ACT’s The Letter - 29 March 2005
The Letter
29 March 2005
THE SKY IS FALLING
Economic sentiment has changed. The share market's bull run seems to have halted. The rise in house prices appears to
have stopped. Interest rates are up. The trade deficit is huge. Economic growth over the last quarter was just 0.4%.
Economic confidence has fallen 10%. Oil prices continue to rise and Labour is going ahead with the 5 cents a litre fuel
tax.
INFLATION
Economist Gareth Morgan points out that if the CPI index still included house prices inflation would now be 7%! He is
predicting a hard landing. He believes an inflationary election budget means further interest rate rises and Asian
Reserve Banks abandoning their US dollar holdings means the US dollar will fall pushing the Kiwi up to 90 cents.
Interestingly the opposite scenario produces the same result. The Kiwi falls, import prices rise, interest rates
increase and the economy has a hard landing.
A HARD LANDING
More interest rate rises and a fall in rental income so heavily mortgaged rental and homeowners are unable to meet
payments. Forced sales means property prices will fall and owners will have no equity. More sales, further price falls.
NZ households are among the most indebted as a percentage of assets in the world. It is possible.
IMMIGRATION
Immigration is just as big an impact on the Auckland economy as interest rates. 580 NZ'ers are now leaving for Australia
weekly. The number of new migrants arriving has fallen. The demand for housing is not just driven by interest rates.
Fewer people mean fewer houses. Even Peters has given up talking about immigration.
GOVERNMENT SPENDING
Government tax revenues continue to rise and Cullen continues to spend. Real government spending has increased
enormously hidden by the fall in spending on unemployment. Family support package spending is yet to kick in. As the
money is directed to low-income families, most on benefits, it will all be spent. Consumers think it's a good time to
buy and employers are still hiring. Result inflationary pressure.
BOOM CONTINUING
The Letter believes the economy will continue to grow at least until the election. Our 'independent' Reserve Bank is
very reluctant to increase interest rates again before the election and is concerned the level of domestic debt is so
high that interest rate hikes will devastate households. The infrastructure spending that the government is committed to
takes the building boom into next year and beyond, motorways, prisons, schools, hospitals it's a long list.
INTERNATIONAL OUT LOOK
NZ has benefited from the worldwide commodity boom. Even though every boom has busted you can put forward some
favourable scenarios. Bush tax cuts stimulate growth and tax revenues - we think it's likely. The Republican Congress
gets serious about controlling spending - less likely. China's boom continues joined by India - likely. The expanded EC
results in new growth in Europe - less likely. Oil starts flowing from Iraq's huge oil deposits - could take a while. A
favourable outcome from the Doha round – likely.
BETTER FUNDAMENTALS
The Uruguay Round has favourably altered NZ's terms of trade. This is significant because NZ provides 50% of the world's
internationally traded milk. Progress in the Doha round would add real wealth to NZ.
THE BUSINESS CYCLE
Every time commentators claim this business cycle is different and there will not be a correction or this time it will
be soft, it is our experience that the next recession is going to be hard. If we knew how and when, we would be out in
the market trading. NZ is a small open economy, which is very vulnerable to external shocks. Our openness means the
shock travels through the economy with remarkable speed. The correction will probably come from some factor we cannot
predict like the Asian bird flu becoming a worldwide pandemic.
GOOD GOVERNANCE
What makes good government difficult is timing. The Clark government is enjoying the benefits of reforms implemented up
to 20 years ago. Changes to the employment laws, extra red tape, increased taxation and greatly increased poor quality
government spending are having only a marginal impact today, lowering growth about 1-2%. Cumulatively over time the
decisions will have a great effect. If the US had grown at 1% less from 1870s to 1990 the average American today would
be as wealthy as the average Mexican.
LABOUR'S LIST
The Letter was 100% accurate in our predictions. Labour's new MP, pro-life Leslie Soper, replaces Jonathan Hunt but has
no chance of being re-elected. Because electoral boundaries favour Labour they only have seven list MPs. MMP is strictly
proportional so the list redeems the balance. On present polling Labour will only get seven list MPs and lose all the
Maori seats. As the Maori MPs with the exception of Tamihere have been given high list places the following Labour list
MPs would be elected, Cullen, Wilson, Horomia, Samuels, Ririnui, Okeroa and Choudhary, who misses out if Hobbs loses
Wellington Central. Shane Jones, Georgina Beyer, Maryan Street, David Parker, (who will lose Otago), Hereora, Steven
Ching, Moroney, Fenton and Chauvel, (all ahead of Leslie Soper) miss out.
OUR POLL
Last week we asked should political parties be able to advertise as they wish in campaigns. 88% of readers said yes. ACT
appeared before the Electoral Commission and argued that political parties not taxpayers should fund elections and
funding should be equal see http://www.act.org.nz/funding. This week "Is the economy going to have a hard landing this year?" Letter readers will be an interesting barometer.
Vote at http://www.act.org.nz/poll.
ENDS