There is now no escaping a Monstrous Economic Contraction
Hmmm… so what exactly constitutes a monstrous contraction?
How bad would it get? Define it.
… well I can give a guesstimate of just how big a contraction would be – although that’s just an opinion.
But on one point at least, I don’t think there can be any debate. The contraction is coming, and indeed is already underway. The debate now isn’t when we will get a recovery, it is how much deeper this recession/depression is going to get.
In large part, the economic situation in NZ is going to be predicated upon what happens in the rest of the world, particularly the United States, so their depression and contraction is our contraction too.
But more specifically: (feel free to insert your own figures)
Currently the NZ government is reported to be borrowing $300 million a week to fund current spending.
That will stop, one way or another, and then we get to see what our economy looks like without that sort of constant injection of cash. The economy is going to contract by 52 x $300 mil per year…
Hmmm, that’s $15 billion a year. What’s our GDP again???
Next, lets look at the PIIGS – Portugal, Ireland, Italy, Greece, Spain.
Portugal and Ireland are looking at interest rates for government borrowing into the low teens. Greece is at 20 percent. (Update 30/8/11 – as of a day ago, the latest figure I saw was 60% on One Year Bonds… Opps)
So tack on several more percentage points for commercial rates…
If NZ follows the same trend, and the fundamental numbers suggest we are in completely the same boat, then mortgage rates here are destined to hit the high to mid teens in the not too distant future. Businesses and mortgages will be paying circa 15%+ . That will double and triple the interest payments on borrowed money.
The NZ reserve bank would have the raw numbers somewhere, but basically the calculus is like this. If there is $100 billion of mortgages in NZ, and there are on average paying 5% interest, then that is $5 billion tax on the national income to service the debt. A 15% interest rate means an additional $10 billion hit/contraction to our economy.
Additionally, a jump of that magnitude in interest rates would kill the Real-Estate market (but existing mortgages still need to be serviced). New sales and mortgage volumes would collapse, but more importantly, so would the existing prices of property. How much? At a minimum I would say between 10 and 20%, but I don’t see any reason why house and property prices couldn’t ultimately collapse by 50%.
If that were to happen, then that is not too far different from saying our economy/national wealth would contract by 50%.
However, that is a different thing from GDP, and we shall try and stick with that type of metric in the meantime. So, just concentrating on our income from goods and services, less our expenses, what else needs to go into the pot?
Oil. I don’t pretend to know where the international price for oil is going to go, but the price has jumped over 20% in the last year or so. (if you have more exact figures, please do share them). If the price of oil continues to climb then that is not just a direct cost for the purchase of it, but also has a chilling effect on the rest of the economy. But for now, lets just say that a notional, national oil bill of $10 billion is now costing an additional $2 billion (20%).
On the positive side, rises in food commodity prices means a boost to our national income. But for the sake of my analysis, I will balance that against a fall in inbound tourist dollars. I would not be surprised to see visitor numbers ultimately drop by 50% from their peak numbers of several years ago.
There are always any number of other “invisibles” that central Banks like to quote.
But also leaving that aside for the moment, lets look at what we have got already.
– 15 billion, (halt to govt borrowing and spending)
– 2 billion, (increase in govt debt servicing)
– 10 billion, (increase in private debt servicing)
– 2 billion, (increased oil import cost)
lets just leave it at that for the moment and tot it up.
We are looking at some $30 billion+ contraction of our economy.
Divide that by the GDP and you have an indication of what sort of contraction of our economy we are looking at.
Interestingly, when I go to the Statistics NZ website and look up GDP, they can give me all sorts of percentage movements there have been in GDP, but nowhere could I find the gross number… mmmm…
Anyway, the Dollar numbers I have used here are just plucked from mid air. I recommend you do your own research and find out just how much money could be sucked out of our economy very very quickly.
And then tell me if that amounts to a monstrous contraction or not.
I would suggest that some $30 billion exiting our economy (per annum) would have a very chilling effect.
(I also think that estimate is likely conservative)
Rug up warm.
Also, requires we don’t get any natural disasters, earthquakes etc… Ohh, wait…!
Interestingly enough, not long after I wrote this, Bernard Hickey wrote an article with some real figures in it. Interesting to compare and contrast…
Forecasts Hard to Believe
The government has forecast a return to budget surplus by 2014/15 and the creation of 170,000 jobs. It has forecast economic growth will rise to 4 per cent, helping to control its borrowing. Here’s five reasons these forecasts are not believable and why the Government will need to cut spending harder and raise taxes either next year or in 2013 to fix its structural deficit.
The de-leveraging drag
New Zealand households and businesses have changed their approach to spending and debt. They are avoiding borrowing and repaying debt at every opportunity. This is suppressing any economic rebound from the global financial crisis. Some analysis suggests this de-leveraging drag could lower economic growth by between 1 per cent and 2 per cent of GDP for up to a decade after the 2008 crisis. This is not reflected in the Treasury’s forecasts.
Household debt to disposable income remains only marginally below its record highs of almost 160 per cent. A drop back to the 100 per cent levels seen in the early 2000s would suppress domestic and retail spending and spending in construction.
Banking the payments
The Government has argued $15 billion worth of reinsurance payments, spending during the Rugby World Cup and the commodity price boom windfall for farmers will boost growth.
However, there are already signs homeowners, businesses and farmers are choosing to put their insurance payments and Fonterra payouts in the bank to repay debt, rather than rebuild immediately or spend money on consumption.
Bank executives have become nervous in recent weeks about a lack of net lending growth as households refuse to take on extra risk when they know interest rates are unlikely to drop any further and house prices are flat to falling in most parts of New Zealand, except for central Auckland.
Slow earthquake rebuild
The Government is assuming more than $20 billion worth of earthquake rebuilding will surge through the economy over the next three to five years. But there remain doubts about how quickly the land stability issue can be finalised and whether the Christchurch CBD will be rebuilt to anything like its previous capacity. The rebuild after the September 4 quake was surprisingly slow and the enormity of the task after the February 22 quake confounds many.
Global growth fears
Treasury’s forecasts depend on continued strong growth in China and recoveries in America and Europe. However, there are fresh doubts about China’s ability to control an inflationary surge and the European sovereign debt crisis continues to bubble along. America has also failed to bounce out of its recession with any vigour.
The slide seen in commodity prices in recent weeks is one symptom of those doubts.
Dairy powder prices have already fallen 12 per cent from their peaks in March.
IRD forecast much less
The Inland Revenue Department forecast revenues would be $4 billion lower than the revenues forecast by Treasury over the next five years. The IRD saw lower corporate tax revenues in later years, yet the Government chose to use the rosier Treasury forecasts.
The risks are economic growth and, therefore, tax revenues will be less than expected, leaving the Budget mired in deficits and the Government borrowing heavily from foreign creditors, including the People’s Bank of China.
This is not the balanced, cautious approach promoted by John Key and Bill English. They may find themselves redoing the numbers soon after the November 26 election.