Tag Archives: New Zealand

Global Debt – 225% of GDP

The New Zealand Parliamentary Library publish a very good monthly economic review and in the July edition the topic of the month was The International Monetary Fund’s Global Debt Database.

The IMF publish their Global Debt Database which provides the gross debt levels since 1950 for 190 advanced economies, emerging market economies and low-income countries. It covers 99% of global GDP in 2016. Currently, total debt levels have reached a new high, standing at around US$164 trillion, or 225% of global GDP with USA, China and Japan accounting for more than half this figure – $92trn out of $164trn – see table.

The big change is China with debt having gone from $5trn to $26trn in the space of 10 years – this equates to 3% of global debt in 2007 to 15% in 2016. Private debt has nearly tripled since 1950.

Government vs Private Debt in New Zealand

New Zealand government debt has been on its way down which is in contrast to its private debt – see figures and graph below. Not surprisingly the IMF is concerned about private debt and the effects of the country’s inflated housing market despite the strong economic outlook. They said “Household debt remains high under the baseline outlook and would amplify the impact of large downside shocks, notwithstanding recent improvements in its risk structure after macroprudential policy intervention. Such shocks could also trigger a disruptive housing market correction,” The main risks to New Zealand are an economic slowdown amongst developed countries and China, the fallout from increasing protectionism and the Mycoplasma bovis cow disease.

Source: New Zealand Parliamentary Library – Monthly Economic Review – July 2018

Dairy debts make NZ Banks vulnerable

New Zealand dairy farmers are making banks worried about their ability to keep up with their mortgage payments. Four recent issues haven’t helped the cause:

1. Falling produce prices making it harder for farms to service debt
2. Mycoplasma bovis cutting productivity and profitability of the sector
3. Regulatory changes  – restrictions on foreign ownership and therefore reducing the value of dairy farms
4. Environmental regulations – increasing operating costs for farms

Whilst the last two might improve the long-term sustainability of the dairy sector they could reduce the profitability of highly indebted farms and their equity buffers.

Banks are closely monitoring about 20% of their dairy farm loans because of concerns about the borrowers’ financial strength. Although a dairy downturn is unlikely to threaten the solvency of the banking system, it does weaken their position if there is another external shock like another GFC. Bank lending in the dairy sector has been consistent over the last few year years but the proportion of loans on principal and interest terms has increased from 6% in January 2017 to 12% in March this year.

Although the average mortgage for most farm types has decreased in dollar value over the past six months, the average mortgage amount increased in the dairy farms – see graph below. The average mortgage for dairy farms is the highest at $5.1 million for the first time since the survey began in August 2015.

The table below shows the average current mortgage by sector over the years shown. Dairy farmers continue to hold the largest proportion of mortgages in excess of $2 million. They are also more likely to have a mortgage over $2 million – 62.5% of all dairy farms – and $20 million – 3.4% of dairy farms.

Source: Federated Farmers of New Zealand – Banking Survey – May 2018

New Zealand’s regional and per capita GDP.

From the New Zealand Parliamentary Library – April 2018.

  • Auckland region has the largest regional GDP at $101,370 millionWellington region
  • ($35,603 million), and the Canterbury region ($34,933 million). Economic output in the North Island accounted for over 77 percent of total economic output in New Zeala
  • Old with the South Island providing the remaining 22.7 percent.
    The economy expanded by 6.2 percent over the year in nominal terms (not to be confused with real economic growth of 3.7 percent over the year). The Bay of Plenty region grew the most in percentage terms, expanding by nine percent in nominal ter
  • ms, followed by the Northland and Waikato regions (8.2 percent each). In contrast, the Wellington region expanded by 4.6 percent over the year.

The region with the highest GDP per capita was the Taranaki region ($70,863), followed by the Wellington region ($69,851), and the Auckland region ($61,924). The region with the lowest GDP per capita was the Gisborne region, at $39,896 for the year ended March 2017.
The following table shows nominal GDP, the annual percentage change, and GDP per capita for the year ended 31 March 2017 by region.

Source: New Zealand Parliamentary Library. April 2018



Benefits of CPTPP to New Zealand.

On 23 January 2018, in Tokyo, the negotiations for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) were concluded. Its inception came from the TPP Agreement but that could not come into force until it was ratified by four other signatories, including the United States. After the election of Donald Trump the US made it clear that it did not intend to become a party to the Agreement. However the remaining eleven countries continued negotiations.

The eleven countries in the CPTPP are: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The economies  account for 13.5 percent of world GDP – worth a total of US$10 trillion. These are economically significant for New Zealand. The 10 economies:

• Are the destination for 31 percent of New Zealand’s goods exports (NZ$15.2 billion) and 31 percent of New Zealand’s services exports (NZ$6.9 billion) annually (year to the end of June 2017).

• Include four of New Zealand’s top 10 trading partners (Australia, Japan, Singapore, and Malaysia).

• Include four countries with which New Zealand has never had a free trade agreement (Japan, Canada, Mexico and Peru). We export over NZ$5.5 billion of goods and services to these four countries.

• Are the source of 65 percent of total foreign direct investment in New Zealand (as of March 2017).

The CPTPP will provide significant benefits for New Zealand goods exporters across a range of sectors. Tariffs will be eliminated on all New Zealand’s exports to CPTPP economies, with the exception of beef into Japan; and a number of dairy products into Japan, Canada, and Mexico, where access will still be improved through partial tariff reductions and duty-free quotas.

Source: New Zealand Foreign Affairs and Trade.

New Zealand election: economic impact of new Government’s policies.

Since the election businesses seem to be unsure of the new direction of government policy and therefore this has led to a reduction in business confidence. This is not unusual especially with a change of political ideology and the more left leaning government which could make things – regulation, taxes etc – harder for businesses. The government plans to cancel next year’s scheduled tax cuts even though it would have added 0.4% to GDP. This could be partly offset by an increase in expenditure on Working For Families and the free tertiary education for first year students.

The new Government plans to spend more than the national government which is not unusual considering its position of the political spectrum – see graph. This will be partly funded by tax revenue and borrowing $7bn more over the next four years – this is a borrowing and spend fiscal stimulus. The impact of this spending will be influenced by the fiscal multiplier.

Fiscal Multiplier.
It refers to the change in GDP that is due to a change in government fiscal policy – taxes and spending. For example, if increased government spending of $1bn causes overall GDP to rise by $1.5bn, the multiplier effect is 1.5.

There are problems for the new Government in that:

1. Some of this extra spending will go on imports and this will mean an outflow of money from the New Zealand economy and therefore making no contribution to GDP. Remember that GDP expenditure approach = C+I+G+(X-M).

2. There is also the crowding out effect – this is when government spending fails to increase overall aggregate demand because higher government spending causes an equivalent fall in private sector spending and investment. This could include: extra spending on public healthcare leading to less spending on private healthcare; government employment creating labour shortages for firms; and government employment creating labour shortages for firms. Crowding out can also happen indirectly via fiscal stimulus increasing interest rates and consequently the exchange rate making exports less competitive and imports cheaper.

Ultimately the government debt must be repaid by the use of government revenue from taxation. A labour coalition government usually increase taxes during their time in government and this has the tendency to discourage private sector investment. The government’s borrow-and-spend plans will not necessarily make the economy any larger in the long-run but it is expected that government spending (G) will be a larger share of the economy with consumption (C) and investment (I) having a lower share – see graph below. Interesting to note the government spending as a % of GDP for Labour and National – goes up as a % of GDP when Labour are in office and goes down as a % of GDP when National are in office.

Source: Westpac Quarterly Economic Overview – November 2017

Government debt as % of GDP – New Zealand amongst the lowest in the OECD.

In 2015 New Zealand’s government debt as a % of GDP was amongst the lowest amongst the OECD countries coming in at 35.6% – NZ$86.1bn. This gives the government the ability to borrow billions of dollars to stimulate growth in the economy and fund necessary infrastructure projects. This is important when a recession phase is threatening the economy. In 2015 the median level of debt to GDP was the Netherlands with 77.5% and Australia was 67.7%. The UK and the USA had debt to GDP of 112.6% and 125.9%. The standout countries are Japan with debt of 234% of GDP and Greece at 182%. High amounts of debts are only become a concern when the debt is mainly funded from overseas and issues in non-local currency and the country is unable to alter its exchange rates. For Japan a lot of the debt has been issued internally and been bought by the Bank of Japan (central bank) but this is not the case for Greece as they have had significant help from other countries.

Govt debt as % GDP

Does aggressive or cautious fiscal stimulus lead to higher debt-to-GDP ratio?

With low interest rates globally and liquidity trap conditions a more expansionary fiscal policy has become more prevalent for most governments. However the level of severity of fiscal policy – aggressive fiscal stimulus v cautious fiscal stimulus – is important with regard to a country’s debt-to-GDP ratio as recent experience shows. A paper by Alan Auerbach and Purity Gorodnichenko of University of California Berkeley found that short bursts of expansionary fiscal stimulus doesn’t necessarily lead to higher debt-to-GDP ratios or to higher interest rates. They noted that in some instances markets revised down their worries about creditworthiness in response to large scale stimulus.

Other research by Brad De-Long University of California Berkeley and Larry Summers Harvard University seems to support this view. Their research suggests that long periods of cautious growth eat away at an economy’s productive potential as investments don’t get finished and healthy workers drop out of the labor force.

In future the level of stimulus and its time periods should be automatic and proportionate to the severity of the downturn. Examples could include:

  • Labour tax rates could be linked to unemployment figures so that pay packets jump the moment conditions deteriorate.
  • Funding to local governments could be similarly conditioned, to limit painful cutbacks by municipalities.
  • To prevent a scramble for worthwhile, shovel-ready infrastructure projects, governments could make sure to have a ready queue, so spending could easily scale up in a downturn.


  • The Economist – The Borrowers – 9th September 2017
  • BERL: New Zealand among lowest government debts in OECD – 26th September 2017

Tourism booming in New Zealand and Lions tour still to come.

Recent figures show that the tourism industry is now a bigger export earner that the traditional dairy industry. For the year ending December 2016, total exports of dairy and related products were $12.05bn, accounting for 17.2% of all exports. Over the same period, tourism (including air travel) was worth $12.17bn, or 17.4% of exports. These compare to 18.2% and 16.9% (respectively) for 2015, showing the increasing importance of tourism to the NZ economy. After these two industries, the next largest export is meat, all the way back on 8.4% of total exports, leaving tourism and dairy well out in front. If you look at GDP figures – Tourism accounts for 5.6% whilst Dairy is 5% of GDP.

NZ Goods and Services Exports (Values $m)

Exports - Dairy and Tourism

NZ Visitor arrivals.pngWhat are the drivers behind the tourism numbers?
1. The growth of the Chinese middle class who can now afford to travel overseas and additional carriers operating out of China into New Zealand
2. The impact of The Lord of the Rings and Hobbit films
3. The 2011 Rugby World Cup and 2015 Cricket World Cup boosted arrivals significantly.

Also there are two further events which are bound the increase tourist numbers – The World Masters Games that finished today and the British Lions Tour in June/July. The Lions Tour is bound to have a significant impact on the economy especially with the hype that is currently building which largely comes about as the tour only occurs every 12 years.

British Lions Tour 2005 and its impact on NZ Economy

Contribution to New Zealand’s GDP – 16,000 supporters at approximately $10,000 per trip equates to NZ$160 million or 0.1 per cent of GDP. But spending doesn’t equate to value added. Value added is broadly a third of the initial spend therefore this leaves a direct macro impact on value added of $53 million. Second round multiplier effects increase the impact to NZ$132.5 million or broadly 0.1% of GDP.

Retail sales figures for June 2005 were up 1.2%. Accommodation providers, for example, experienced a 5.1% increase in turnover during June. And spending in bars increased by 3.9% in June from May and spending a café and restaurants increased by 1.3% while liquor sales surged 3.7%.

Some economic pricing invariably led to higher prices in some markets. A terrace ticket cost NZ$100 for the Lions vs All Blacks game at Eden Park but excess demand on the black market did mean that some tickets were double the face value. Also prices in bars and cafés increased significantly in the main centres.

Spending Spree
Sales figures for June and July 2005 released by credit card operator Visa International show visiting Lions fans pumped millions of dollars into the New Zealand economy.
UK and Irish-based Visa card holders spent $42.2 million during the two-month period, more than double the amount spent by cardholders during the same period last year. Below is some of the breakdown:

Hotels, motels, resorts: $5,967,931
Travel agencies: $4,927,429
Vehicle rental: $2,574,812
Restaurants: $2,245,621
Tourist attractions: $1,588,492
Air New Zealand: $1,446,342

Although results didn’t go their way, the Lions supporters certainly had a good time. The impact is bound to be significantly greater this year with numbers of supporters up to around 20,000. However as with the 2005 tour there will significant infrastructure problems in meeting this demand.

After the win in Australia four years ago maybe the Lions could pull off a series win – the last time was 1971.

New Zealand property seen as a good ‘store of value’ if you can afford it.

House Price % change.pngOne of the functions of money discussed in the AS Level course is store of value. In 2010, after the GFC, gold became a popular as a store of value rather than as an adornment and its price rose from $700 an ounce in 2007 to $1264.90 in June 2010. A similar situation has become apparent in 2016 with property.

New Zealand seems to be seen as the safe ‘store of value’ for overseas investors in that they have purchased a large number of expensive properties in the local market. Although they only account for 3% of all New Zealand properties sold, overseas purchases have focused on properties over NZ$1m which have increased by 21%. This in turn has pushed up property prices nationally by 13%. Other countries have also seen the impact of foreign money.

*London – property prices are up 54% in four years
*USA – Chinese investors have bought 29,000 US homes for $27bn. mainly in San Francisco, Seattle, New York and Miami.

In many of these countries affordability looks stretched. The Economist gauges house prices against two measures: rents and income – see graph. If, over the long run, prices rise faster than the revenue a property might generate or the household earnings that service a mortgage, they may be unsustainable. By these measures house prices in Australia, Canada and New Zealand look high. In America as a whole, housing is fairly valued, but in San Francisco and Seattle it is 20% overpriced.

In most cases property maintains a good store of value with its intrinsic value. However gold’s main use is for jewelry, especially in India and China, and it has been quite strange that the price should remain so high at certain times without any changes in the fundamentals of supply and demand. Also why has gold maintained such value as a commodity without any real intrinsic value – its price being based on nothing more than a common belief its value is going to appreciate. Much like the tulip bubble in Holland in 1636.

Brexit and trade – UK can learn from New Zealand’s experience

With the departure of the UK from the EU there have been many questions asked about the future of UK trade. No longer having the free access to EU markets both with imports and exports does mean increasing costs for consumer and producer.

New Zealand’s Experience

A similar situation arose in 1973 when the UK joined the then called European Economic Community (EEC). As part of the Commonwealth New Zealand had relied on the UK market for many years but after 1973 50% of New Zealand exports had to find a new destination. However with the impending loss of export revenue New Zealand had to make significant changes to its trade policy. In 1973 the EEC took 25% of New Zealand exports and today takes only 3%. Add to this the oil crisis years of 1973 (400% increase) and 1979 (200% increase) and protectionist policies in other countries and the New Zealand economy was really up against it.

What did New Zealand do?

1. It negotiated a transitional deal in 1971 with agreed quotas for New Zealand butter, cheese and lamb over a five-year period, which helped to ease the shift away from Britain.

2. New Zealand was very active in signing trade deals of which Closer Economic Relations with Australia was the most important in 1983. The other significant free trade deal was with China in 2008. Below is a list of New Zealand’s current free trade deals and a graph showing the changing pattern of New Zealand trade:

NZ Free trade Deals

NZ exports goods 1960-2015.png

With brexit around the corner it will be imperative that the UK starts to develop trade links with non-EU countries of which New Zealand might be one. The UK is the second largest foreign investor in New Zealand and its fifth largest bilateral trading partner.

Importance of Tourism to New Zealand

nz-short-term-arrivalsGiven the growing importance of tourism to the NZ economy, there is a risk that the latest earthquake could adversely impact visitor arrivals. However, looking at the 2010/11 earthquakes, the long-term impact appears to be limited (see graph from ASB Bank).  It is estimated that the impact on visitor arrivals is likely to be small in comparison to the previous quakes, though Wellington through to North Canterbury are likely to see a reduction in visitors. Spare a thought for  Kaikoura, the whale-watching capital, which has experienced a lot of damage and currently has no access routes.

Unlike other sectors  which produce material goods, tourism encompasses a range of industries and is based on characteristics of the consumer, rather than what is being produced by the producer. Feeder industries into the tourism sector include:

Accommodation – Transport – Retail Trade – Food and Beverages – Car Hire – Tourist Sites

Tourism spending – year ended March 2016

  • Domestic = $20,213m ($15,361m spent by households $4,852m spent by business and government)
  • International = $14,486m ($2,747m from international students)

Total = $34,699m

One significant point from the data was that tourism revenue surpassed export revenue from dairy products.

Contribution of Tourism to Gross Domestic Product (GDP) 

  • Direct contribution – $12,873m = 5.6 % of GDP.
  • Indirect Contribution (supplying of goods and services to tourism sector) – $9,815m = 4.3% of GDP
  • Total contribution = $12,873m + $9,815m = $22,688m = 10% of GDP

Employment – the tourism sector is quite labour intensive, with:

  • People employed 188,136 = 7.5 % of total employment.
  • People indirectly employed = 144,186 = 5.7% of total employment.
  • Total 332,322 = 13.2 % of total employment


Source: Parliamentary Library – Monthly Economic Review  November 2016