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Q+A: ANZ Economist Sharon Zollner

Q+A: ANZ Economist Sharon Zollner interviewed by Corin Dann

The global financial market is “starting to smell a bit like 2007” says senior economist

A stark warning came from ANZ Economist Sharon Zollner on TVNZ’s Q+A programme this morning.
“I think it’s fair to say that some things are starting to smell a bit like 2007 out there in global financial market land”, she said.

Whilst she acknowledges there are “still plenty of tailwinds” to the so called ‘rock star economy’, she says, “a number of those tailwinds seem to be running out of puff.”

Fuelling concern for the future of the New Zealand economy is the Auckland housing market.

“Our major vulnerability, I’d say, is Auckland house prices – how stretched they are. And also consumer debt, mostly mortgage debt, is now at a record high relative to income.”

Q + A
Episode 32
Interviewed by Corin Dann

CORIN Statistics New Zealand released its latest stats this week showing that food prices had increased 3% in the year to September. That follows a 2.3% increase in the year to August. The main culprits? Dairy exports, butter, fresh milk, cheese and yoghurt, were all more expensive, which isn’t great for your household budget, but it is a sign of the good prices our food exporters are getting in their overseas markets. How long will that last? It’s a good question for my next guestSharon Zollner, a senior economist at ANZ Bank. Good morning to you.

SHARON Good morning.

CORIN That is one bright spot, isn’t it, for the economy – that our export prices have held up pretty well recently, haven’t they?

SHARON Yes, that is true, and they’ve held up better than hard commodity prices, for example. So the price of our main dairy export, whole milk powder, is holding up better than iron ore, for example – Australia’s main single commodity export. So that’s been showing up in our cross rate.

CORIN In saying that, though, what’s the outlook for the next government, as they come in and they’re confronted with their first briefing from Treasury on the state of the economy. It is looking a little softer going forward, isn’t it?

SHARON I think that’s probably fair. Yes, the summary would probably say the economy’s doing rather well and that’s still plenty of tailwinds, and that is true. But a number of those tailwinds seem to be running out of puff a little bit at the same time – not in terms of necessarily falling, but in terms of their growth flattening out a little bit.

CORIN So, that’s your– Obviously, strong immigration, tourism, construction – the big three. They all– Is the outlook for them all coming off a little bit?

SHARON A little. It’s flattening off. The housing market is another one I would add to that list. Obviously, it’s tied in with construction. House prices are actually falling in Auckland at the moment. At the moment, we’re seeing consumers remaining remarkably resilient, at least when you survey them about how they’re feeling, how they’re– about their own finances, about the economy as a whole. They sound very confident, but what we’ve actually seen is some weakness in actual spending, so maybe they’re not putting their money where their mouth is.

CORIN Talk to me about housing markets. So, there will be some people at home, and I know they will be thinking, “Oh, it’s the election. It’s the uncertainty of an election, and it’s all going to bounce back into life. We’ll get its late-Spring bounce.” Is that going to happen?

SHARON I’m sceptical. Auckland house prices are very, very high relative to incomes. I mean, they’re world-beating on a metric you don’t really want to be leading the world in, and that’s a real risk for the economy, and I think the LVR restrictions, the restrictions on high loan to value ratio lending for investors have really made a big difference. We’ve seen investor lending pull back sharply. At the same time, the banks are also pulling back on that lending, and it’s not clear that that’s all going to free up any time soon.

CORIN So why are the banks–? I notice two- and three-year fixed mortgage rates are coming down. Is there a bit of a mortgage war starting up in that space? What’s going on there?

SHARON I think things have eased up a little bit. It’s very clear the Reserve Bank is on an extended holiday. We’ve pencilled in an OCR hike in the second half of next year, but it’s in a 6B pencil. It’s really with an eraser on the end. It’s not a strong-conviction view. So, you’ve got monetary policy on hold. You’ve got global funding costs have stabilised. And now I think banks are starting to compete a little bit more for some of that mortgage lending.

CORIN I wonder if the next government – it’s going to be New Zealand First flavoured regardless of what shade it is. But there is going to be some spending promises, and it would imply that we might see some more spending from a government – let’s call it ‘a government’. How is the economy likely to respond to that? Is that actually going to be, perhaps, welcomed? When you look at the Reserve Bank governor, he’s probably looking for a bit of inflation, isn’t he?

SHARON Yes, but what we’ve seen in recent years is that more activity hasn’t necessarily flowed in to more inflation. So that whole model that the inflation targeting is based on, that’s stronger than sustainable activity leads to stronger inflation, and you can kill two birds with one stone by raising interest rates – that model seems to have broken. It’s not just in New Zealand. It’s around the whole world. And that’s a conundrum from monetary policy everywhere. But it is certainly true that if some of the other drivers of activity are coming off, then that’s not bad timing for a little bit of a fiscal boost, perhaps.

CORIN Do we need…? Is there, sort of, an amount that we need? Or is it just… Will the economy roll with it?

SHARON Yeah, the economy does its own thing to a large extent. I think there’s a bit of a tendency for people to give the government more credit and more blame than it perhaps deserves for the business cycle, which is more driven by exchange rates, interest rates, commodity prices, more than actual fiscal policy. Of course, government policy is very important for the long-run, in terms of education and productivity and competitiveness, and all those sorts of things that determine your long-run trend, sustainable growth rate. But in terms of the business cycle, it’s really not an easy thing to try to steer.

CORIN Are markets, foreign investors, businesses, whatever, going to be freaked out if there is radical change to our monetary policy settings? Personally, I don’t think there will be radical change, but, I mean, is that a risk?

SHARON If we did see radical change, then, yes, I think there is a risk that markets could do a bit of a double-take. I think, in some sense, there’s a bit of an expectation that New Zealand is no longer the rock star, that we might be coming off that particular pedestal, so any negative news might have a larger impact than otherwise. I think perhaps people are looking for a reason to sell the New Zealand dollar, rather than buy it at the moment, just because the rest of the globe is doing better, and consistently so. The range of growth rates around the countries in the world is very narrow at the moment – unusually narrow. And it’s looking like New Zealand, just as we led into the upswing, may be the first to peak in terms of growth rates as well.

CORIN Let’s talk about some potential shocks that this new government could face. We’ve obviously got– There’s always a risk around China and its debt, and, I guess, the US stock market, including our stock markets, have had a huge run. Are there some sort of, you know, scary risks out there that we need to think about?

SHARON Certainly, there are. I think it’s fair to say that some things are starting to smell a bit like 2007 out there in global financial market land. ‘There’s been a bull market in everything,’ as the Economist called it. And that’s completely understandable, because the price of borrowing money has been at record lows for a very long time, and so the price of anything you could borrow money to buy has been pushed up, whether that’s equities, commercial property, residential property, collector cars, fine art – you name it, it has all benefited from this extreme monetary policy stimulus.

CORIN Just not wages?

SHARON Just not wages, not inflation. It’s been a bizarre time, but it is probably fair to say that the quality of the growth that we’ve seen since 2008 has not been great. It’s been fuelled by debt and by leverage. And at some point, that debt has to be paid back.

CORIN Well, the question then is – how well prepared is New Zealand for that?

SHARON That’s an interesting question. In some ways, we’re in better state than we were in 2007. In particular, our current account is very contained. We haven’t got–

CORIN Our debt to the world, if you like?

SHARON In a way, yeah. The cumulative addition to the debt in our debt to the world. Our net foreign debt is low. It’s lower than Australia. It’s much lower than it was in 2007. But our major vulnerability, I’d say, is Auckland house prices – how stretched they are. And also consumer debt, mostly mortgage debt, is now at a record high relative to income. So the best-case scenario is that that dampens growth going forward in a very smooth, even fashion. The worst-case scenario is that everybody’s tomorrow arrives all at the same time and consumers go into something of a panic about their mortgage payments.

CORIN So, we need Auckland house prices– Or the next government would quite like Auckland house prices just to sit flat and for wages to catch up – that’s the best-case scenario?

SHARON It is. It’s not historically what tended to happen, but that is certainly–

CORIN So what’s historically tended…?

SHARON Well, real house prices, at least, tend to– Well, they go up, and they go down.

CORIN What are you forecasting for the Auckland housing market, then?

SHARON Well, we don’t forecast Auckland house prices specifically, but I guess, unless you get some sort of negative shock, then, yes, they should hold up OK; unless we get migration dropping sharply or a big outflow of people to Australia. But what’s happening there with the Australian government making it increasingly uncomfortable for New Zealanders living over there, would suggest that we may see a change in the historical drain that we’ve had to Australia, because, for example, parents with children who are approaching university age may not be able to afford to stay there.

CORIN That’s interesting, because that means that even if a new government was to put curbs on immigration, they can’t stop New Zealanders or Australians coming back here, can they? Won’t affect that flow.

SHARON No, that is true. It is very difficult, actually, to target any kind of net migration number, because New Zealand passports come and go as they wish, and there’s a lot of New Zealand passports in Australia, for example.

CORIN So, the government’s in reasonably good position, obviously, with its debt to deal with any potential crisis, They’re in reasonable– That’s right, isn’t it? Not too bad, are they, in terms of government debt?


CORIN But the Reserve Bank doesn’t have a lot of room to move this time around if we were to get in to a lot of trouble, does it?

SHARON No, and our official cash rate is at record lows. It’s lower than it was at the absolute trough of the recession following the global financial crisis, which is quite a remarkable statistic, but in that kind of situation, but that doesn’t, unfortunately, mean that our situation is any better. It just means we’re all in the same boat, but last time, when the GFC hit, the OCR was over eight, and we cut it down to two. So we cut it by 600 basis points. Now we could cut it maybe 100. And I don’t think we could do the kind of money printing, quantitative easing…

CORIN Can’t go below zero.

SHARON ...that¬– No. I think we’d be laughed out of town as a small, very risky– well, nation that is seen as risky, because we’re a small commodity exporter. We’re not the nation’s default asset like the US Treasury bond market. We don’t have that kind of power.

CORIN Sure. Sharon Zollner, thank you very much, from ANZ. We appreciate your time on Q+A.


Please find attached the full transcript and the link to the interview

Q+A, 9-10am Sundays on TVNZ 1 and one hour later on TVNZ 1 + 1.
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