revised version of his earlier (2011) The Chief: Douglas Haig and the British Army. It's a balanced account that gives Haig more credit than he usually gets, and particularly on the logistical side of running an enormous enterprise. As Sheffield notes (pp154-5), at its peak the British army in France had to feed 2,700,000 men: "To keep one division in the field for one day required 'nearly 200 tons dead weight of supplies', and Haig's army consisted of more than 60 divisions". Haig as chief executive comes out well; Haig as general, somewhat well, though I haven't been entirely shifted from the "lions led by donkeys" camp. You could argue that Haig's "one last push and we'll break though into open country" was indeed finally vindicated, but too many people died to get there. Then again, it's also hard to shake the thought that, with the technologies of the day, there was little alternative to an attritional strategy, however appalling the casualties became.

Military historian Allan Mallinson doesn't like the "lions led by donkeys" line (it's "facile"), but in his Too Important for the Generals: Losing and Winning the First World War he's not impressed by the generals' strategic grip: "nothing can acquit the high command of its failure to see beyond no-man's-land [on the Western Front] and its embrace of the 'strategy of attrition" (p330). He also believes that the politicians should have taken a stronger hold of the overall direction of the war, and in particular gone for more flanking initiatives (like a better run Dardanelles operation) as well as boosting support for Russia and Serbia, rather than letting Russia slide into revolution and Serbia lose to Austria. All of which reflects the still unsettled scholarship on the Great War: you no sooner read one book suggesting the generals were doing as well as they could than the next suggests the opposite.

In brief: anything Robert Harris turns his hand to (the life of Cicero; a dystopian world where Hitler won) is highly readable. You'll like Conclave, which (natch) is about a papal election. Carl Hiaasen's written a series of high-paced comic novels about Florida bizarrenesses: his latest, Razor Girl, is right up with the rest of them. And if you like private eye novels set back in the Roman Empire - and let's face it, who wouldn't - you've probably worked your way through Lindsey Davis' Falco and Flavia Albia series and John Maddox Roberts' SPQR series, but don't miss the equally good Russo ones by Ruth Downie. I've just finished the latest, the fifth in the series, Vita Brevis.