Economic Week - February 14

by Nick Clark

OCR unchanged

The Reserve Bank kept the Official Cash Rate unchanged at 1.0% at its review this week.
The Reserve Bank’s dual objectives for inflation and employment both remain under control, with inflation close to the mid-point of its 1-3% target range, and employment around its maximum sustainable level.
The Reserve Bank noted that global growth has been acting as a headwind to domestic growth and that competitive pressures and ‘subdued’ business confidence have suppressed business investment.  But it still expects economic growth to accelerate over the second half of 2020.
The Reserve Bank’s forecasts now suggest the next move in the OCR will be up, although that might not happen until later in 2021. Not so long ago it was forecasting further cuts.
While expecting the economy to be impacted by the coronavirus outbreak at this stage it assumes any hit to be of short duration, although it did acknowledge that some sectors are being significantly affected.  The OCR could still be cut if the economic impact worsens or is prolonged.  Its next review will be on 25 March.

Feds speaks on Budget priorities
This week Finance Minister Grant Robertson announced Thursday 14 May as Budget day.
Also this week, Federated Farmers presented its submission on the Budget Policy Statement to Parliament’s Finance & Expenditure Select Committee.  The BPS sets out the fiscal parameters and government priorities for the Budget, so provides hints on what to expect.
As with last year’s Budget the Government has used the BPS to signal a strong focus on ‘wellbeing’, with five key priorities:

  • Just transition – supporting New Zealanders in the transition to a climate-resilient, sustainable and low-emissions economy.
  • Future of work – enabling all New Zealanders to benefit from new technologies and lift productivity through innovation.
  • Maori and Pacific – lifting Maori and Pacific incomes, skills and opportunities.
  • Child Wellbeing – reducing child poverty and improving child wellbeing.
  • Physical and mental wellbeing – supporting improved health outcomes for all New Zealanders.

Federated Farmers has no problem with the concept of wellbeing, or any of these priorities which are all very worthy, but in practice ‘wellbeing’ can mean all things to all people and it’s often used to justify almost any policy or programme and it would be a problem if it resulted in growth in lower value spending. 
Over the past several years a growing economy has generated enough growth in tax revenue to allow growth in operating expenditure, the maintenance of operating surpluses, and a reduction in the ratio of net debt to GDP.  This happy set of circumstances doesn’t happen by accident and it’s been thanks to successive governments having a strong focus on the economy and for fiscal responsibility to underpin the economy.  Boring perhaps but necessary.
Governments shouldn’t take the economy for granted.  Bill Clinton’s political; strategist James Carville was right in 1992 and he’s still right today when he coined the phrase ‘it’s the economy stupid’.  Put another way it will be hard to achieve the Government’s wellbeing priorities if the economy can’t deliver.  
Governments shouldn’t assume they can keep growing their operating expenditure by several billion dollars annually and at the same time maintain operating surpluses and keep debt under control. 
That we have gone from a $7 billion operating surplus last year to a $943 million forecast operating deficit this year should be a wake-up call.  Government spending has been allowed to increase by more than $6.5 billion last year and by more than $6.7 billion this year.  The strong growth in spending is the main reason for the forecast deficit.  The slowing economy over the past couple years and slower growth in tax revenue simply exposed it.
In response, Federated Farmers submitted that the operating allowance for Budget 2020 ‘new initiatives’, which was increased last year, should be cut back and it should be used for tax relief, such as adjusting income tax thresholds for inflation, rather than new spending on top of that already committed. 
Furthermore, while supporting the Government’s substantial boost in infrastructure capital investment, there needs to be more for rural and regional New Zealand, the engine room for exports and the economy.   These areas need stronger increases in infrastructure spending than those announced at the end of January.  
An emphasis on infrastructure going forward should be on rural local roads and rural and regional state highways, rural telecommunications, and assistance for upgrades to three waters infrastructure.  This is especially necessary to help many small rural councils that are struggling with cost pressures and challenges to maintain let alone renew and replace ageing infrastructure.\Budget 2020 will be delivered only four months out from the election and while budgets aren’t the big bang affairs of the increasingly distant past this one will be a key political set piece for the contest ahead.  While the temptation to spend up large will no doubt be strong, especially if the polls are looking close, New Zealand can’t afford a spending binge which squanders the country’s finances and leaves a nasty hangover.
A boring budget is probably what we need in these uncertain times.

Surplus for first six months
The Government’s interim financial statements for the six months to December 2019 showed a $437 million operating surplus before gains and losses, $519 million better than forecast two months ago.
Core Crown tax revenue of $43.1 billion was $263 million above forecast, mainly thanks to higher than forecast tobacco duties.  Meanwhile, core Crown expenses of $45.6 billion was $118 million below forecast.  Net core Crown debt of $64.5 billion (21.0% of GDP) was slightly lower than forecast.
An operating surplus for the first six months is welcome but the outlook for the full year is still for there to be a deficit.  And that was before factoring in the coronavirus outbreak which will inevitably have an impact on the economy and on the Government’s revenue and spending.

Weak productivity growth but primary industries shine
Productivity growth continues to be insipid overall according to Statistics NZ’s annual Productivity Statistics.  For the year ended March 2019 labour productivity rose 0.5%, while multifactor productivity rose 0.3%, and capital productivity rose 0.1%.
For years, New Zealand’s productivity growth has been weak with most economic growth driven by increases in inputs, such as numbers of workers and hours worked.  This problem has baffled policy makers and economists who point to New Zealand’s generally sound policy settings, but this plus is outweighed by negatives of a small domestic market and geographic distance from trading partners.
A bright spot is the primary industries.  In the March 2019 year, labour productivity in primary industries rose 11.6%, recovering from falls in the previous two years. In stark contrast, labour productivity in the goods-producing and services industries decreased slightly, falling by 0.5% and 0.4%, respectively.
Over the longer-term the primary industries have also had by far the highest labour productivity growth, up 72% over the 1996-2019 period.  This compares to 41% for services industries and 23% for goods-producing industries.

Card spending down
Retail card spending in January was down a seasonally-adjusted 0.1% compared to December, according to Statistics NZ’s monthly Electronic Card Transactions.
There were increases in spending for fuel, durables, and motor vehicles (excluding fuel), but these were outweighed by reductions in spending for apparel, consumables (i.e., groceries and liquor), and hospitality.

Banking chart of the week…
The Reserve Bank has a very interesting page on its website called the Bank Financial Strength Dashboard.  It’s chocka with data on banks, including for their agricultural lending.    Over the coming week’s I’ll be highlighting information from it.
This week it’s a chart showing changes in agricultural lending by major bank comparing the September 2019 quarter with the June 2019 quarter (December quarter’s data is due on 2 March).  It shows drops for ANZ and ASB and increases for BNZ, Rabobank, and Westpac.

NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 13 February) show all regions of the North Island’s soils significantly dryer than usual as well as those in the top of the South Island.  Southland and Otago’s soils remain significantly wetter than usual following last week’s heavy rain and floods.

Exchange Rates

Although it lifted in the wake of Wednesday’s OCR decision and statement, the NZ Dollar was still down for the week against the TWI and it also down against most of our key trading partners, the exception being the Euro.



NZ Dollar versus

This Week


Last Week (5/2/20)

Last Month (13/1/20)

Last Year (13/2/19)

US Dollar





Australian Dollar










UK Pound





Japanese Yen





Chinese Renminbi





Trade Weighted Index





Source: Reserve Bank of NZ


Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill interest rate was down 4 basis points but the rate for 10 Year Government Bonds was up 14 basis points.  The OCR will next be reviewed on 25 March.



This Week


Last Week (5/2/20)

Last Month (13/1/20)

Last Year (13/2/19)






90 Day Bank Bill





10 Year Government Bond





Source: Reserve Bank of NZ