Tuesday, 31 May 2016

The state of telco play, 2016

The Commerce Commission's latest annual report on the state of our telco markets came out last week. At the time I was too busy on other things to give it a good read - and if you're also up to your eyes, then there's a media release and a cheat sheet infographic to give you the gist - but I've now got round to it and, like the previous ones, it's well worth a look (my comments on earlier ones are here and here).

Before getting into some of the details, I'll just say - again - that we have a daft system for regulatory review of what's happening in our markets. The Telecommunications Commissioner, who is part of the Commerce Commission, is required to conduct and publish reports on what's going on in telco markets (under s9A of the Telecommunications Act 2010), but the Commerce Commission itself is forbidden to do it in any other markets (under the courts' reading of the Commerce Act). There are people in the bowels of MBIE looking at the discrepancy at the moment: let's hope they come down on the sensible side of the fence.

And there's a good example in this latest report on how proactive enquiries into the state of competition might work. The report was looking at market shares in the mobile market (p36):
We have noted 2degrees’ very small share of business market revenues in prior reports. We commissioned UMR to undertake a survey of the business mobile market in the latter half of 2015 to gain a better understanding of the market and check if there were any barriers to expansion. Overall, the survey revealed no evidence of anti‑competitive behaviour.
Excellent - the Telecommunications team found something odd that might have been an issue with competition, investigated it, and was able to blow the All Clear. Exactly what should be happening in every other sector of the economy.

This year's report is mostly a record of solid, ongoing progress in the sector, with greater uptake, faster speeds, decent levels of consumer choice, and somewhat lower prices (more obviously lower when quality-adjusted). Your interests may be different, but here are a few thoughts that occurred to me.

This is the graph showing how broadband download speeds have been improving.

All well and good, but the set of comparators looked a bit idiosyncratic. Where are the smaller OECD economies like Denmark or Ireland or Switzerland that we might normally want to match ourselves against? And why Malaysia, of all places? So I went to the original Akamai report these numbers came from, and I was able to find a table of download speeds for a wide range of Asia-Pacific countries (including us), and also a table of European speeds.

By Asian standards, we're doing pretty well, especially when you consider that some of the very densely urbanised countries like Korea, Hong Kong and Singapore must be a good deal easier to serve, compared to us having to trench our way up the Cobb Valley. But by European standards, we're not such hot stuff, even when compared with long, skinny, thinly populated places like Norway and Sweden which must have similarly challenging geographies.

If we were a European country, we'd rank only 21st on that table (behind Poland, ahead of France). And globally we rank 41st in the Akamai universe - not so flash. We'd expect to be somewhere in the top 20 on most other economic measures (the other day we came 16th in the latest World Competitiveness Rankings, for example). So by all means let's be happy that speeds have improved, but also let's be aware that we are (for whatever reason) still well behind the sorts of speeds our kids on OE can get (unless they're in Australia).

There was also a fascinating chart showing the extent of pent-up demand in New Zealand for decent online content, after years of limited choice, long delays, and high prices. The little arrow on the chart shows the immediate and ongoing surge in data consumption when Netflix arrived. I can only begin to imagine the existential angst in the strategic planning units of our telco and media companies: some current business models can't hold.

Finally, on the regulatory front, the report noted (p30) that
The wholesale cost of terminating a phone call on a mobile network is called the mobile termination rate and is regulated in nearly all countries. We last reviewed the mobile termination rate on 5 May 2011, and the last regulated reduction prescribed in that determination was to 3.56cpm (excluding GST) on 1 April 2014. The ACCC last year set the mobile termination rate for Australia at A1.7cpm, and as at July 2015 the weighted average for Europe was 1.22 eurocents per minute.
There is no obvious reason why our mobile termination rates should be well in excess of those overseas - at current exchange rates, roughly twice Australia's, and roughly 75% higher than Europe's. The technologies are the same, and on some opex costs we should be cheaper (our wage bills are lower, for example). I'm no great fan of extra regulation, and still less of extra price control regulation, but if the subtext of "We last reviewed the mobile termination rate five years ago" is "And, you know, it's about time we had another look", I reckon the Telecommunications Commissioner is on the right track.

Friday, 27 May 2016

Overoptimistic Budget forecasts?

My post yesterday about the Budget concentrated on what I thought were some of the key higher level issues. But perforce you can't cover everything, and I didn't spend any time on whether Treasury's economic forecasts looked plausible or not.

Reading the various Budget commentaries that have come out since, however, apparently it's an issue that bothers some folk. So in an effort to clear the air, here's a table that compares Treasury's main forecasts (finalised on April 13) with the latest set of consensus forecasts collated by the New Zealand Institute of Economic Research (published on March 14). I've made them a bit more comparable by using Treasury's March year forecasts, rather than the headline June year forecasts in the Budget, and which are available on p138 of the Budget Economic and Fiscal Update: this matches the March years used in the consensus forecasts. There are still differences between them (eg some March quarter compared with full March year numbers), but they make no real difference. The Treasury set go out a year further than the consensus does.

My conclusion? They're not identical twins, but they're clearly describing the same economy. Treasury's got a slightly stronger GDP track, and when you unpack it and look at the more volatile components of GDP (house construction and exports), you find it's down to Treasury expecting a bigger and longer burst of housebuilding than the consensus did, and they could well be right.

There may well be a timing element involved, too. The set of consensus forecasts was collated after a very rocky period for global markets in January and the first half of February, when people had been anxious over the prospects for global economic activity (and particularly over China), and this may have helped produce a slightly weaker GDP outlook compared with Treasury's set, which had the benefit of seeing markets recover confidence in March.

But these are marginal points around the edges. For all practical purposes the Treasury forecasts aren't meaningfully different from the consensus. There's the odd item I'd quibble with - I wouldn't be surprised, for example, if Treasury's expected drop-off in net migration didn't materialise to the extent they think it will - but overall there's not a lot of evidence that Treasury's forecasts are idiosyncratically off the mark or systematically biassed.

And if you've still got some "smoke and mirrors" conspiracy view of the Budget numbers and projected surpluses, as I mentioned yesterday the overall picture of the fiscal position gradually moving into growing surplus comes through even when you use the alternative, lower growth scenario that Treasury also modelled in the Budget documents.

Thursday, 26 May 2016

No drama - and that's fine

First thing I'd say about today's Budget is that I hope the central economic forecasts work out as expected. If we do indeed get annual economic growth of close to 3% a year, low inflation, and the unemployment rate gradually falling to 4.6% by 2019, we'll be doing quite nicely, thank you. The growth numbers aren't as hot if you do them on a per capita basis, as you really ought, but even so 1.3% a year isn't too shabby. And a 4.6% overall unemployment rate does a power of good for getting more marginal groups into employment.

The Budget is one of the few places where people can get some sort of feel for one particular facet of the economic outlook, namely what is likely to happen to business profits in coming years: we don't yet have a Statistics NZ measure (most other countries do), but fortunately Treasury has to forecast them to get a handle on likely company tax. For agriculture, it's not pretty, as you'd expect given the loss-making level of dairy prices in particular: agricultural profits are expected to have dropped by 5.6% in the March year just finished, and to drop a little more (‑1.6%) in the year to next March, before snapping back smartly in the years to March '18 (+29%) and March '19 (11.5%).

For non-agricultural businesses – the bulk of the economy – profits went up only 2% in the year to March '16, are expected to grow only slowly in this current year to March '17 (+1.0%) and to do rather better in the following two years (+8.75% and +7.25%), though it's far from a profits bonanza. Currently, our share market is trading on a historically high valuation: that is partly down to low interest rates making equities relatively more attractive but (if these Treasury numbers play out) it may also be down to unrealistically optimistic expectations on corporate profits.

There were no big tax or spending initiatives, and that's good. We may have more of a splurge next year as an election looms closer, but not this time round: on Treasury's measure of the 'fiscal impulse', this year's Budget was effectively neither expansionary nor contractionary. And that's okay: “steady as she goes” is – mostly – fine. Outside emergencies, we don't need abrupt, unsignalled change in fiscal policy. We certainly don't need populist Finance Ministers splurging to win elections, or running perennial deficits to build taxpayer-funded clientèle constituencies, which has been the fiscal downfall of a number of European exchequers. And the fact that our government finances are now in good shape by developed economy standards is a tribute to a succession of Steady Eddies in both major parties – not that they get much credit at the time from the squeaky wheels demanding public grease.

It's good to know too that the fiscal surpluses look reasonably robust to whatever the economic outlook eventually throws at them. As usual, Treasury runs some alternative 'better' and 'worse' scenarios, and even on the 'worse' outlook, the fiscal outlook remains solid. There are borderline deficits/surpluses for a couple of years, and then surpluses re-emerge in 2019 and 2020. And you can see other evidence of fiscal responsibility elsewhere in the Budget data. Since the last major economic update last December, for example, expected tax revenues over the 2016-20 period have improved by $3.6 billion, which in some hands would have been an excuse for a knees-up: in fact,  expected spending has been revised down by an equal $3.6 billion.

I've qualified the fiscal outlook as “reasonably” robust, because there's still one factor in the background that's flattering the accounts, and that's our export prices. Sure, dairy prices are at a low ebb, but overall the country is still benefiting from export prices that are still substantially above their historical averages when compared to the cost of the things we import (our 'terms of trade'). Maybe they'll stay there. But maybe they won't. If they didn't, our fiscal picture would look more like this.

The dark blue line shows the fiscal deficit, adjusted for the state of the economy (the 'cyclically adjusted balance', or CAB), as a percentage of GDP. As a general rule, it's a much better guide to the true state of the fiscal books than the headline number you'll see in the newspapers, but at the moment it doesn't make a lot of difference as both the headline number and the cyclically adjusted number are showing the same thing: a modest surplus gradually turning into a more substantial one. But the dashed line shows what the deficit would be if our export prices compared to our import prices dropped back to where they've been on average over the last 30 years. We'd still be in deficit – not a big deficit, and even from this downbeat perspective we'd be back to breakeven by 2020 – but it's just worth remembering that, while we have been good fiscal managers in recent years, and genuinely do have some room to manoeuvre if we want more spending or less tax or less government debt, we still wouldn't want to go mad about it.

The tweak around the edges I'd have liked to have seen would have been more infrastructure spending, partly because we're short as things stand, partly because I think it's part of the answer to getting that 1.3% per capita growth up to something  more substantial, and partly because borrowing costs are exceptionally low, so it's an excellent time to borrow to pay for assets with a long-lasting payoff. And one of the handout blurbs was headlined “$2.1 billion investment in public infrastructure”, which sounds at first blush like it got adequate attention.

But that's a total over four years ($700 million in opex, $1.4 billion in capex): per annum, it's not a lot in the great fiscal scheme of things. And it's also hugely dominated by the upgrade to the IRD's computer systems, which are going to cost a scarcely believable $1.4 billion ($1.06 billion opex, $350 million capex). Some of the rest is merely keeping pace with the growth in population (new schools are required, for example) or replacing and strengthening Canterbury infrastructure. There's very little left that you would regard as a genuine increment in the amount of infrastructure per capita – and little or nothing specifically targeted at the biggest infrastructural deficit of all, the one in Auckland.

More positively, it's good to see that Treasury plans to make at least some use of current exceptionally good borrowing terms. There are plans for a new 20-year bond to be launched later this year. That's a start, but other countries are way, way ahead of us in taking advantage of the current global borrowers' market. Switzerland has just done one for 42 years, France for 50, and Belgium (!) and Ireland (!!) have managed 100 year issues.

Overall? There were some nice micro measures (like funding for more apprenticeships and other aids to get people into jobs) – there may even have been too many micro programmes. But it was also missing a few things: there was a good deal of faffing, but less substance, on housing and multinationals' tax, and it should have done better, even within an overall conservative setting, on infrastructure. But, as I said earlier, not enough credit is given at the time to Finance Ministers who steer a steady course: another year of continuity and responsibility is a good outcome.

Tuesday, 10 May 2016

Why are Auckland housing consents falling?

Here's a rather worrying graph. It's the number of consents each month for new dwelling units in the Auckland region, on a 'trend' basis (the statisticians' best effort to remove seasonal variation and random noise).

I've put up the whole history of this series*, back to the start of 1995, because it tells us several interesting things. One is that, while people rightly point to a variety of reasons for Auckland's current housing shortage, one that tends to get forgotten is the GFC: at a rough estimate, at least 7,500 houses didn't get built in that period that would normally have been. And another is that despite the recent strong rise in consents, we're still not up to the best levels of the past (in the early 2000s), even though the need is much more pressing these days.

The thing I wanted to highlight, though, is the drop-off at the right-hand end.The number of consents has been falling since September and October - it was 812 in both those months - and has since dropped to 766 (in March, the latest date available).

It's certainly a very odd development. It seems at variance with what you see on the ground in Auckland. Sure, there are lags between consents and construction, and a lot of the current activity could be down to the higher levels of consents issued earlier last year, but if there was a genuine drop-off in the housing consent pipeline over the past six months, you'd think you'd be seeing some slackening off in actual construction activity by now. And you're not, at least on my subjective 'economics by walking around' assessment. Everywhere I go around Auckland's North Shore, there are new developments I hadn't seen before.

Given that the data, at least to me, don't line up with the reality I see, I've been doing a bit of tyre-kicking with the ever-helpful Statistics NZ staff, on this occasion Danielle Barwick in the Christchurch office (and I should say all views here are mine, not hers).

My first thought was perhaps the number of dwelling units per consent might have been going up. Ten years ago, perhaps the 'typical' consent was for one detached house: maybe, these days, one consent could be for 20 terraced townhouses? Some of the new developments are high-density indeed: here's one I snapped today at Silver Moon Road in Albany.

So consents, perhaps, could be going down but with increasing dwellings per consent, dwellings could still be going up? Nope. A single consent for a 30 house development gets counted as 30 dwelling units.

There is another possibility, though. At the early stages of a project, there can be a consent for the earthworks part of a project: at that stage the final shape of the development isn't yet known (so Stats can't put a dwellings unit number on it, though they will when it's finalised). You could have a single consent actually representing a very large project until the full size gets logged later. And if there are a lot more of those happening - and there are lots underway, here's another local one, off Spencer Road, again in Albany - then the consents numbers could be temporarily lower but the pipeline could actually be getting larger.

Maybe that's part of the answer, and we'll all be relieved when these earthworks-stage projects eventually get counted at their full value. Maybe something has fried the brain of the trend-identifying algorithm, and it'll all come right with a few more months' data. Maybe the planners have been experiencing some kind of consent back-up or logjam (though they've been handling higher numbers in the past, so why now?). And it could be that this recent drop-off in consents is just one of those things: there have been fluctuations in the past that went against the longer-term trend for a while before getting back on track.

At the moment, though, it looks distinctly odd. And if it keeps up for any further length of time, it will go from 'distinctly odd' to 'downright alarming'.

*You can find it for yourself, if you're minded, on Stats' Infoshare service, search for the series identifier BLDM.SF021100A1T

Friday, 6 May 2016

Hold the rotten tomatoes

Every now and then (my last one was here) I've counselled folks to have a bit of forbearance when it comes to getting stuck into finance ministers or central bank governors. If they've stuffed something up because of mistakes any sensible person, in possession of the same data and same policy mandate at the same time, would not have made, that's one thing: throw the rotten tomatoes by all means. But that's not often the case: more often, they - like the rest of us - are manoeuvring best they can in a statistical fog, not entirely sure where they are, let alone what's round the next fogbank.

Today's Statement on Monetary Policy from the Reserve Bank of Australia had some graphs that make the point quite well. Here are the RBA's forecasts for Aussie GDP growth, core inflation, and the unemployment rate over the next two years - plus the confidence intervals around the central forecast, based on how well the RBA's forecasts have actually turned out since 1993.

Even if you are a good forecaster - and central banks tend to be at least as good as any others in the forecasting game - and your best guess is that GDP growth will be a little over 3% in two years' time, the likelihood (going by the 70% interval) is that it's actually going to be somewhere in a band from a bit under 2% to around 4.5%. 

In other words, your best call is that the economy is growing at or a little better than trend, and you probably don't need to do anything to monetary policy from a growth perspective. But it might turn out (given that monetary policy has long lags) that right now you should easing (because the economy is actually heading for well-below-par sub-2% growth) or that you should be hitting the brakes (because it could as easily be heading for boom-time 4.5% growth). And bear in mind that there's roughly a one in three chance that the actual outcome might be something else again - even slower or even faster. And (as you'd expect, since they're all linked) there are similar uncertainties over inflation and unemployment.

Let's not forget, either, that this is uncertainty about the future, when, in addition, there's uncertainty about the starting point of the here and now. That's why the Fed of Atlanta, for example, has felt it needed to come up with its "nowcast" of where US GDP currently lies. The rotten tomatoes will have their uses someday, but the reality is that monetary (and fiscal) policy making, real time, is a lot more difficult than it's often given credit for.

On the substance of what's actually happening in Australia, I was interested in these two graphs.

In the top one, you'll see that non-tradables inflation, the pricing pressure generated domestically and the only bit of inflation that a central bank can really expect to control over the longer haul, has been falling sharply over the past three to four years. In the bottom one, in the 'Administered' panel, you'll see that the prices that get announced to you in a largely non-market way - the rates, school fees, medics and medicines, the cost of a stamp - are also not going up anywhere near as much as they used to. They're still going up in Australia by 4% a year, sure, but it's nothing like the 7% they were getting away with four years ago.

And there you have the big puzzle for central banks everywhere (including ours), given that these patterns, and others, including sharply lower inflation expectations, are common across a wide range of developed economies. Inflation has headed lower than central banks (and everyone else) thought it would, given the cyclical state of the developed economies, and there's scant sign of it returning to the target bands central banks are meant to be policing. If anything, current inflation expectations suggest the undershoot will either persist, or get even larger.

So, as well as the cyclical uncertainty over where the economy is right now, and the cyclical uncertainty over where it might go next, there's an even bigger, structural one: why isn't inflation behaving the way it used to? And that's where life gets really tricky for central bank governors.

Because nobody knows.