“Time for some tough decisions”

12 MinutesBy NZ Trucking magazineOctober 30, 2020

On 28 October the RTF hosted a zoom presentation with economist Cameron Bagrie, who gave a rundown on the current state of affairs in a Covid-inflicted environment. Taking a local and global perspective, also commented on what may lie ahead of us in the short to medium term. 

Overall effect of Covid

Bagrie began by commenting that Covid has exacerbated change and highlighted the growing gap between the firms that are fit for a disruptive environment and those that are not. New Zealand firms are no exception. “We need to learn to take risk, it‘s not an environment that people want to take risk, but not taking risk is no longer the risk-free strategy. Start to think through an innovative, adaptive and creative framework,” Bagrie suggested. 

When it comes to the transport industry in particular, Bagrie suspects that at some point there will be a collision between the interaction of energy, transport and IT – and it will all centre on the vehicle. “What we need to accept is that is exponentially taking place. The fourth industrial revolution (4IR) is here and innovative firms are being rewarded.”

New Zealand‘s resilience

Government‘s policy response, the wage subsidy and the reserve bank cutting rates, combined with low corporate debt levels ahead of Covid, have meant New Zealand has been able to springboard out of the lockdown and get back to a semblance of normalcy. The country has had the muscle and resilience to ride through those difficult times, noted Bagrie. 

“We‘re in a fundamentally better place than a lot of other countries. The government‘s got a huge fiscal war chest, lower interest rates, the housing market has perked up, there are major signs that businesses are adapting, and commodity prices have held up well, especially dairy.”

Jobs, migration and skills deficiencies

Bagrie said that the job market outlook is fragile. Advertised jobs in manufacturing, transport and logistics have risen significantly but are still a long way off the 2019 levels. There have been more people applying for the jobs, although job-seeker numbers have just recently plateaued. 

Rural regions have seen less of an increase in the job-seeker benefit numbers with the biggest surge in Auckland – which Bagrie said will really suffer when the impacts on migration and tourism manifest next year. “The dispersion we‘re seeing with adaptability in industry sectors is also going to happen within regions.”

Migration collapsed from 33,000 in the March quarter this year to just 2000 in the June quarter. Net migration is running at 400 per month, from 5000 to 6000. Bagrie said the impact of that on the property market will show in 2021, but what really worries him is the underinvestment in local key skills and capability – because it‘s been easy to bring in people from overseas. “What if we can‘t source these people? It‘s highlighting big skills deficiencies…”

Disrupted supply chain 

Bagrie noted that New Zealand‘s export machine is tracking in line with 2019, mostly thanks to agriculture, but import numbers are well below 2019‘s and getting worse, partly due to soft demand and partly because other countries are not fully productive. Imports from China have tailed off again and countries like the UK have suffered big impacts. “Covid is not conducive to being highly productive,” he said.

“It worries me that we‘ll get into an environment where sourcing important goods will become an issue. People are thinking about demand but we also have to think about supply, Covid is not supply friendly.”

Buoyant housing market, nervous population

About $150 billion in mortgages has been refinanced (about 50% of the total mortgage debt) and the average interest rate on mortgage debt is 3.6%. “Most people will get around 2.5% so the interest bill on mortgages will go down about 30%. The economics of renting versus ownership have been transformed. The value of housing stock in New Zealand is up $100 billion in the past 12 months. Probably $3 billion of that will find its way back into consumption,” said Bagrie.

He noted that while banks are throwing money at the housing sector, he‘d like to see the rules change, with more going into the business sector.

Bagrie commented that, despite lower interest rates, an additional $31 billion has been held in bank deposits since January this year. “Some of that might be money from the wage subsidy scheme, but what it tells us is that there‘s a bit of liquidity in the system, a cash buffer, and also that people are really nervous. It‘s risk management and it‘s smart.”

Bagrie said that while there‘s a bit of spending going on, household savings rates will rise, which means retail may suffer. “The good news is there‘s money in people‘s pockets and record low debt servicing.”

Infrastructure investment

“One of the things that worries me at the moment is the ridiculousness of how government thinks about infrastructure investment,” Bagrie said. “All that‘s happening is their making the debt numbers look less bad is overriding good policy. What‘s good policy in infrastructure? Analysing what we need so we have a rough idea from year to year what those needs will be 10 years out. In New Zealand it‘s an absolute lottery from year to year.”

He said there‘s a need to come up with a bit of certainty regarding a proper framework for infrastructure so those businesses know they have a commitment down the track. “We‘ve been through this with the roading contractors; all the Roads of National Importance stuff was coming to an end and they had uncertainty as to the next stages. This is going on across the board and needs fixing. 

“If the government using its balance sheet creates more debt in the near term then so be it, we‘ll sort that out. Hopefully the Infrastructure Commission under Alan Bollard really gets turbocharged over the coming four to five months. Now‘s the time to do it.” 

The Covid recovery

The anatomy of New Zealand‘s recovery is shifting from a big bounce to a slower crawl, said Bagrie. It‘s also going to take some time for the GDP to get back to 2019 levels. Many sectors are still not back at 2019 levels and, although interest rates might be low, getting a loan in the business and agricultural sectors is tough.

“We‘ve seen pretty big fiscal support. The fiscal package has been underspent so it looks like it‘ll be $58 billion total. Two-thirds of that into has gone into transfers, loans and debt relief, one third into investment and government consumption. I‘d like to see more of that money go into real investment in the productive parts of New Zealand. However, the more we borrow today the more we‘ll have to be really disciplined down the track. I think the government debt is going to be a lot higher than 55% of GDP.” 

Bagrie noted that the reserve bank has gone aggressive but he feels it‘s actually doing too much.

“I‘d prefer the government to be out there spending more on critical infrastructure and the reserve bank doing a lot less. The policy mix is not right, we need both to be playing but we need fiscal policy to be bigger so we don‘t get unintended consequences.”

Making bold decisions

Bagrie closed by saying that when the country emerges from Covid some pretty bold, hard decisions will need to be made. “We have to ‘shake the tree‘ to get more growth out of New Zealand and delivery of government services. Unless we deliver some major savings and make tough decisions, we‘re going to have a major fiscal headache down the track that will involve tax rates heading much further north.” 

He said the government will need a couple of billion dollars, and these are the stories that will evolve over the next three or four years. 

“At the moment we need to be focused on getting the economy back on track and getting the right policy mix.”

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