Archive | Economy

Housing supply the main concern as Reserve Bank holds cashrate

The Reserve Bank held the official cashrate at 1.75% today.

The bank cut its cashrate by 25 basis points in November, the third 25-point cut last year.

Bank governor Graeme Wheeler’s biggest concern was whether housing supply would start to address the imbalance in that market, but he noted that prices had drifted back.

Mr Wheeler said: 

“Macroeconomic indicators in advanced economies have been positive over the past 2 months. However, major challenges remain with ongoing surplus capacity in the global economy and extensive geopolitical uncertainty.

“Global headline inflation has increased, partly due to a rise in commodity prices, although oil prices have fallen more recently. Core inflation has been low & stable. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

“The trade-weighted exchange rate has fallen 4% since February, partly in response to weaker dairy prices & reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth.

“Quarterly gdp was weaker than expected in the December quarter, but some of this is considered to be due to temporary factors. The growth outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth and high levels of household spending & construction activity. Dairy prices have been volatile in recent auctions and uncertainty remains around future outcomes.

“House price inflation has moderated, and in part reflects loan:value ratio restrictions & tighter lending conditions. It is uncertain whether this moderation will be sustained, given the continued imbalance between supply & demand.

“Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Headline CPI will be variable over the next 12 months due to one-off effects from recent food & import price movements, but is expected to return to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well anchored at around 2%.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

Attribution: Bank release.

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Small rise in migrant inflow, but Auckland gain marches onward

New Zealand’s net migrant inflow continued upward in February, rising by 28 above the previous record, set in January, to 71,333 for the last 12 months.

The increase over the year to February 2016 was almost 4000, from 67,391.

For the month of February, the net inflow was 8609 (8581 a year earlier). Arrivals totalled 13,793 (13,267), departures 5184 (4686).

Exits to Australia jumped 10% for the month over a year ago to 2564 (2331), and the annual number of departures rose to 24,650 (24,204). Arrivals from Australia rose by 3 for the month to 2235, but are down over the year to 25,684 (25,810), reducing the net annual trans-Tasman gain to 1034 (1606).

The net outflow of NZ citizens continued to decline this February – 3059 out, 2662 in for a net outflow of 397 (439 last February). For the year, the net outflow was 1687 – 31,914 in, 33,601 out – down 57% from the previous 12 months. The next outflow in the February 2012 year was 38,769, falling to 36,713 in 2013 and 17,786 in 2014.

And the flow into Auckland continues, up 653 for the month and up nearly 4300 for the year. The net inflow for the month was 4543 (3890), and for the year 35,313 (31,035). Annual arrivals have risen from 46,954 2 years ago to 52,407 and now 57,156, while departures have held in a range from 21,370-21,850 over those 3 years.

Attribution: Statistics NZ tabales.

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Fed approves the anticipated raise

The US Federal Reserve did what was widely expected overnight, and raised its federal funds rate target range 25 basis points to 0.75-1% “in view of realised & expected labour market conditions & inflation”.

Its previous 25-point raise was in December.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, wanted no change. The other 9 members of the committee supported the raise.

The central bank’s open market committee said in its summary of economic conditions this morning:

“Information received since the federal open market committee met in February indicates that the labour market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the committee’s 2% longer-run objective; excluding energy & food prices, inflation was little changed and continued to run somewhat below 2%. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

Looking ahead, the bank said: “The committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

“The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt & agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalisation of the level of the federal funds rate is well under way. This policy, by keeping the committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”

Attribution: Fed release.

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US economy: Replacing the apparatus of government, talking up a rate rise

I read the promotion for a US strategic investment conference today which made me ask where the US thinks its economy is going, in light of a welter of outpourings from the Federal Reserve and what is widely reported as chaos at the new government.

As the new president still works to get his team in place, and still has time to spray others on Twitter for purported crimes against the nation, the sharemarket is riding high and the Fed has opened up about policy, perhaps as a forward defence on the assumption that President Trump will openly criticise the central bank no matter what option it chooses to make.

Global finance & geopolitics writer Harald Malmgren is quoted in the Mauldin Economics promo for the conference just down the road from Disney World in Florida: “What [Trump] has basically done is clear the deck in order to bring in an entirely new establishment. And you could say it’s risky, but you could also say it’s a chance to replace the entire apparatus of government in the US with fresh people and no past agenda…..

“When you tell the story of the US economy, there are really 2 stories: There is the Fed’s story…. which is, the economy has been growing since the Great Financial Crisis; it’s better now than it was because it’s safer than it was. But just take the 95% of people in the streets…. [and] you get 2 groups: one group that is no better off, and then a large, large group that is much worse off.”

Trump “has to be outrageous” for change to occur

Dr Malmgren’s daughter Pippa – an economist & trend spotter who advises investors & governments about economic policy & investment strategy, and also cofounded a company that makes drones – added: “[Trump] is like a guy with a bulldozer: he goes into the system and razes everything. And this is what people want, because they realise that the government is broke. It’s got its finances in a terrible mess; it’s never gonna be able to look after you. So if you want to look after yourself, then you want a world that has smaller government, lower taxes, less red tape – and in order to get there, he has to be outrageous in his attack on the system…. So that’s the world we’re looking at. It’s going to be a rough ride, but somebody had to do it.”

It’s a country heading in multiple economic directions simultaneously, and it’s hard to know which of these directions will dominate the impacts for a place like New Zealand.

Fed creates new explanatory charts

On Friday, the Fed released examples of new charts – sometimes called fan charts or, alternatively, the fudge the Fed needs to wade through before picking a number for its target funds rate.

The new chart & related material “illustrate & describe the uncertainty that attends Federal open market committee participants’ macroeconomic & interest rate projections,” the US central bank said. The fan charts will be included in the summary of economic projections, starting with the minutes of the 14-15 March meeting, scheduled for release on 5 April. The examples released yesterday are based on data from last September & December.

The Fed under Janet Yellen (pictured above), chair since February 2014, has had far more public voices than under previous chairs Ben Bernanke, Alan Greenspan & Paul Volcker. During Dr Yellen’s rein, all the board has taken part in elaborating on policy, and they’ve all attracted more attention as analysts search for a glimmer of movement in stated direction.

As the uncertainty of US economic direction has grown in the first weeks of the Trump presidency, the output of Fed speeches with concrete messages – rather than the standard “I have a speech to make and will tell you nothing you can put a finger on” – has been up.

Speeches galore by Fed heads

This week, Governor Lael Brainard addressed transitions in the outlook & monetary policy on Wednesday. On Friday, Dr Yellen & 2 other governors made speeches on monetary policy topics – Dr Yellen discussed the choices from adding accommodation (quantitative easing) to scaling it back, Vice-chair Stanley Fischer discussed the question of how to decide monetary policy (by rule, committee or both), and Governor Jerome Powell spoke in innovation, technology & the payments system.

Mr Powell addressed the economic outlook & monetary policy in a speech to the Forecasters Club of New York on 22 February and Dr Yellen spoke on the same topic at Stanford University in January.

Going back…..

In December 2005, the Fed’s open market committee saw nothing out of the ordinary happening to the economy. For example: “Although some scattered signs of cooling of the housing sector had emerged, the pace of construction activity & sales remained brisk”.

The minutes of the March 2006 meeting also presented a contented committee: “The information reviewed at this meeting suggested that economic activity was expanding strongly in the first quarter. Consumer spending was on track to rise at a robust pace…”

At the end of the Greenspan era, the 31 January 2006 meeting, Federal Reserve Bank of Richmond president Jeffrey Lacker was the one voice opposing foreign currency intervention by the Fed. The minutes noted: “In his view, such intervention would be ineffective if it did not also signal a shift in domestic monetary policy. And if it did signal such a shift, it could potentially compromise the Federal Reserve’s monetary policy independence.”

Mr Lacker was often a lone voice for the rest of his term as he questioned the extent of quantitative easing and pushed, well ahead of others, for the bank’s target cashrate to be raised. Another outspoken dissident, Esther George of Kansas, replaced him on the committee in January 2013, and Mr Lacker is now an alternate member.

Yellen says rate rise in 10 days likely

Dr Yellen, in her speech to the Executive Club of Chicago on Wednesday, reviewed the conduct of monetary policy over what she said was the nearly 10 years since the onset of the financial crisis. Even that number’s wrong: Most mark the start of the crisis as 2008, I’ve always marked it as 2007, but the money the Fed was pouring into early versions of quantitative easing at the start of 2006, combined with currency manipulation then, makes it an 11-year saga.

Dr Yellen said the Fed policy strategy “for systematically pursuing its congressionally mandated goals of maximum employment & price stability has not changed during this period”, but the open market committee had made “significant tactical adjustments” along the way.

She saw 2014 as a turning point, when the committee began to transition from providing increasing amounts of accommodation to gradually scaling it back, but progress was uneven in 2015 & 2016.

One cause of concern was that “the gains during this economic recovery have been skewed toward the top of the income distribution, as has been the case for quite some time. Families at the 10th percentile of the income distribution earned about 4% less in 2015 than they did in 2007, whereas families at the 90th percentile earned about 4% more.”

Assuming employment & inflation “are continuing to evolve in line with our expectations” when the Fed next meets on 14-15 March, Dr Yellen said “a further adjustment of the federal funds rate would likely be appropriate”.

San Francisco Fed president John Williams told a California audience on Tuesday: “In my view, a rate increase is very much on the table for serious consideration at our March meeting.”

NY Fed chief sees even stronger growth

New York Fed president & chief executive Bill Dudley told a Cornell College of Business annual New York City predictions event a week earlier that, if growth was “slowly above trend” and inflation headed towards 2%, “we would expect to gradually remove further monetary policy accommodation, snug up interest rates a little further in the months ahead”. However, unlike the others, he added: “But the uncertainty around that forecast is pretty high.”

Still, uncertainty wasn’t going to get in the way of another of his comments: “I think now the balance of risk is gradually shifting, where the possibility is that growth could actually be stronger than expected, rather than weaker than expected. The markets expect fiscal stimulus out of this Administration. That’s another factor that probably will over time tilt the equation more to the upside.”

Generally, he said, “If you look at the Federal open market committee projections, people think that the federal funds rate in the medium term is going to more like 3% rather than the 4% that might have been attained historically.

“Now there’s one little problem with this. Economists are terrible at actually forecasting productivity growth. So just because productivity growth has been weak over the last few years doesn’t mean it will necessarily be weak over the next 5 years.”
All of that amounted to an ‘I don’t know’, but weighted towards steady rises.

All of these discussions in the last couple of weeks have revolved around a small set of figures whose movements dictate the setting of a funds rate.

Looming in the background, and not mentioned as a factor in those calculations, is the US national debt, which made it to $US1.14 trillion at the September 1982 balance date, rose to $US7.9 trillion in 2005, hit $US10 trillion in 2008, $US13 trillion by June 2010 and $US14 trillion by the end of that year, then climbed to $US19 trillion at January 2016.

US Federal Reserve, 3 March 2017: Fan charts
Fed governors’ speech links
Janet Yellen, 3 March 2017: From adding accommodation to scaling it back
25 November 2008: Federal Reserve announces the creation of the Term Asset-Backed Securities Loan Facility (TALF)
28 October 2008: Federal Reserve and Reserve Bank of NZ announce the establishment of a temporary reciprocal currency arrangement
29 September 2008: Federal Reserve and other central banks announce further co-ordinated actions to expand significantly the capacity to provide $US liquidity
10 August 2007: FOMC statement: The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets
Mauldin Economics, strategic investment conference
The Balance, national debt

Earlier stories:
24 September 2016: Absurdity still wins at the Fed
17 March 2016: One Fed member baulks but rest stick with worrying

Attribution: Fed speeches, Mauldin Economics, The Balance.

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Even in January, immigration leaps

The net migrant inflow leapt over the 71,000 mark for the January year. Long-term arrivals jumped by 1000 from last January to this one while exits rose by 300 for a net gain of 700 to 8446.

For the year, arrivals have risen by 5300 and exits have fallen by just 67.

The net amounts to a rise in immigration for the January year of just under 5400, to 71,305.

Arrivals from Australia were up by 29 and departures to Australia by 20, raising the inflow margin by 9 to 1264 for the year. 2 years ago it was a net outflow of 2888 and, in the previous 2 years, 17,064 & 37,936.

There is still a net outflow of NZ citizens, though not by much. For 6 of the 7 years to January 2013, NZ citizen exits for that month were in the range of 6-7000 and 2-3000 came home. The result over those 7 Januaries was an average outflow of 3800. Net exits for the month went under 1800 in January 2014, under 900 a year later, then to 474 and now to 385.

The annual net outflow has now fallen below the level for one month 3 years ago – 1729 versus 1781.

The latest annual NZ citizen outflow is 2500 below the level of the previous year and a quarter of the net outflow 2 years ago. Before that, the net outflow was measured in 5 digits – 19,687 in the January 2014 year, almost double that in each of the previous 2 years (37,922 & 37,602).

Of the 14,457 arrivals in January, 4400 said their destination was Auckland 1259 didn’t say where they were going.

Of the 128,290 arrivals in the January year, 56,231 (43.8%) said their destination was Auckland, up from 51,831 (42.2%) in the previous 12 months. The net annual inflow to Auckland rose by 3400 to 34,660 (30,369), or 48.6% of the net inflow, up from 48.05% in the 12 months to December.

The January figures set a number of records – the net inflow for the 12 months to December, 70,588, was the previous high. Migrant arrivals, at 128,290, were a record. The previous record, also set in December, was 127,305.

The net inflow from China took to place for the year again, passing India. For the 12 months to January, the net flow from China was 10,197 (9124 the previous year) and from India, 8560 (12,991 after student visa questions), followed by the UK 5981 (3680) & the Philippines 4580 (5127).

Statistics NZ said the 3,537,561 overseas visitors for the 12 months was a record, up 11.5% on the previous year, and the 2,635,331 NZ residents heading overseas was a record, up 8.9% on the previous year.

165,673 NZ citizens took off on overseas trips in January, up from 145,708 a year earlier, and 288,306 came back that month (262,570).

Attribution: Statistics NZ tables & release.

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Economist sees scope for house price fall – my picture more complicated

Infometrics chief forecaster Gareth Kiernan said yesterday the economic consultancy saw “scope for a 12% drop in property values by the end of 2020”.

That turned into this heading: House prices to fall 12% by 2020.

A 12% price fall in 3 years – or a multitude of trend changes? I interpolate:

Some have fallen that much this year while others have been taken off the market because the windfall window has passed. How & what you measure makes a big difference.

When the America’s Cup was first touted as coming to Auckland in the 1980s, my house’s value – along with every other house in the neighbourhood – rose overnight by a million dollars. But few houses actually went on the market to catch this windfall, a handful of homes sold at escalated prices, the cup event didn’t come and the market shot back to where it had been. Did homes drop in value? They didn’t in reality rise.

Auckland was unusual in the wake of the global financial crisis of 2008 – on Quotable Value’s figures, a drop from double-digit price growth in 2007 to a decline of about 7% both nationally & in Auckland in 2008, followed by a 3% turnaround nationally in 2009 – and a rise of 7.3% for the year in Auckland.

By late 2011 – the year housing consents bottomed – Auckland’s house price index was above the level of the previous peak in late 2007, but on low turnover.

Through to late 2016, both prices & turnover rose. Turnover is now down, and you can see vendors facing hard decisions at auction. Yet, at auction this week, some apartments sold at high price levels – above $10,000/m² for secondary stock that’s now “old”. That can be attributed partly to the rising cost of construction for new developments.

The unitary plan has put another factor into the pricing equation, the ability to intensify sections that previously might have been able to take only 2 townhouses. This potential can raise the apparent value of standalone houses throughout suburbia, though it’s actually a change in land values.

Mr Kiernan raises mortgage rates as a factor below, suggesting a rise could keep some buyers out of the market. Higher interest rates or increased supply over the last 15 years, or both, would have suppressed prices. Supply is starting to increase but, while net immigration keeps rising, that supply will still fall short. That could encourage price rises while, at the same time, ordinary local buyers will tot up capital & mortgage costs which will show prices for them must come down.

Over the last 4 years, New Zealand turned – swiftly – from a net outflow of 39,000 migrants/year to Australia to a zero outflow, and a little more slowly to a net inflow of almost that number (33,900 in 2016) just into Auckland.

Those migration tides can reverse again just as quickly but, as I’ve suggested below, other factors come into play and one of those is amenity for new developments.

Kiernan: several risks hanging over economy

Mr Kiernan said the solid outlook for growth – a prediction of 3%-plus gdp growth over the 3 years to June 2019 – masked several risks hanging over the economy: “Mortgage holders in Auckland look particularly vulnerable to even modest interest rate rises that are likely to occur in the next 2-3 years. Debt-servicing costs in the city now take up a greater proportion of income than in 2007, when mortgage rates reached 8.7%. A future rise of 1.5-2 percentage points in mortgage rates would clearly stretch many borrowers in Auckland and squeeze potential buyers out of the market.”

Infometrics predicts that wholesale interest rates will gradually rise further in the next few months and that the Reserve Bank will start increasing the official cashrate by mid-2018.

“Net migration & population growth will be easing at the same time as interest rates start to rise, and this cocktail could be the catalyst for a housing market correction. Apart from the stresses on the market in Auckland, underlying demand conditions in some other regions do not justify current high prices, and we see scope for a 12% drop in property values by the end of 2020.”

Looking at the wider economy, Mr Kiernan turned first to employment: “Despite the unemployment rate edging up to 5.2% in data released this week, the labour market has been tightening across the board. The capacity constraints that have previously been most intense in the construction & tourism sectors are becoming more widespread.

“Infometrics expects to see increased wage pressures as firms battle harder to attract & retain staff, with the unemployment rate dropping back below 5.0% in 2017 and continuing to decline over the next 2 years.”

Next up, international politics: “Heightened political uncertainty also has the potential to derail New Zealand’s growth train. At this stage, the main threat to New Zealand from US President Trump’s policy agenda appears to be potential trade barriers against China.

“Mr Trump has talked about 45% tariffs on Chinese imports, which would reduce American demand for Chinese products, dampening economic growth in our largest export market and undermining New Zealand’s export incomes.

“President Trump’s proposal is a significant threat to Chinese & global economic growth, and New Zealand would not be able to dodge the flow-on effects over the following couple of years if trade barriers between China & the US were implemented.

“Closer to home, a change of government or a shift in the balance of power after New Zealand goes to the polls on 23 September could also affect our medium-term economic outlook.”

Migration factors

Bald assertions can take some filling in to make sense. For migration & population growth, the biggest factor is the Australian economy.

In the June 2015 year, Australia’s net migrant inflow was 168,000, down nearly 10% from the previous year, and 40% went to New South Wales. The country’s population rose by 338,000 (1.4%) to 24.1 million in the year to June 2016. Incredibly, those seem to be the latest figures from the Australian Bureau of Statistics.

The New South Wales economy seems to be in better shape than other states’, which may lead to a resumption of higher emigration from New Zealand in the next couple of years. A resumption of growth in Western Australia’s mining sector looks further away than that.

The Auckland construction market looks overheated and, combined with the unusually high level of infrastructure underway, will drain labour from other parts of the country and require imported labour.

One factor in New Zealand’s migration statistics that’s played down is the proportion of migrants from India, many on student visas and therefore seen as not really permanent migrants. I regard that pool of migrants differently, as a revolving supply because many return home, but still showing a net increase of over 10,000/year, at a similar level to the net inflow from China.

Statistics NZ projections

Statistics NZ’s latest regional projections show Auckland’s population growing at just over 1%/year on the low projection through to 2043, and at nearly 2% on the high projection.

One question there is whether the supply of and for housing will increase enough to dampen the increase in its price. The high growth projection for Auckland over the 5 years to 2023 would see the population up by 200,000 to 1.94 million – by an average 40,000/year, which would require an extra 14,800 homes/year to satisfy demand.

Changing trends will complicate values

The trend in new housing is toward less standalone housing and more intensive development, notably lowrise townhouses & suburban units along with retirement village units rather than a high concentration of apartments. Land values based on higher potential may change that lowrise preference.

A combination of the unitary plan allowing more building height, particularly in both suburban & regional centres, and council organisation Panuku Development Auckland’s regeneration programme for as many as 20 centres around the region could see an increase in apartment living as commercial & retail centre amenity improves.

That would shift the pricing focus away from houses in the most expensive suburbs and to different kinds of home. The expensive suburbs are likely to retain their high pricing levels because of limited supply – one reason they’re expensive even on bad days – but housing elsewhere should graduate to new ranges.

To achieve those changes, more amenities will be needed in suburban centres. As a city apartment dweller told me yesterday, Auckland fares poorly in the provision of amenities for apartment occupants compared to many cities in other countries, such as Vancouver & Sydney.

Some developments provide a pool or a gym, many don’t. Rather than an increase in inhouse amenities, and against council budgets which are very unlikely to allow for an expansion of communally owned amenities, the growth of apartment living in suburban centres could be matched by the separate private-sector provision of amenities.

That in itself would produce 2 value changes – one to reduce the value of apartments by eliminating costly inhouse amenities, the other to increase their value for proximity to externally available amenities.

Attribution: Infometrics release, my own economic date, Statistics NZ, Australian Bureau of Statistics.

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Strong population growth projected to continue for Auckland as much of country slows

Statistics NZ said on Wednesday its projections suggested the record growth rates seen in recent years would begin to subside but Auckland will keep growing.

The projections for the 30 years 2013-43 indicate Auckland will receive over half the net migrant inflow and will account for over half the country’s growth.

The biggest concentrations of growth will be in the Waitemata local board area – the cbd, to Parnell in the east, Westmere in the west, south to Grafton & Great North Rd, and also including Waiheke Island – and Upper Harbour, which takes in Whenuapai, Hobsonville & Albany. Both Waitemata & Upper Harbour’s populations are expected to grow at an average 2.6%/year.

From a starting point of 1.49 million in 2013, the projections show high/medium/low increases for Auckland of:

2018: 1.74 million, 1.7 million, 1.66 million
2028: 2.1 million, 1.99 million, 1.87 million
2038: 2.45 million, 2.2 million, 2 million
2043: 2.6 million, 2.33 million, 2.05 million.

On those projections, Auckland’s population would grow over 30 years by:

High: 1.1 million, 1.9%/year average
Medium: 833,000, 1.5%
Low: 554,000, 1.1%

Around the rest of the country, growth is projected to be strong through to 2028, but slowing in most of the country through to 2043. The total is picked to rise from 4.4 million in 2013 to, in 2043:

High: 6.73 million, up 2.29 million at an average 1.4%/year
Medium: 5.9 million, up 1.48 million, 1%
Low: 5.1 million, 681,000, 0.5%

Statistics NZ’s projections indicate Christchurch’s growth district outside the old city, Selwyn, should average 2.6% growth to 2043, and Queenstown-Lakes 2.2%/year.

A warning from Statistics NZ on the figures: “These projections are not predictions. The projections should be used as an indication of the overall trend, rather than as exact forecasts. Statistics NZ produces low, medium & high growth projections for every local area every 2–3 years to assist planning by communities, local councils & government.

Statistics NZ, Subnational population projections

Attribution: Statistics NZ.

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Prime ministers vow to continue with TPP and toward single market

New Zealand & Australian prime ministers Bill English & Malcolm Turnbull confirmed in a joint statement on Friday that they’d work together to progress the TPP (Trans Pacific Partnership) agreement with other TPP members following the US withdrawal.

They also signed an agreement to better integrate Australia & New Zealand’s science, research & innovation agendas by enabling collaboration between researchers & innovative companies on both sides of the Tasman.

And they committed to continue finding ways to make it easier to operate across the transTasman market, and for the 2 countries to continue aiming for a single economic market.

Joint statement – leaders meeting 17 February 2017

Attribution: Government release.

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Wheeler holds cashrate and sees change a long way off

The Reserve Bank left the official cashrate unchanged at 1.75% today, and indicated it would be a long time before change was needed.

Bank governor Graeme Wheeler pitted an improved global outlook against surplus capacity & geopolitical challenges, and once again argued that the $NZ was overvalued.

Mr Wheeler said in his statement on the cashrate decision:

“The recovery in commodity prices and more positive business & consumer sentiment in advanced economies have improved the global outlook. However, major challenges remain, with ongoing surplus capacity in the global economy and rising geopolitical uncertainty.

“Global headline inflation has increased, partly due to rising commodity prices. Global long-term interest rates have increased. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

“New Zealand’s financial conditions have firmed, with long-term interest rates rising and continued upward pressure on the $NZ exchange rate. The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate ‘negative inflation’ in the tradeables sector. A decline in the exchange rate is needed.

“Economic growth in New Zealand has increased as expected and is steadily drawing on spare resources. The outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity. Dairy prices have recovered in recent months, but uncertainty remains around future outcomes.

“Recent moderation in house price inflation is welcome and, in part, reflects loan:value ratio restrictions & higher mortgage rates. It is uncertain whether this moderation will be sustained, given the continued imbalance between supply & demand.

“Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradeables inflation. Longer-term inflation expectations remain well anchored at around 2%.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

Monetary policy statement
Monetary policy statement press conference live-stream at 10am
Graeme Wheeler reading statement

Attribution: Bank release.

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Australia holds cashrate as picture brightens

The Reserve Bank of Australia decided today to leave the cashrate unchanged at 1.5% as the country’s economic picture brightened.

Bank governor Philip Lowe said: “Conditions in the global economy have improved over recent months. Business & consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain.

“In China, growth was stronger over the second half of 2016, supported by higher spending on infrastructure & property construction. This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain.

“The improvement in the global economy has contributed to higher commodity prices, which are providing a boost to Australia’s national income.

“Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices. Long-term bond yields have also moved higher, although in a historical context they remain low. Interest rates have increased in the US and there is no longer an expectation of further monetary easing in other major economies. Financial markets have been functioning effectively and stock markets have mostly risen.

“In Australia, the economy is continuing its transition following the end of the mining investment boom. GDP was weaker than expected in the September quarter, largely reflecting temporary factors. A return to reasonable growth is expected in the December quarter.”

Mr Lowe said the Australian central bank’s central scenario remained for economic growth to be around 3% over the next couple of years: “Growth will be boosted by further increases in resource exports and by the period of declining mining investment coming to an end. Consumption growth is expected to pick up from recent outcomes, but to remain moderate. Some further pickup in non-mining business investment is also expected.

“The outlook continues to be supported by the low level of interest rates. Financial institutions remain in a position to lend. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

“Labour market indicators continue to be mixed and there is considerable variation in employment outcomes across the country. The unemployment rate has moved a little higher recently, but growth in fulltime employment turned positive late in 2016. The forward-looking indicators point to continued expansion in employment over the period ahead.

“Inflation remains quite low. The December quarter outcome was as expected, with both headline & underlying inflation of around 1.5%. The bank’s inflation forecasts are largely unchanged. The continuing subdued growth in labour costs means that inflation is expected to remain low for some time. Headline inflation is expected to pick up over the course of 2017 to be above 2%, with the rise in underlying inflation expected to be a bit more gradual.”

Mr Lowe said conditions in the housing market varied considerably around the country: “In some markets, conditions have strengthened further and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come onstream over the next couple of years. Growth in rents is the slowest for a couple of decades. Borrowing for housing has picked up a little, with stronger demand by investors. With leverage increasing, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments.”

In sum, he said: “Taking account of the available information, and having eased monetary policy in 2016, the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

Attribution: Bank release.

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