The Dim-Post

November 10, 2012

Set the controls for the heart of the sun

Filed under: economics — danylmc @ 8:11 am

Fran O’Sullivan puzzles over the Prime Minister’s completely bizarre (non)reaction to the rise in unemployment over the September quarter:

For Key to simply shrug his shoulders on this score doesn’t cut it.

If he was gazumped by the awful statistics, so too were the nation’s economists when official figures confirmed the unemployment rate was the highest it has been since June 1999. “A true shocker,” said Westpac.

Fundamentally you would have to wonder if they have all had their eyes wide shut in recent months while export-orientated companies have cut heaps of jobs in response to more difficult environments overseas.

Key – and the economists who have been caught short by the official statistics – will be hoping the September outturn in the Household Labour Force Survey is a statistical aberration. Westpac has pointed out the survey has a history of throwing up “wild false signals”.

The Reserve Bank was also caught out by the September quarter figures. The central bank has been urged to slash interest rates further in the hope this will depress the value of the NZ dollar, boost export competitiveness and spark firms to hire more workers.

If I understand the new RBNZ Governor Graeme Wheeler – already dubbed ‘Asleep at the Wheeler’ by financial journalists – correctly, he doesn’t need quantitative easing or any other macro-prudential tools because he still has room to cut rates, but he can’t cut rates any further because it would probably lead to increased indebtedness in the household and dairy sectors.

So we have high and rising unemployment, an over-valued currency, very low inflation, our central bank won’t lower rates and it doesn’t want any additional tools to address this situation. The Prime Minister’s reaction is to hope that the statistics are wrong, and keep on doing what he’s doing, which doesn’t seem to be anything. This seems completely insane.

I do wonder if there’s a feedback loop operating here between the Treasury forecasts and the National government. Treasury predict growth, low unemployment and high inflation because there’s a right-wing government in power, and the government reads the forecasts and does nothing, because they don’t need to – prosperity is on the way, Treasury said so!

UPDATE: Matt Nolan has a substantive reply. Short version:

The RBNZ currently believes that, after loitering at a high level for a few more quarters, the unemployment rate will come down sharply.  Furthermore, they believe that current high unemployment IS due to weak demand – so if they could go back in time they would cut rates but RIGHT NOW cutting rates looks inappropriate.

If nothing else, this will be an interesting field trial for central bank independence. Many of the opposition parties would currently direct the RBNZ to act . . . if they could.

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18 Comments »

  1. He can cut rates if he forces the banks to apply a dampening LVR ratio. This will see an immediate cooling in the Auckland property market. Only Auckland and Christchurch are real estate hot zones. Everywhere else is flat or declining.

    Comment by Barnsley Bill — November 10, 2012 @ 8:22 am

  2. Worst Government Ever

    Comment by CnrJoe — November 10, 2012 @ 8:47 am

  3. Meantime, a little voter waits for a viable alternative…

    Comment by gn35 — November 10, 2012 @ 8:53 am

  4. We get two for the price of one: not only a fact free government but also faith based government.

    We must be winners.

    Comment by Andrew R — November 10, 2012 @ 9:20 am

  5. This is a government that refuses to debate one on one with oppposition MPs in the media, whose leader and minister refuse to front on RNZ, which prefers to suppress reports to reading unpleasant news, and who prefer to get their advise from hand picked sycophant “consultants” than from civil servants. In other words, this government has surrounded itself with such a thicket of delusion that it is genuinely puzzled by intrusions of fact. Key doesn’t want to know. DPF gave it 36 words then buried the story with four rubbish posts in four hours. This is a willfully deluded government in denial.

    Comment by Sanctuary — November 10, 2012 @ 9:29 am

  6. Hope Key understands that if this does turn into another slump, it puts a real dent in his re-election chances. Though if he loses because of the economy he’ll probably blame the RBNZ (with some justice).

    Comment by bradluen — November 10, 2012 @ 9:48 am

  7. I would be nice if Key was seen to actually be DOING something rather than shrugging his shoulders and mumbling.
    BTW who actually voted this lot in? no one except Fatboy seems to admit to it.

    Comment by SPLOOGE — November 10, 2012 @ 10:11 am

  8. I think we end up at something like 8.7 percent unemployed in the last quarter of 2013, briefly 8.8 percent at the start of 2014, and a steady decline from that point onwards.

    Comment by Dan — November 10, 2012 @ 12:04 pm

  9. English’s blurb is jibberish,Key’s response is that his plans are working and it will be ok,even if the ship is sinking and hits the bottom.
    If his desire is to have a destitute nz population and the country bailed out by the imf,he is on the right path.

    Comment by anne — November 10, 2012 @ 12:22 pm

  10. >Treasury predict growth, low unemployment and high inflation because there’s a right-wing government in power

    No – Treasury predict these things because that is how their model is constructed. Look at all of their forecasts – in the long run they always predict something like 3% growth regardless of the short-run. It doesn’t matter who is in power, it’s their understanding of the economy.

    Comment by Karl — November 10, 2012 @ 12:27 pm

  11. The reserve bank is trying to keep inflation low and stable. Thats it. Its tasked with making sure the value of my dollars do not evaporate. Its a moral obligation. Thankfully we have reserve bank independence.

    Meanwhile, with a mini-boom in the housing market, we still have very low levels of building in Auckland and Christchurch. Perhaps someone needs to start pointing the finger at the council (and government) control freaks.

    Comment by swan — November 10, 2012 @ 9:09 pm

  12. “If nothing else, this will be an interesting field trial for central bank independence. “
    Remind me why we have Reserve Bank independence again? Oh, that’s right, because we don’t want to follow nutty, ideological, hare-brained theories…. like leaving everything to an RBNZ obsessed with one economic factor only.

    To be fair, swan makes a good point – RBNZ is supposed to be independent to ensure govt doesn’t evaporate monetary value by tinkering for short-term election cycle benefits. However, that does seem to ignore the evidence that the RBNZ are as blinkered as a clydesdale on the downsides to preserving monetary value we are currently experiencing.

    My vote? Nationalise the RBNZ (without compensation) and tell Key to show us how wonderful he is at setting monetary policy to achieve his economic goals. Then we can at least have a good laugh when the next jump in unemployment comes out.

    @ swan – lack of building in Auckland and Chch has nothing to do with council control freakery; everything to do with a failed free market approach to building. Our system is based on owner-operator builders, with similar contractors and subbies, and sub-sub-sub-subbies…. none of whom have the capital to order a Chinese takeaway on Friday night (the more successful builders have their capital tied up in trucks, diggers, etc). So the actual builders don’t have the coin or equity to buy the land and develop it. Which leaves property development to the wealthy investors, who are happy to sit on their landbanks and watch values rise as the housing shortage grows. Sure, they’ll trickle out a small supply of homes, but not enough to slow their speculative capital value growth (unlike the builders, who would keep building, as they need the regular income).

    Basically, we are short of a big cashed up investor who is willing to get builders in regular work creating enough houses for everyone to live in without big house price rises. I wonder where we could find such an investor? Perhaps we should ask our good mate Housing NZ?

    Comment by bob — November 11, 2012 @ 12:40 am

  13. Housing NZ are a big cashed up investor*? Jees, don’t tell Treasury.

    * Unless you mean they have access to govt funding? From a govt that is having to borrow money to pay public service salaries…?

    Comment by Clunking Fist — November 11, 2012 @ 9:49 am

  14. It’s not the public sector that’s holding up rebuilding in Christchurch – it’s the private sector.

    Banks won’t lend and builders won’t build without insurance, and the insurance companies have been very wary about lending because of the earthquake risk. Also, subdividers are competing with one another to make their subdivisions the ‘higher-class’ ones, by setting minimum floor areas for houses to be built on them (meaning that if you lost a small house, and had an insurance payout to build a new small house, you struggle to get a site where they will let you build as house of a size you can afford), and they also generally banned people from shifting existing houses from red-zoned land to the new subdivisions. This means there has been an exodus of houses from Christchurch being shifted to other parts of the country, even while Chrtistchurch was the place where the demand for houses was highest, because people couldn’t get land in Christchurch to put them on.

    People who worship the wisdom of the market should be happy about how slowly the Christchurch rebuild has been going, because it is the market in its infinite wisdom that has decided to keep Christchurch people homeless.

    Comment by kahikatea — November 11, 2012 @ 2:57 pm

  15. Wow! I was thinking mostly of Auckland when I commented on building kahikatea, but what you say is scandalous – the National government seems hellbent on destroying Christchurch people’s lives. What possible reason could they give for not letting people shift an undamaged (or lightly damaged) house from a red zone to safe land? Other than their desire to create a speculative property crisis, and hence, extra profits.

    Comment by bob — November 11, 2012 @ 3:23 pm

  16. “Also, subdividers are competing with one another to make their subdivisions the ‘higher-class’ ones, by setting minimum floor areas for houses to be built on them (meaning that if you lost a small house, and had an insurance payout to build a new small house, you struggle to get a site where they will let you build as house of a size you can afford), and they also generally banned people from shifting existing houses from red-zoned land to the new subdivisions.”

    The reason for this? There is fundamentally tight supply thanks to regulation. If there was no such thing as a council banning subdivision, there would be enough supply to cater for all sectors of the market – like in the rest of the economy.

    Bob – the banks are falling over themselves to lend against housing. There is no shortage of access to capital.

    Comment by swan — November 11, 2012 @ 3:43 pm

  17. I have no interest in lower NZ$. It would just mean that everyone gets a big pay cut….but that those earning the inflated dollars derived from foreign currency conversion would be somewhat insulted. That translates to me as sacrificing the living standards of the 90% of Kiwis so a a few thousand farmers and other exporters can tread water on import costs while we all pay more and more. Maybe I’m missing something…..but that just seems dumb.

    Comment by Steve (@nza1) — November 11, 2012 @ 6:49 pm

  18. Translation: “insulted” should be “insulated”

    Comment by Steve (@nza1) — November 11, 2012 @ 6:50 pm


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