The week in numbers

  • Household borrowing accelerated to 13.6%pa in June
  • Non-residential consents softened in June, but the June quarter was relatively strong, with Factory and commercial consents elevated
  • Residential consents lifted strongly in June, on the back of robust house price growth.  Wellington was a top performer

Most of this weeks data was expected.  However, after the RBNZ said household borrowing was easing, the continued growth in borrowing came as a surprise.

Immigration and inflation

I have just been flicking through the NZX submission on monetary policy, thanks to a link kindly provided by Lucy.

While I disagree with most of the submission (for the reasons I gave yesterday about higher interest rates being structural), I was happy to see that they discussed immigration.

Now immigration is an interesting issue, ignoring any social issues (i’m an economists after all), I’m going to focus on the link between immigration and inflation. According to Rebus legal perth lawyers, one of the main reason why the overall economy could have a massive downfall and the country could go into the state of depression is due to lack of immigrants. A recent study showed that most of the top CEOs of the county are not the originals of the land but are the descendants of on immigrants who came to the country and got it to a great position where it now stands on.

Some people say immigration causes inflation, as it increases the demand for goods and services, driving up the price. Other people say that immigration drives down inflation by increasing labour supply, and thereby driving down real wage demands, preventing wage inflation.

Now the way I see it is that immigration increases demand and supply. After all labour is an input to production, but once labour has been paid they turn into consumers, who purchase the goods. As a result, whether inflation rises or falls with immigration depends on the productivity of the immigrants. If we bring in a whole lot of untrained, unproductive workers it will cause inflation. If we bring in workers that have the highest marginal product (so in the places where firms are begging for labour) then it should decrease inflationary pressures.

It seems incredibly simple, the difficult issue is actually identifying and bringing in skilled, hard working labour. However, i’m not sure that cutting immigrant numbers when we have shortages of unskilled and skilled labour is a good idea. I’m sorry RBNZ, but I think the NZX is right on this one.

RBNZ, NZX and equity markets

The NZX wants the RBNZ to pay more attention to the way the equity market behaves when the bank change the official cash rate.

Now I can’t find a copy of the submission anywhere, but the above stuff article at least tells us that the NZX would like policy goals to be focused on long term economic growth. Now I think the ultimate goal of the RBNZ is long term economic growth, however the Bank believes that the way to do it is to provide an environment with a high degree of price stability.

The NZX counter-argument is that the narrow focus of RBNZ policy leads to higher equilibrium interest rates, which increases the cost of capital for firms, retarding long run economic growth.

Now I have some sympathy with the idea that our equilibrium interest rate is too high, however I think we have to figure out why interest rates seem to be, on average, higher in NZ than in the rest of the developed world. The RBNZ acknowledges the fact that New Zealand seems to have higher equilibrium interest rates than other develop nations, but they see this as a result of New Zealand’s poor net investment position. As it is the result the Bank doesn’t see monetary policy as the problem, the problem is structural.

The question I have to ask then is, why is our net investment position so bad (current account deficits damn it) and how do we get out of it?

P.S. If anyone knows where I can find copies of the submissions to Parliament’s Finance and Expenditure Committee, please tell me in the comment section. I can only seem to find the Reserve Bank one.

Creative destruction

I’ve always had a soft spot for the idea of creative destruction, even though my understanding of the it is well below par.

I found the following article interesting, in the way it used the idea of job creation and destruction to describe the process of changing unemployment.  It gives us a good idea about the massive flows associated with input changes in the labour market.

Using this concept, it describes how the composition of employment in NZ is changing, with more highly paid, high value jobs being created, at the expensive of low value, low skill jobs.  In my opinion, and the opinion of the article, this is a good thing.  What do you think?

What is the RBNZ talking about

“New Zealanders have been showing early signs of moderating their borrowing.”

Does anyone know what these early signs are. From what I can tell, the growth in household borrowing is at record highs, in fact todays M3 data confirms that. If anything, household borrowing seems to be accelerating, I’m sure it will slow eventually, but why did the RBNZ say that if they didn’t mean it.

My suspicion is that the RBNZ wanted to talk the exchange rate down. They said that the level of our exchange rate was the result of New Zealanders borrowing too much, and buying things from overseas. As a result, higher interest rates will stop New Zealanders doing this, helping the exchange rate.

Now that is a load of crap. Our Reserve Bank needs to take a big long look at itself, and realise that it has been acting like a 14 year old girl who got a pimple just before the big ball. Stop making excuses for our inflation and just deal with it! I wish the Reserve Bank governor was a computer.

A little bit of risk is a dangerous thing

So, our dollar has fallen 5% against the US, and 8% against the yen in the last few days. While some people may think that the prospect of no more interest-rate hikes is the driver, the truth is that market participants have become a bit more risk-averse.

A little bit of wobblying in the US stock markets, and suddenly a bunch of people have decided to unwind carry trades, and as we are the number one carry trade country, our exchange rate eased. That is why we are only down by 2% against the Aus$ since Thursday, they were a carry trade currency as well.

I expect us to stay around in the mid-70’s, we might even climb up a bit against the US. After all, this new found risk is based on subprime lending worries in the US, and the fundamentals of the strong NZ$ (high interest rates, strong commodity prices) are still in place. However, if asset prices (especially housing) start to ease too quickly, our exchange rate might be in for a bumpy ride.