Archive | Economy

Trump wants to slash housing support by 18%

Supporters of the homeless & low-income families in the US are aghast at proposals in President Donald Trump’s budget which would slash Housing & Urban Development Department (HUD) funding by 18.3% – $US8.8 billion.

The HUD budget cuts are based on 2 themes:

  • Encouraging work & self-sufficiency, and
  • Switching federal funding to state & local governments and the private sector.

This is how it’s expressed in the budget document: “The budget reflects the president’s commitment to fiscal responsibility by reforming programmes to encourage the dignity of work & self-sufficiency while supporting critical functions that provide assistance to vulnerable households. The budget recognises a greater role for state & local governments and the private sector to address community & economic development needs & affordable housing production.”

In short, the Trump scheme is to stop federal debt rising – US public debt has gone past $US20.6 trillion, now that the debt ceiling has been removed – by handing liability to others, or canning functions altogether. Principally, those abandoned or altered functions seem to affect the most vulnerable.

Affordable Housing Finance deputy editor Donna Kimura outlined the housing changes in the Trump budget on Monday, saying it called for the elimination of several key housing programmes:

“Once again, the administration calls for terminating the popular community development block grant (CDBG) & HOME programmes. The proposal also seeks to end the Choice Neighbourhoods programme as well as the National Housing Trust Fund.

“The White House called for many of the same cuts last year, but the programmes were ultimately funded by Congress.”

Ms Kimura quoted David Dworkin, president & chief executive of non-partisan affordable housing advocate the National Housing Conference: “The best thing one can say about this budget is that it is dead on arrival. This budget is bad policy & bad politics. It undermines years of public-private investments in housing & community development that have had broad bipartisan support, like the CDFI Fund & block grant funding for neighbourhood redevelopment. It even cuts the Capital Magnet Fund & National Housing Trust Fund, which aren’t even paid for by taxpayers.”

Ms Kimura wrote that the budget sought no funding for the public housing capital fund, which had had nearly $US2 billion in funding in recent years. Instead, the proposal is to merge the public housing capital fund into the public housing operating fund, reducing funding overall.

Links:
Affordable Housing Finance, 12 February 2018: White House proposes to slash HUD programmes
Trump budget proposal (HUD section at p63)

Attribution: Affordable Housing Finance, Trump budget proposal.

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Spitting the dummy, and changing the international order

US president Donald Trump has been spitting the dummy. Most of the toys are now out of the cot.

Other people have been picking up those toys. Prepare for massive change in the international order.

This article is about fundamental changes which are likely to occur – I say likely, but there will be plenty of scrambling to prevent it – and how things might pan out.

One factor in the changes is a simple process of counting quotas, with worldwide implications.

Another factor is Mr Trump & his desire to open acrimonious fights. The latest revelation on that front was about a border patrol agent who died in December. Mr Trump used the event to promote his wall fronting Mexico, saying the agent had been “lost” [as in died] and his partner “badly beaten”, although the partner had radioed in that he thought he’d hit a culvert and investigators found no evidence of any other cause. Texas governor Greg Abbott offered a reward “to solve this murder”. By the time the story reached the Fox News airwaves, illegal immigrants had bashed the first agent to death with rocks.

You might consider that incident a minor side issue in the international scheme of things, except that it’s a standard ploy and it colours expectations of Mr Trump’s behaviour in other forums.

On top of some other factors already in play – currency, the sharemarket rollercoaster (particularly US, but internationally), some trade conflicts and some trade aspirations – I’ve followed through on some wider trade questions, examined how the international applecart might be completely overturned, and provided you with some sections of text where you can use your own judgment on what people & institutions are saying.

Those pieces of text are:

  • a repeat of the opening to my newsletter last Wednesday
  • part of an article by Russian president Vladimir Putin, and
  • segments of the BRICS summit declaration last September.

If you’re like me, most of your sources for international matters will be American. Your choice then is to go left (or our right, depending on your view of how people lean in the US), right (or further right, if like me you think there’s not much that’s truly on the left), or, if you have a lot of time, hunt for something in the middle, neutral, balanced, can be substantiated.

BRICS & the IMF

We have this constant focus on the US because of the oh-so-frequent outbursts from its oh-so-remarkable president, but the game is getting serious.

One occasion, which will tell how serious, occurs on Friday-Sunday 20-22 April, when the International Monetary Fund (IMF) & World Bank Group hold their joint annual spring meetings in Washington.

Since the IMF was founded in 1945, the US has held a power of veto (over 15% of the vote). After the latest adjustment of quotas, the 5 BRICS nations (Brazil, Russia, India, China & South Africa), combined, will also have veto potential.

I’ve been following the writings (sometimes rants) of Jim Rickards (lawyer, economist, financial writer, editor of Strategic Intelligence) via the Daily Reckoning website (and also the separate website of Daily Reckoning founder Bill Bonner), and last year Mr Rickards was convinced the change in power at the IMF would result in its special drawing rights usurping much of the $US’s role in international exchange.

It didn’t happen, but that may be just a matter of timing for processes to be completed. Or, if the 5 aren’t yet ready, they may hold off for another 6 months or a year.

However, Mr Rickards is at it again, this time pointing to that April meeting of the IMF where, he says, the BRICS nations’ combined voting strength will rise from 14.2% to 16.21%, while the US vote will fall from 16.54% to 16.44% – still veto power for the US, but with fewer mates in support of its case.

Privileges & power written in for US

Among the privileges the US has had for decades, its greenback has held primacy as the international reserve currency. Primarily through the BRICS relationship, Russia & China began using their own currencies for trade between them last year, and both Russian president Vladimir Putin & the BRICS summit declaration point to more of that, plus changes along the lines of this statement from the summit declaration: “We resolve to foster a global economic governance architecture that is more effective & reflective of current global economic landscape, increasing the voice & representation of emerging markets & developing economies.”

Under the old order, that would have been squashed in a backroom, although official statements wouldn’t have put it quite that way.

China has also signed currency swap agreements with over 20 other countries, setting the greenback’s role aside in each case. To demonstrate how this matters, Mr Rickards pointed to the US love affair with cars – and the price of fuel, which has long been far lower than anywhere else in the developed world: “Why do we pay less? Because oil is priced & purchased in our dollars.”

Here’s the exercise in today’s money: US gallon = 3.785411784 litres, $US1 = $NZ1.38, average US petrol price currently $US3.12/gallon of premium 91-octane unleaded according to the American Automobile Association, = $NZ1.14c/litre. Auckland price currently? Around $2/litre.

Pointing the finger – but the backing is shrinking

President Trump has accused China, in particular, of currency manipulation & theft of intellectual property and has pressed for sanctions against Chinese suppliers of washing machines & solar modules, and Canada on lumber & dairy products. US airline maker Boeing tried too, but failed in a bid to have heavy tariffs imposed on Canadian planemaker Bombardier.

Broadly, in addition, any sign that a foreign company has an element of government ownership will mean it can be targeted for “unfair” competition.

Trump wants one-on-one, others work on multi-partnerships

Mr Trump rejected the Trans Pacific Partnership, which still favoured US corporates after much negotiation, and wants changes to the North American free trade agreement with Canada & Mexico.

Meanwhile, other countries are moving into multi-partner relationships – both for constructive trade reasons and, particularly now, as protection against a wild card.

Now, you have a revised TPP being finalised without US involvement, the BRICS nations are gradually starting to get a multitude of joint activities underway, and China is working on closer relations across Central Asia, into Europe and into Africa through its reinvented Silk Road, the “one belt one road” of land & sea routes.

The international reserve currency question is a big one. The move away from the greenback has already begun, and could accelerate quickly if the IMF goes the BRICS nations’ way. The US administration could find itself a rock on the road, being driven into the ground by every other nation.

US trade & infrastructure parked on a tightrope

While Mr Trump has talked jobs for struggling areas of the US and promoted exports, the official unemployment rate has been falling (with a couple of blips) for 2 years and has been at 4.1% for 4 months, and average hourly earnings have crept up 2.9% in the last year. He wants a low exchange rate to be internationally competitive, and low interest rates to keep the cost of federal debt down, but can expect inflation if the economy continues to improve (net of stimulation-targeting debt injections).

To get his massive infrastructure programme underway, Mr Trump wants local contributions of about 80%, federal no more than 20%. Previously, infrastructure programmes have been directed through the federal coffers, and neither states nor cities will have the funds to meet this changed requirement.

Swat: Deal “non-existent”

As an example of how the whole idea of continuity, forward planning for project funding and acceptance outside the presidential palace of how everything’s supposed to work, CNN Money ran a story at the end of January on how all that smart thinking can be upended: “Deep underneath the Hudson River between Manhattan & New Jersey lies a century-old rail tunnel, heavily damaged during Superstorm Sandy, that still carries 200,000 riders/day.

“Engineers say the tunnel should be replaced as soon as possible, at a cost of $US12.7 billion. In 2015, the Obama administration agreed to supply half the funding for it, and designs are nearly complete. But in December, President Trump’s Federal Transit Administration sent a letter to the Port Authority of New York & New Jersey declaring the deal ‘nonexistent’.”

Mr Trump has been intent on unwinding every measure his predecessor, Barack Obama, put in place, but CNN said this rail tunnel project had implications for travel through both Democrat- & Republican-voting districts.

Congress set up a commission in 2010 with Amtrak & mid-Atlantic governments as partners, which put a $US38 billion price tag on repairing the north-east corridor line. The House of Representatives approved a $US500 million “down payment” last year to start the repairs, but CNN said the Senate approved only $US26 million, no agreement has been finalised, and added this most important factor in the politics of US public money: “The North-east Corridor is now at a political disadvantage in Washington because it connects Democratic cities with limited influence.”

The North-east Corridor Commission has estimated shutting the service down – not by choice but for danger or damage – would cost the US economy $US100 billion/day.

The original letter from New York state budget office director Robert Mujica was cursory, mentioning progress being made but saying nothing about agreement reached by 2 states on their proposed shares of the cost. On New Year’s Eve, Mr Mujica wrote a longer explanation, but it seemed he was responding to a “don’t want to” federal letter.

Under the terms so far revealed of the Trump infrastructure plans, the 7 years of planning for this major work will have been wasted, but other states might also not be able to take up the offer if they can’t source enough funds locally.

With US public debt escalating beyond $US20 trillion, the local & state governance structures militating against early starts, the potential for an early collapse in soaring sharemarket prices, and big changes in international economic structures, the Trump infrastructure programme looks in danger.

Buy American law: blatantly protectionist

While I was looking for the original correspondence to balance the portrayal by CNN (which didn’t mention the numerous questions raised by the federal transport official, deputy administrator Jane Williams), I spotted a piece of New York state legislation passed on 15 December, the New York Buy American Act, requiring state entities to include a contract provision requiring the use of US-made structural iron & structural steel for all surface road & bridge projects.

One of the most contentious clauses in the Trans Pacific Partnership documents when the US was still involved in writing it – the investor-state dispute settlement provision – was designed to combat this kind of lopsided trade law.

The New York law is blatantly protectionist legislation – just one of the 6 state senate & assembly leaders quoted in Governor Cuomo’s release thought product quality was an important ingredient worth mentioning.

Making sense of a complicated picture

That, I think, sets a picture more fully than the newsletter lines I wrote last week (repeated below). In short:

  • Lines of finance could change, though that might take longer than some of the other potential & likely changes
  • Trade directions could be radically altered, by positive additions such as the central Asian growth, and by negatives such as the influence of internal US bickering
  • The cost of money, or the currency of trade, or both could change
  • US leaders’ behaviour may reinforce other nations’ determination to take their trade elsewhere, and
  • US infrastructure-related businesses, unable to function properly at home, may look (at least short-term) for work elsewhere.

Click to read page 2: Spitting the dummy page 2: Putin, BRICS & last week’s summary

Earlier story:
31 January 2018: Trump changing longstanding rules of play on infrastructure

Links:
BRICS 2017
4 September 2017: BRICS leaders’ Xiamen declaration
1 September 2017, Vladimir Putin article: BRICS: Towards New Horizons of Strategic Partnership
Jim Rickards on Collide (subscription required)
CNN Money, 26 January 2018: The biggest infrastructure nightmare facing the US
29 December 2017: Federal Transport Department letter to New York state budget director
31 December 2017: New York state budget director response to Federal Transport Department
14 December 2017: Governors Cuomo & Christie announce commitment to fund 100% of states’ half of new Gateway tunnel
13 December 2017: New York state budget director letter to Federal Transport Department outlining funding agreement progress
New York governor Andrew Cuomo, 15 December 2017: Governor Cuomo signs “Buy American” legislation for all structural iron & steel on New York roads & bridges
Washington Post, 9 February 2018, opinion article by Dana Milbank: Trump concocted a story about a border agent’s death. The truth won’t catch up.

Attribution: BRICS, Vladimir Putin, Jim Rickards, CNN Money, New York State, US Federal Transport Department, Washington Post.

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Spitting the dummy page 2: Putin, BRICS & last week’s summary

Click to read page 1: Spitting the dummy, and changing the international order

Vladimir Putin at the BRICS summit.

Russian president Vladimir Putin wrote an article days before the September 2017 summit of the 5 BRICS nations (Brazil, Russia, India, China & South Africa) in Xiamen, China, espousing views on economic issues – and on a wide range of other matters of international politics, but especially on an extremely wide range of potential areas of co-operation among the 5.

The central message was this: The balance of power is changing.

For the BRICS partners, there was a call to work together in many spheres, which sounds enlightened & constructive but also faces many obstacles.

For New Zealanders, whose primary sources of foreign information used to be British and are now mainly American, it may take suspension of belief to digest the following statements and to accept them at face value, but that’s not why I’ve run them.

The reason they’re here is to show you the stated intent ahead of highly significant changes which may start to emerge in 2 months.

Key points of the Putin message:

“Russia highly values the multifaceted co-operation that has developed within BRICS. Our countries’ constructive co-operation on the international arena is aimed at creating a fair multipolar world and equal development conditions for all.

“Russia stands for closer co-ordination of the BRICS countries’ foreign policies, primarily at the UN & G20, as well as other international organisations….

“Russia also calls for promoting the interaction of the BRICS countries in the area of global information security. We propose joining our efforts to create a legal basis for co-operation and subsequently to draft & adopt universal rules of responsible behaviour of states in this sphere. A major step towards this goal would be the signing of an intergovernmental BRICS agreement on international information security….

“Russia is interested in promoting economic co-operation within the BRICS format. Considerable practical achievements have been recently reported in this area, primarily the launch of the New Development Bank (NDB)….

“Russia shares the BRICS countries’ concerns over the unfairness of the global financial & economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies. We will also work towards a more balanced distribution of quotas & voting shares within the IMF & the World Bank.

“I am confident that the BRICS countries will continue to act in a consolidated manner against protectionism & new barriers in global trade. We value the BRICS countries’ consensus on this issue, which allows us to more consistently advocate the foundations of an open, equal & mutually beneficial multilateral trade system and to strengthen the role of the WTO as the key regulator in international trade.”

Other BRICS leaders joined the charge

The 5 BRICS leaders followed those Putin lines of thinking in their joint summit declaration 4 days later:

“… 10. We agree to promote the development of BRICS local currency bond markets and jointly establish a BRICS local currency bond fund, as a means of contribution to the capital sustainability of financing in BRICS countries, boosting the development of BRICS domestic & regional bond markets, including by increasing foreign private sector participation, and enhancing financial resilience of BRICS countries….

“11. In order to serve the demand arising from rapid growth of trade & investment among the BRICS countries, we agree to facilitate financial market integration through promoting the network of financial institutions and the coverage of financial services within BRICS countries, subject to each country’s existing regulatory framework & World Trade Organisation (WTO) obligations, and to ensure greater communication & co-operation between financial sector regulators…. We agree to communicate closely to enhance currency co-operation, consistent with each central bank’s legal mandate, including through currency swap, local currency settlement, and local currency direct investment, where appropriate, and to explore more modalities of currency co-operation. We encourage the BRICS interbank co-operation mechanism to continue playing an important role in supporting BRICS economic & trade co-operation. We commend the progress in concluding the memoranda of understanding among national development banks of BRICS countries on interbank local currency credit line and on interbank co-operation in relation to credit rating….

“22. We appreciate the efforts & contribution of the BRICS Business Council & Business Forum to strengthening our economic co-operation in infrastructure, manufacturing, energy, agriculture, financial services, e-commerce, alignment of technical standards & skills development….

Changing global economic governance

“29. We resolve to foster a global economic governance architecture that is more effective & reflective of current global economic landscape, increasing the voice & representation of emerging markets & developing economies. We reaffirm our commitment to conclude the IMF’s 15th general review of quotas, including a new quota formula, by the 2019 spring meetings and no later than the 2019 annual meetings. We will continue to promote the implementation of the World Bank Group shareholding review.

“30. We emphasise the importance of an open & resilient financial system to sustainable growth & development, and agree to better leverage the benefits of capital flows and manage the risks stemming from excessive cross-border capital flows & fluctuation. The BRICS contingent reserve arrangement (CRA) represents a milestone of BRICS financial co-operation & development, which also contributes to global financial stability. We welcome the establishment of the CRA system of exchange in macroeconomic information (SEMI), and the agreement to further strengthen the research capability of the CRA, and to promote closer co-operation between the IMF & the CRA.

Looking to change in Africa

“31. We welcome the establishment of the NDB Africa regional centre launched in South Africa, which is the first regional office of the bank. We welcome the setting up of the Project Preparation Fund and the approval of the second batch of projects. We congratulate the bank on the ground-breaking of its permanent headquarters building. We stress the significance of infrastructure connectivity to foster closer economic ties & partnerships among countries. We encourage the NDB to fully leverage its role and enhance co-operation with multilateral development institutions including the World Bank & the Asian Infrastructure Investment Bank as well as with the BRICS Business Council, to forge synergy in mobilising resources and promote infrastructure construction & sustainable development of BRICS countries.

“Open & inclusive”

“32. We emphasise the importance of an open & inclusive world economy enabling all countries & peoples to share in the benefits of globalisation. We remain firmly committed to a rules-based, transparent, non-discriminatory, open & inclusive multilateral trading system as embodied in the WTO. We reaffirm our commitments to ensure full implementation & enforcement of existing WTO rules and are determined to work together to further strengthen the WTO. We call for the acceleration of the implementation of the Bali & Nairobi MCM outcomes and for the WTO ministerial conference to be held this year in Argentina to produce positive outcomes. We will continue to firmly oppose protectionism. We recommit to our existing pledge for both standstill & rollback of protectionist measures and we call upon other countries to join us in that commitment….

Rebalancing tax

“34. We reaffirm our commitment to achieving a fair & modern global tax system and promoting a more equitable, pro-growth & efficient international tax environment, including to deepening co-operation on addressing base erosion & profit shifting (BEPS), promoting exchange of tax information and improving capacity-building in developing countries. We will strengthen BRICS tax co-operation to increase BRICS contribution to setting international tax rules and provide, according to each country’s priorities, effective & sustainable technical assistance to other developing countries…”

My newsletter Wednesday 7 February:

Stock markets have taken a tumble – no surprise. The question was the timing. Next, though, come 2 important questions: How big will that tumble be (here & particularly in the US)? And what other markets will the stock/bond shifts affect?

Commercial property yields have declined in keeping with the low/zero interest rates, but in many of the world’s markets property investors seem to have been trading for more superficial reasons than with defence against changes in the economic climate in mind….

The second question above – what other markets will be affected, and how? – may be answered with interest rate changes, though central banks will be loath to squeeze… And the availability of debt will be variable, from country to country – and, in this country, affected by the state Australia’s big 4 banks find themselves in…

Will New Zealand’s apartment & general residential markets be affected? Undoubtedly. NZ investors who are in both shares & property will find themselves squeezed on the share side of the equation, affecting their actions on the property side…

Foreign investment in NZ residential property was already about to be curtailed by the new government, immigration is declining slowly, Australia is unlikely to offer a strong economic alternative to the NZ workforce – conditions here are likely to tighten…

Interest rates need to rise (though not by a lot) to bring more sense to markets, but central banks around the word will, instead, be looking at how to turn tricks with debt… In that situation, while uncertainty may reduce property pricing, delay in raising interest rates would put a hold on that change…

Click to read page 1: Spitting the dummy, and changing the international order

Earlier story:
31 January 2018: Trump changing longstanding rules of play on infrastructure

Links:
BRICS 2017
4 September 2017: BRICS leaders’ Xiamen declaration
1 September 2017, Vladimir Putin article: BRICS: Towards New Horizons of Strategic Partnership
Jim Rickards on Collide (subscription required)
CNN Money, 26 January 2018: The biggest infrastructure nightmare facing the US
29 December 2017: Federal Transport Department letter to New York state budget director
31 December 2017: New York state budget director response to Federal Transport Department
14 December 2017: Governors Cuomo & Christie announce commitment to fund 100% of states’ half of new Gateway tunnel
13 December 2017: New York state budget director letter to Federal Transport Department outlining funding agreement progress
New York governor Andrew Cuomo, 15 December 2017: Governor Cuomo signs “Buy American” legislation for all structural iron & steel on New York roads & bridges
Washington Post, 9 February 2018, opinion article by Dana Milbank: Trump concocted a story about a border agent’s death. The truth won’t catch up.

Attribution: BRICS, Vladimir Putin, Jim Rickards, CNN Money, New York State, US Federal Transport Department, Washington Post.

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Reserve Bank holds as uncertainties rule

The Reserve Bank left the official cashrate unchanged today at 1.75%.

The Reserve Bank of Australia held its cashrate at 1.5% yesterday and the US Federal Reserve decided on 1 February to hold its target range for the federal funds rate at 1.25-1.5%.

NZ Reserve Bank acting governor Grant Spencer said there were numerous uncertainties, and monetary policy would remain accommodative for a considerable period. This is how he saw the economic landscape:

“Global economic growth continues to improve. While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have increased, although agricultural prices are relatively soft. International bond yields have increased since November but remain relatively low. Equity markets have been strong, although volatility has increased recently. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

“The exchange rate has firmed since the November statement, due in large part to a weak $US. We assume the trade-weighted exchange rate will ease over the projection period.

“GDP growth eased over the second half of 2017 but is expected to strengthen, driven by accommodative monetary policy, a high terms of trade, government spending & population growth. Labour market conditions continue to tighten. Compared to the November statement, the growth profile is weaker in the near term but stronger in the medium term.

“The bank has revised its November estimates of the impact of government policies on economic activity based on Treasury’s half-year economic & fiscal update. The net impact of these policies has been revised down in the near term. The Kiwibuild programme contributes to residential investment growth from 2019.

“House price inflation has increased somewhat over the past few months but housing credit growth continues to moderate.

“Annual CPI inflation in December was lower than expected at 1.6%, due to weakness in manufactured goods prices. While oil & food prices have recently increased, traded goods inflation is projected to remain subdued through the forecast period. Non-tradable inflation is moderate but expected to increase in line with increasing capacity pressures. “Overall, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2%.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Link: Monetary policy statement

Earlier stories:
7 February 2018: Australian central bank holds rate
1 February 2018: Fed holds rate, no mention of debt programme

Attribution: Bank release.

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Australian central bank holds rate

The Reserve Bank of Australia’s board left its cashrate unchanged at 1.5% yesterday.

This is how the bank’s governor, Philip Lowe, saw the Australian & international economies as markets began to tumble, including 10s of billions of dollars wiped from Australian share values:

“There was a broad-based pick-up in the global economy in 2017. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth has also picked up in the Asian economies, partly supported by increased international trade. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.

“The pick-up in the global economy has contributed to a rise in oil & other commodity prices over recent months. Even so, Australia’s terms of trade are expected to decline over the next couple of years, but remain at a relatively high level.

“Globally, inflation remains low, although higher commodity prices & tight labour markets are likely to see inflation increase over the next couple of years. Long-term bond yields have risen but are still low. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus. Financial conditions remain expansionary, with credit spreads narrow.

“The bank’s central forecast for the Australian economy is for gdp growth to pick up, to average a bit above 3% over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.

“Employment grew strongly over 2017 and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. There are reports that some employers are finding it more difficult to hire workers with the necessary skills.

“Inflation is low, with both CPI & underlying inflation running a little below 2%. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2% in 2018.

“On a trade-weighted basis, the $A remains within the range that it has been in over the past 2 years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity & inflation than currently forecast.

“Nationwide measures of housing prices are little changed over the past 6 months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. To address the medium-term risks associated with high & rising household indebtedness, the Australian Prudential Regulation Authority (APRA) introduced a number of supervisory measures. Tighter credit standards have also been helpful in containing the build-up of risk in household balance sheets.

“The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the board judged that holding the stance of monetary 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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Migrant inflow holds above 70,000/year, Auckland influx rises

The net annual migrant inflow continued to slide in December but stayed just above 70,000.

From a high point of 72,402 last August, the net inflow fell to 70,016 in the December year (70,588 in the December 2016 year).

In 2012 it was negative – a net outflow of 1165.

Immigrant numbers rose slightly in December to 10,710 (10,687 a year earlier), but exits rose slightly more to 6049 (5688) for a net inflow in December of 4661 (4999).

For the year, immigrant numbers rose to 131,566 (127,305), emigrant numbers rose more, to 61,550 (56,717).

Arrivals from Australia were steady for the month at 2923 (2909), down for the year at 24,950 (25,783). Departures to Australia were 2533 (2608) for the month, 24,841 (24, 220) for the year. Net, arrivals outnumbered exits for the month by 390 (301), and for the year by 109 (1563).

The inflow into Auckland was 4303 (4384) for the month, 59,678 (55,322) for the year. Net, that influx reduced to 2010 (2152) for the month, but was 36,152 (33,916) for the year.

In practical terms, that net annual inflow equates to a demand for about 12,560 homes in Auckland in 2017, at 2.7 residents/household. Consents for new homes in Auckland in 2017 totalled 10,867 – short of demand by 1700, ignoring natural population increase.

Attribution: Stats NZ tables & release.

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Fed holds rate, no mention of debt programme

The US Federal Reserve’s open market committee decided overnight to hold its target range for the federal funds rate at 1.25-1.5%.

While pundits are forever predicting precise dates for increases in the rate, the committee closed today’s release with a statement roughly equating to “time will tell”: “The committee expects that economic conditions will evolve in a manner that will warrant further 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 lifted the rate in December by a quarter percent from the level set in June. It made no mention of reducing its debt mountain.

The committee outlined its “normalisation programme” last June and issued a one-liner on progress in November: “The balance sheet normalisation programme initiated in October is proceeding.”

Background to “normalisation”

In its June release, the committee said it was “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.

“The committee currently expects to begin implementing a balance sheet normalisation programme this year, provided that the economy evolves broadly as anticipated. This programme… would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities.”

The normalisation programme has 2 parts to it, as outlined in June:

  • For payments of principal that the Federal Reserve receives from maturing Treasury securities, the committee anticipates that the cap will be $US6 billion/month initially and will increase in steps of $US6 billion at 3-month intervals over 12 months until it reaches $US30 billion/month.
  • For payments of principal that the Federal Reserve receives from its holdings of agency debt & mortgage-backed securities, the committee anticipates that the cap will be $US4 billion/month initially and will increase in steps of $US4 billion at 3-month intervals over 12 months until it reaches $US20 billion per month.

On that basis, the total reduction should now be $US10 billion/month.

According to the US Debt Clock website, US public debt has reached $US20.6 trillion and treasury securities total $US1.18 trillion.

Yellen’s last call

The 31 January meeting was the last for Janet Yellen, 71, who handed in her notice as a member of the board of governors in November. Jay (Jerome) Powell, 64, will replace her as chair when he is sworn in on Monday.

Link: US Debt Clock

Attribution: Fed release.

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Surveying the international influences

On the one hand Donald Trump, as a disruptive US president trying to change the order of life in his country’s public services, and simultaneously in its trade with the rest of the world.

On the other, bands of nations working towards new economic alliances, often with religious overlays.

In between, the moneymen of Davos, happy to keep state-funded neoliberalism alive & in good heart.

Hanging over the whole scene, a growing mountain of debt which has theoretically lifted economies over the decade since the global financial crisis began but which nobody feels too inclined to reduce to a manageable level.

The world at peace & harmony, developing economically on well founded lines? Or the world at war, so every step forward is rewarded with a slash from angry opponents?

China sets new paths

As Mr Trump tries to reset the rules of trade combat further in his country’s favour, China has embarked on a journey which promises to establish very different trade routes, but with trouble ahead at various outposts on its One Belt One Road update of the old Silk Road & sea passage to Zanzibar.

Every time I look at international events to gauge how – or even whether – they might affect us in New Zealand, the picture shifts, new players emerge and old ones start playing different games. One of the surprises has been immediately west of us – a country where everyone believed for decades that it was impossible for the federal government to destroy the economy – but they did it!

Among the outcomes, for New Zealanders, is that the Australian job market tightened, Kiwis came home and others who would have gone overseas didn’t, pushing net immigration to record highs. Housing demand & supply in New Zealand was pushed further out of kilter than it had already been for the previous decade.

A change for the better in the Australian economy will bring changes in New Zealand – more emigration, the release of housing pressure, and renewed trade opportunities.

Further away – does it matter?

For the rest, does it matter? Or will NZ sail on, oblivious to the changing winds to the north?

I think those changing winds do matter, because they’re going to bring new trade openings, new migrant sources, new partnerships, and they will widen the range of potential investors in this country, which needs investment in the infrastructure to keep our cities moving and our rural economy productive.

Many opportunities along the Silk Road, but…

China looks intent on reviving the Silk Road, which should bring new investment – not just Chinese – to the stans of central Asia, notably Kazakhstan, Kyrgyzstan, Turkmenistan & Uzbekistan. Already, preparations for a combination of the land route across central Asia and the sea route to Africa are bringing new development to Pakistan. At the same time, religious fervour could cripple those opportunities.

Gansu Bank debuted on the Hong Kong stock market 2 weeks ago and its shares have taken off, Ben Kwok wrote in Monday’s Asia Times. The north-west Chinese province of Gansu is in the Silk Road corridor – so, poorer than most of China but changing times.

Asia Times, 29 January 2018: Gansu province poor but a strategic location in BRI

Controlling the zombies

In an Asia Times story yesterday, Gordon Watts picked up detail from a regular statistical release (seeing through the usual fawning language) that indicated China’s many “zombie enterprises”, often owned by local government or the state, “are being closed, merged or forced to slim down after being weaned off a diet of overproduction”.

That is a change that would have huge consequences, internally in the way production is carried out & counted, internationally in China’s trade relationships – including, for instance, the quality of steel it supplies.

Asia Times, 30 January 2018: China tries to breathe new life into corporate walking dead
18 January 2018, Chinese National Bureau of Statistics: National economy maintained the momentum of stable & sound development and exceeded the expectation

National security – or protectionism?

A third Asia Times story yesterday put US-China trade issues together. Citing a Bloomberg article on Monday, the Asia Times wrote about the possible move for the US Government & trusted US or foreign companies to build 5G networks, saying it could hit Chinese suppliers Huawei & ZTE, and the Global Times (a Chinese tabloid published under the auspices of the People’s Daily) criticised “hysteria” & “protectionism’ under the guise of national security.

“The Donald Trump administration is reported to be in talks with private companies to build a secure 5G network and rent out access to domestic telecom carriers due to concerns about Chinese firms & risks to cybersecurity, Bloomberg revealed on Monday, citing 2 anonymous US administration officials familiar with the plans,” the Asia Times story said.

The Asia Times was established in Bangkok in 1995, closed in 1997 days before the Asian financial crisis began to unfold, and is now based in Hong Kong and owned by Asia Times Holdings Ltd.

Asia Times, 30 January 2018: Chinese firms may face lock-out if Washington seals off 5G networks

Singapore now the big investor in US property

Again citing Bloomberg, the Asia Times noted yesterday: “For the first time since 2012, Singapore outspent China to be the largest Asian investor in US commercial property, as deals by Chinese investors plummeted amid a regulatory pressure from Beijing.”

Singaporean sovereign wealth fund GIC Pte Ltd accounted for almost 75% of the $US9.5 billion of deals.

Asia Times, 30 January 2018: Singapore outspends China on US property for first time in years

Redirecting trade policy

President Trump has been pushing hard for manufacturers who supply the US market, especially vehicle makers, to move production lines from Mexico to the US.

He tweeted on Sunday in praise of Fiat Chrysler: “Our economy is better than it has been in many decades. Businesses are coming back to America like never before. Chrysler, as an example, is leaving Mexico and coming back to the USA. Unemployment is nearing record lows. We are on the right track!”

Fiat Chrysler said it wasn’t shutting the assembly plant in Saltillo, Mexico, that currently builds the Ram heavy-duty trucks, but would use the plant to build commercial vehicles it will sell around the world. The company will spend $US1 billion upgrading its plant at Warren, Michigan, so it can produce these Ram trucks there.

CNN is one of the hardest-line US news outlets against the Trump presidency, but its own story indicates both sides of the argument are technically correct.

More importantly, the Christmas tax boost to corporates and the encouragement for them to take their overseas cash holdings home means more local production by US companies and either a change in production or a closedown for their plants elsewhere – unless foreign investors pick up the pieces.

Either way, the US – and Mr Trump in particular – is leading the direction of trade policy. Outfits like the Trans-Pacific Partnership, representing disparate interests, won’t easily combat that sort of confrontation.

CNN, 29 January 2018: No, Mr President, Chrysler isn’t leaving Mexico

And back to Australia

On the Australian MacroBusiness website, columnist David Llewellyn-Smith (Houses & Holes) wrote last week: “The rest of the world is increasingly seized by the notion of ‘global synchronised growth’ but Australia looks increasingly like the odd man out. How did it come to this?”

The answer was short: “It is all of our own doing. At each turn all we needed to do was to manage the real exchange rate & household debt.”

The brief article runs through some causes of the predicament.

Houses & Holes on MacroBusiness, 25 January 2018: Has Australia mismanaged itself out of a global boom?

Attribution: Asia Times, CNN, MacroBusiness.

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Dickens alleges business confidence surveys contain major political bias

Independent economist Rodney Dickens said in his first Ravings with Rodney column for the year the business confidence surveys which lead political & economic direction “have major political bias”, and backed that up with charts & statistics.

Mr Dickens, who runs his own company, Strategic Risk Analysis Ltd, wrote: “The ANZ business survey has gone AWOL again. Unfortunately, the bank economists – and therefore the media – haven’t focused enough on the massive political bias that currently overwhelms the results of the survey and make it a poor input into business & investment decisions.

“The NZIER business survey has been corrupted less by political gamesmanship, but some components have become poor leading indicators, while even the most useful component is under a cloud.”

In his Raving column, Mr Dickens put the 2 main components of the ANZ & NZIER surveys “in context which is critical for assessing whether much, if any, weight should be put on them in making business & investment decisions.

“When what were once useful leading indicators can’t be relied on, it increases the importance of having access to quality analysis of economic and housing prospects as input into business and investment decisions. Our driver-based approach to forecasting, that is supported by educated interpretation of the leading indicators rather than blind faith in indicators that have gone AWOL, should be a must-have for any businesses & investors wanting to make informed & profitable decisions.”

What Dickens found

“Based on the ANZ business confidence survey, the economy is heading for a recession (ie, negative gdp growth), with significantly more firms negative than positive (left chart). Based on the ANZ own activity survey, near-term prospects for annual gdp growth aren’t so bad, but growth should slow to below 2% over the first half of this year (right chart).

“When these surveys tumbled in November after the election outcome was finalised, the results were reported as if there was a significant threat to economic growth. For example:

NZ Herald, 30 November 2017: Business confidence tumbles to 8-year low in November
Stuff, 30 November 2017: Slump in business confidence poses ‘material risk’ to economy

Mr Dickens didn’t blame the journalists for reporting the survey results verbatim: “They lack the resource & maybe knowhow to back-test the reliability of the surveys. Consequently, they rely on the bank economists to provide the appropriate interpretation, which is a mistake.

“The headlines should have read: “Businesses again hijack survey to make political protest” & “Survey greatly overstates economic risks from the change in government”.

Mr Dickens said these surveys were useful indicators of near-term economic growth prospects before 2002.

He said the NZIER survey “hasn’t been corrupted as much by political gamesmanship: Thankfully the commentary by the NZIER principal economist regarding the falls in many components of the NZIER quarterly business opinion survey was more balanced. This has in turn largely been reflected in the media commentary on the results of the December quarter survey.”

Note: Red & blue lines across the foot of each graph denote periods of government: Labour (red), National (blue).

Links:
NZIER, 16 January 2018: NZIER’s quarterly survey of business opinion shows businesses more pessimistic after the election
Stuff, 16 January 2018: Business confidence drops, with fewer expecting to hire or invest
Interest.co.nz, 16 January 2018: NZIER business opinion survey shows the usual fall in confidence after a Labour-led government takes office, effect of election on actual business activity muted

Mr Dickens took issue with what he said was “still a lack of supporting analysis to put the NZIER December quarter results in context. And in my assessment there hasn’t been enough focus on political gamesmanship; instead, like the commentary accompanying the ANZ November & December surveys, the initial focus was on ‘uncertainty over new government policies’.”

He said the NZIER business confidence survey “has, like the ANZ business confidence survey, become much less useful as a leading indicator of economic growth since 2002. As the NZIER principal economist goes on to point out, it has generally had a negative bias while Labour governed and a positive bias while National governed, although this has only been the case after 2002.”

Link:
Rodney’s Ravings (entry by free subscription)

Attribution: Rodney’s Ravings.

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Local interest rate rise depends on US action

ASB Bank’s economists have forecast rises in interest rates toward the end of this year, ahead of an increase in the official cashrate (OCR) in early 2019.

ASB economist Kim Mundy said in the bank’s Home loan rate report, out on Monday, longer-term interest rates could move higher this year as US interest rates lift.

“Heading into 2017, our expectation had been for slightly higher mortgage rates by year-end. Key to this was expectations of higher offshore (US) interest rates & ongoing bank funding challenges. However… current mortgage rates are close to where they were in January 2017 (and some fixed-terms are even lower than they were then!).

“So what happened? Firstly, bank funding challenges were already exerting pressure on mortgage rates at the end of 2016/early 2017. However, increasing domestic deposit growth rates later in 2017 saw some of these pressures ease.

“Secondly, the lift in US interest rates was less straightforward than we had anticipated. Despite the US Federal Reserve lifting the Fed funds rate 3 times in 2017, interest rates actually softened as concern over the pace of US tax reform progress grew.

“Now as we face 2018 we are, once again, expecting interest rates to lift over the year. US interest rates are expected to continue lifting (particularly now that the US tax bill has passed). US interest rates tend to impact New Zealand’s longer-term interest rates and, as a result, we are likely to see this pressure flow through to the 3-year-plus fixed rates.”

The Reserve Bank cut the official cashrate from 2% to 1.75% in November 2016 and has held it there. ASB’s economists expect the Reserve Bank to raise the official cashrate in February 2019 – “and, as the OCR is one factor influencing floating & shorter-term fixed mortgage rates, there is a risk that New Zealand’s shorter-term interest rates start to lift ahead of any OCR increases.”

Attribution: Bank report.

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