A sharp fall in expected GDP growth

The Reserve Bank’s expectations survey results were released this afternoon.  The Bank itself will have had the results last week, and will have been able to take them into account in finalising tomorrow’s Monetary Policy Statement.

Mostly, only the inflation expectations numbers get reported.  They didn’t change materially, whether at a 1, 2, 5 or 10 year ahead horizon.   Perhaps that isn’t too surprising, but it is encouraging given the lift in the sectoral core inflation measure evident in the most recent CPI.

There was also hardly any change in wage inflation expectations –  a slight lift in one year ahead expectations and no change at all in two year ahead expectations.  On these measures, real wage inflation is expected to no higher than 1 per cent per annum –  not high in absolute terms, but rather faster than recent productivity growth (itself next to non-existent).   The Bank themselves produced a graph of the results suggesting real wage inflation is actually expected to slow from here.

wage expecs

I was more interested in two other series.  In the first, the Bank asks respondents to indicate how tight they think monetary conditions are now, and how tight they expect them to be a year ahead.  Ever since 2011, the mean respondent has judged conditions to be easier than neutral –  despite which inflation has consistently undershot the target –  but what is somewhat interesting is how respondents expect things to change.

In this survey, there has been a bit of an increase in the proportion of respondents who expect monetary conditions to tighten over the coming year.

mon cond year ahead 18

Those expectations still aren’t as strong as they were at the peak of the (misplaced) tightening fervour in 2014, but they aren’t far away now.    Quite why, or what has changed, is a bit of a mystery (noting the unchanged inflation expectations).  “Monetary conditions” isn’t further defined in the survey, so includes (implicitly) not just official interest rates, but the exchange rate, credit conditions or whatever the respondent has in mind.  Perhaps respondents are expecting credit conditions to tighten (further)?

Whatever the explanation, it does seem a little surprising set against the backdrop of respondents’ expectations for GDP growth.  The survey asks about expectations for GDP growth one year ahead and two years ahead.  The one year ahead numbers can be thrown around by all sorts of short-term noise, but the two year expectations should be a better reflection of the underlying sense of what is going on (as with the two year ahead inflation expectations).  Three months ago respondents expected real GDP growth two years ahead of 2.7 per cent.  This time, the two year ahead expectation is 2.2 per cent.

Is that difference material?  Well, I had a look back over the history of the series.  If we go all the way back to 1996, there have only been three quarters when two year ahead growth expectations have been revised down by more than the fall this quarter.

When were they?

The first was in the September 1997 quarter, just prior to the 1997/98 recession (a fall of 0.8 percentage points).

The second set were the December 2008 (a fall of 0.8 percentage points) and March 2009 quarters (a fall of 1.6 percentage points), in the midst of the last recession, and the financial crises abroad.

(The quarters with large increases in expectations also come, as one might expect, just after these recessions.)

The fall in two-year ahead expectations this time is still a bit smaller than the falls in 1997 and 2008/09, but it doesn’t look like a result that should be lightly dismissed.  In one sense, people can say “oh, just consistent with the fall in business confidence measures”, but this survey isn’t just a sentiment indicator, but asks about specific macroeconomic aggregates.   And the fall isn’t just concentrated in one year ahead expectations (which actually fell less than the two year ahead expectation), suggesting that whatever is influencing respondents isn’t something they expect to dissipate quickly.

I’d be a bit rattled if I was the Reserve Bank.  It just adds to the sense that growth has probably slowed further already (beyond what is reported –  last official data was the March quarter and it is now August) and may have further to fall.  And respondents –  who include most of the economic forecasters –  don’t see much reason to think a significant rebound is likely any time soon.

Such expectations aren’t accurate predictions of what will happen two years hence –  partly because if things get bad, policy (including monetary policy) responds –  but large falls in the past have coincided with the two periods of worst economic outcomes in the last couple of decades.

(And readers of the Minister of Finance’s speech today won’t have found anything in it to instill much confidence in the sort of rebalancing  –  or stronger productivity growth in the medium term –  the Minister claims to be pursuing.  Strangely, the Minister continues to repeat the election campaign lines about how well the economy has done in recent years –  the economy that saw weakening per capita GDP growth, little or no productivity growth, weak business investment and a declining relative size of the tradables sector.)

Don Brash and Massey revisited

I wanted to touch on three largely-unrelated points, two on the controversy, and one of what Don Brash was apparently going to say in his speech:

First, very briefly, much of the story has been written in terms of Massey’s Vice-Chancellor denying Don Brash the right to speak on campus.   As far as I can see, Don Brash doesn’t have any particular “right” to speak on campus, any more than you (assuming “you” aren’t a Massey student) or I do.  In that sense, the issue shouldn’t be about Don Brash –  although that is what Professor Thomas tried to make it about –  but about a Massey student society’s own freedom; the freedom to invite anyone they wish (operating within the law) to speak on campus.  That should probably be where the focus is, including  adding the question of whether Professor Thomas thinks she should also have the right to ban altogether student groups that might happen to hold views she strongly disagrees with. After all, such groups might be fora for such dangerous ideas to be uttered, not just once (probabilistically –  see the VC’s “fear” that Don Brash would utter such views) but day after day, week after week.   Both would be chilling, and especially so in a public (state-established, largely state-funded,  and with several members of the council appointed by the government) university.   Has she stopped, even momentarily, to reflect on the implications of her stance?  She’d have had no problem with anti-Vietnam War speakers –  even eminent sceptics – being banned in the 1960s?  Or perhaps speakers favouring legalisation of homosexuality in the 1970s?  And so on.  It always pays to try to look at these things the other way round, unless of course Professor Thomas’s view is “who care’s about inconsistency, I hold the commanding heights now”.    A fine standard for a university that would be.    As it is, neither Professor Thomas –  nor her Council –  will explain themselves.

Second, someone asked me last night why I made so much in my post of the fact that Professor Thomas had only been in New Zealand for 18 months or so.   Her general stance –  banning the Brash speech at the merest whisper of the threat of a few protestors, and banning it because she regarded Dr Brash’s view on some live public issues as unacceptable –  would be reprehensible from any Vice-Chancellor.

And, sadly, this stuff happens elsewhere.  La Trobe University in Melbourne last week initially tried to ban a speaker –  social commentator Bettina Arndt –  they didn’t like, then partially backed away trying to charge the organisers hefty security costs, only now to finally back down completely and adopt the only stance consistent with the values of a free and open society

But university administrators yesterday told The Australian they had decided the university would cover the cost of security, out of a desire to preserve free speech and discussion on campus. “We welcome free speech and the event will go ahead,” a spokesman said.

But if Professor Thomas banning the student society from having Dr Brash to speak would have been reprehensible at the best of times, whatever the issue, I found it more than usually unacceptable when the views Professor Thomas disapproves of so strongly are those relating to the Treaty of Waitangi, Maori wards, etc etc.    These are very specific New Zealand issues, and despite her repeated attempts to wrap herself in the Treaty of Waitangi (all that talk of being a Treaty-led organisation, whatever that means) and it ill behoves newly arrived foreigners to attempt to decree what aspects of these issues should be able to be freely discussed (hint: in a free society, any of them).  It all has the feel of a social justice warrior, rather out of her depth in a new country, having allowed herself to be captured by a particular minority.  It would be unacceptable in any public university Vice-Chancellor, but should be doubly so in one with little familiarity with the underlying issues –  and, frankly, no obvious personal interest or commitment to the future of New Zealand democracy or society.

My third point was really totally unrelated to yesterday controversy itself.  But the Herald has on its website the speaking notes Dr Brash was planning to use for his talk to Massey students about his life in politics etc.  I was struck by his final comments, particularly those on a couple of economic issues and how they have been treated under the previous government, and how things might unfold under this government.

Of the previous National government

A hugely disappointing Government:

I. They pledged to reduce the gap between NZ incomes and those in Australia, and utterly failed;

II. They pledged to make housing more affordable, and utterly failed

Hard to disagree with him on either of those.  Productivity gaps between New Zealand and Australia widened over the last 9 years, and as for housing, it became ever more unaffordable in large chunks of the country.

And here is what Dr Brash –  former leader of both National and ACT – has to say about prospects under the current Labour-led government

In my own view, the present Government is likely to do a better job in making housing more affordable, but probably a worse job in closing the income gap with Australia

I’m pretty sure he will prove right about the income and productivity gaps with Australia –  it is the sort of story I’ve been telling myself –  although bear in mind the likelihood of a change of government in Australia next year.

But what of housing?  It would be great if Dr Brash’s positive story were true, and would be quite an indictment on the previous National government.  But is he right?

I’ve been sceptical for some time, for two main reasons:

  • first, any Labour-led government was going to be dependent on the Greens, who had never shown any signs of fixing the urban land market in ways that would open competition and lower land prices. “Sprawl” is, after all, one of the things they seem to detest, and
  • second, whether in the year or two before the election or subsequently, there has been no mention of freeing up the land market from party leaders (Little or Ardern in Opposition, Ardern as Prime Minister –  although it was there if you went looking in the details of the housing policy), and lots of talk of policy responses since which, at best, only tackle symptoms.  There is lots of talk of Kiwibuild –  which, at its best, would do nothing about the land market.  There was –  and is –  no sign that the Labour leadership really believed what most serious analysts will be telling them is the only long-term fix.  If you don’t really believe it strongly, are never heard to openly make the case for it, it seems unlikely that you will be willing to push such reform through your own caucus, let alone get in through the Greens caucus.

In the last week or so I’ve seen a couple of bits of data which still leave me unclear about whether Labour will, finally, make much of difference in fixing the decades of dysfunction.

Whatever doubts many have about the Housing minister, Phil Twyford, it has always seemed as though he genuinely got the sort of reforms that might be needed.  The free-market people at the New Zealand Initiative certainly thought so a year or two back when they teamed up for a joint op-ed.

Consistent with that interpretation were some reported comments Phil Twyford had made recently in a vigorous debate with Environmental Defence Society CEO Gary Taylor.  I saw a copy of these yesterday, I gather taken from a longer article at politik.co.nz (for those with access)

Twyford replied that it was a question of values. 

“This is for us, for Labour, for our coalition government, this is fundamentally a social justice issue. 

“Our objective is not to build a Copenhagen of the South Pacific. 

“We could build a beautiful city with a whole lot of the policies we have talked about. 

“We could build a Vancouver of the South Pacific; beautiful but utterly unaffordable. 

“I’m interested in us fixing this totally dysfunctional urban land economy.

 “If we don’t deal with affordability we will have completely wasted the opportunity that has been given to our generation.”  

Twyford said the only way to deal with the affordability issue was to deal with the land price issue and that meant dealing with the artificial scarcity of land caused by the planning system and the availability of finance for infrastructure.

My spirits lifted when I read that. I imagine it was the sort of thing Dr Brash has in mind when he talks about a degree of optimism that Labour might change things for the better.

But then there was the Cabinet paper pro-actively released last week on the government’s “Urban Growth Agenda”.   It was really only a progress report, with full papers to come back to Cabinet next year.  And there was some good –  if highly politically contentious –  stuff around congestion charging.  Near the top of the list of recommendations (all only noting ones) were these positives

note that the high cost and shortage of housing is partly due to deep seated problems with the operation of our urban land markets and how infrastructure is planned, funded, and financed.

note the Urban Growth Agenda will deliver medium to long-term changes to create the conditions for the market to respond to growth, bring down the high cost of urban land to improve housing affordability and support thriving communities.

But then, towards the end of the paper there were paragraphs 32 to 35, which some experts (in email chains I’ve been on) have seen as undermining any hope of a seriously different and better vision of how land markets might work.

How we could see growth occurring in practice
32. Growth enabled through the UGA would likely take a phased and sequenced approach targeting growth within existing urban centres before greenfield development.

33. For example, in Auckland we will firstly emphasise urban intensification and regeneration projects in existing areas, particularly along transport corridors and urban centres. Development in already planned greenfield areas would take place alongside this.

34. Our attention will then focus on new transit-oriented development occurring within existing nodes [a few words redacted at this point] . Development opportunities will be identified collaboratively with local government and other stakeholders.

35. Finally, new leap-frog greenfield development would be enabled beyond the current Future Urban Zone with a priority towards the South of Auckland. This step would be subject to new spatial planning and cost allocation tools to mitigate risks and ensure an efficient urban growth pattern occurs. The majority of this growth would be within Auckland’s existing administrative boundary.

All of which sounds a great deal like central and local government planners trying to keep control, determine where growth does and doesn’t happen, with little real sense of the possibilities that genuine competition (among potential developers and landowners) would open up.  In the entire Cabinet paper, there is no suggestion that we might move to a model in which landowners had a presumptive right to build.

I’m left still fondly hoping that Don Brash’s favourable judgement on the new government, in this particular area, will prove well-warranted, but also still more than a little sceptical.  Nothing like a crunch decision seems to have been faced yet, nothing that would really tell us whether the government will radically transform the market  –  and it really is a social justice issue, as Phil Twyford described it.   But there is one other test: the market test.  If landowners, actual and prospective, really believed that the government was serious, that it was going to implement the sort of vision Phil Twyford talked about so eloquently, land prices on the peripheries of our cities would be falling, and falling rather substantially (just as taxi badge prices in regulated cities abroad as competition finally opened up that previously-overregulated market). I’m not aware of any evidence of such falls, but if readers are please get in touch and I’d be happy to report such an encouraging development.