- Kiwibank business bankers organised a breakfast event for nearly 200 clients. It was a privilege to have Paul Conway, RBNZ Chief Economist, to deliver a speech and open up to questions from the floor.
- Conway’s speech itself covered some familiar ground, setting the scene. The economy has cooled, and we are still evolving out of the Covid period, with substantial structural changes. “We’re not going back to how we were pre-Covid”. And inflation remains a problem for most central banks.
- Importantly, the risks are more balanced, when we compare to the November MPS. The RBNZ’s forecasts have changed, but not a lot according to Paul. It’s the risks around those views that have improved.
- The Q&A session was fantastic and could have kept going for another hour. There were also some interesting comments from clients. See our chatter section.
It’s not everyday we get the chance to hear from (and quiz) an RBNZ official up close and personal. But today Kiwibank business bankers hosted RBNZ Chief Economist, Paul Conway at a breakfast event for nearly 200 clients. It’s was a great event, filled with insightful discussions and plenty of thought-provoking questions. So we thought we’d tell you all about it.
The main takeaway from Paul’s update was: the balance of risks, are better balanced. The economy is tracking broadly as the RBNZ has forecast. We’ve made good progress, especially on the inflation front. But the RBNZ’s job is not over. Inflation is falling, but still high. And the labour market is loosening, but still tight.
When discussing the economy in the post-Covid world, it was the structural changes that got our attention. The working from home phenomenon has reshaped workforces, made working arrangements more flexible, and in many cases, improved work-life balance. The impact on commercial property, as a key example, has been hard. We simply don't need the same floor space with people only in the office 2-3 days a week. A lot of B-grade commercial property has been left high and dry. Premium A-grade sites are doing much better. We’re willing to pay for premium, flexible, workspaces. And then there’s the retail around the office block. The coffee cart, the barber, the Japanese sushi. Fewer people coming into work each day, means a lot less foot traffic.
The discussion around structural changes turned quickly to technology. Banks have seen this first hand. The old cash business that relied on foot traffic, swiftly adopted to paywave machines and websites to stay alive. The adoption of technology has continued. What we thought would take 5-to-10 years to come through, was picked up in a matter of months. It’s a good news story for economy wide productivity. The more we innovate, the faster our technology becomes, the more we get out of every dollar spent.
Today’s event was also a great chance to hear from Kiwi businesses. Between coffee and croissants, we picked up a few anecdotes. The feeling, or vibe, in the room is simply, give us rate cuts, and we can grow. Many business owners are looking past the struggles of last year, and are looking beyond the challenges this year. “Survive until ‘25” was a phrase we heard coming out of the commercial and tourism space, It’s the idea that businesses just need to keep their head above water until the RBNZ starts cutting, and confidence returns. Survive until ‘25 summed up the mood of many. Businesses are still cautious, but there is light at the end of the tunnel. A light that wasn't visible last year.
Q&A.
One of the more interesting discussions was around enabling banks to create cheaper, readily available, credit to SME business. And there was a mention of bank risk weightings, compared to risk weightings on housing.
It was worth reflecting on the current situation. The appetite from the major banks has waxed and waned. Whereas Kiwibank is one of the few still open for business. The client base told us that some banks are there, and then they’re not. And some have stepped back altogether. The risk appetite of banks is always impacted by the economic environment. And we have been in recession. It will take a more tangible uplift in expectations, and possibly rate cuts, to turn the tide. No matter how much you want a loan, if there’s no one willing to provide it, well, that’s it.
Conversely, we note the opposite is also true. Deals that were signed off many moons ago, have not been drawn down. Credit was provided, but not used. The demand for credit has also waned as businesses lost confidence in their own path.
The talk around risk weights is a good one. Engaging with the RBNZ to find ways to potentially reduce risk weights on SME (arguably more productive) lending would enable banks to hold less capital against each loan, which makes it easier to generate more, and at a cheaper price – lower interest rate. It is something we have raised many times over the years. And it was good to be heard again.
Among the mix of questions, the topic of productivity was also brought up a couple of times. Particularly, the issue around needing talent to get productivity gains. But the all-too-familiar kiwi problem of not being able to offer high enough wages to attract foreign talent, or retain top shelf kiwi talent – often lost to overseas markets. Higher productivity is the mythical answer. It’s a classic chicken or egg problem as Paul described it. Which comes first? The talent or, the productivity gains required to lift wages to an attractive rate. It’s not a new problem for us kiwi. As Paul mentioned we’re naturally disadvantaged to productivity issues due to our small size and geographical isolation. But we also have some natural advantages (literally). New Zealand is a renowned and attractive place to live and that should not be forgotten either.
Migration. What is it good for?
2023 was the year of migration. NZ recorded a 130k net gain of permanent and long-term migration – the most ever recorded in a single year. Textbooks teach of the double-edged sword of migration. More people means more labour, easing wages. More people also means more demand, fuelling prices. But every surge in migration is different. And as Conway pointed out, the demand impulse this time around is proving weaker than past booms. Migrants are of a younger cohort and of a different occupation. Over 40% of migrants arrivals are aged 15-30years. They come at working age, and they’re keen to work. The occupational mix is also different to the most recent boom in 2013-2019. We’re importing more tradies, fewer professionals. We’re plugging staffing gaps that were left open for too long during covid. The supply impact of net migration is the dominating force of the current boom. The labour market is flooded with new, and desperately needed, talent. We’re seeing downward pressure on wages. That’s good news for businesses and inflation.
Conway also points to the state of the economy to explain the soft demand impulse. Migrants are arriving at a time when the economic undercurrents are weak and financial conditions are tight. Economic data today is not reflective of rapid population growth we’ve experienced. The volume of retail sales continues in decline, the housing market is struggling to find direction, and overall economic growth is modest at best. All that despite near 3% population growth.
Why did the RBNZ morph from hawk to dove between the Nov and Feb MPS?
With the February MPS not too long ago, it was the question on everyone’s mind. Last November, the RBNZ shocked all with a hawkish tone. The OCR track was shunted higher to signal further rate hikes. The RBNZ appeared to be losing patience in the war against inflation. But over the summer, the RBNZ seemed to have found some patience. And in February, the RBNZ softened its tone. The OCR track was lowered, and the timing of rate cuts brought forward. No one expected a dovish pivot. Not us, and from today’s question to Conway, neither did Kiwi businesses. So what was Conway’s answer? It’s all about the risks surrounding their forecasts and where they lie. In November, the risks were judged to be skewed to the upside. Today, the economic forecasts are similar, but the risks have become better balanced. Progress in the fight against inflation and growing evidence of a slowing economy has given the RBNZ confidence that monetary policy is working as intended. Hence the change in tone. And we expect another change later this year. We believe the RBNZ will be in a position to cut rate earlier than they forecast. We have pencilled in Nov-24 as the start date. For the RBNZ, the easing cycle begins in the first half of 2025. We expect the data to turn before then. Just as the great John Maynard Keynes once said – “when the facts change, I change my mind”. And so should the RBNZ.
For more on the outlook for interest rates, see: “Soft landing nirvana: “on a plain”. Confidence to cut is key. Interest rates will fall for households and business.” We forecast substantial declines in interest rates this year and next. The great unwind of heavy handed hikes will help households and hampered businesses, producing a better outlook. The glass half empty will turn full. 2024 will be a better year than 2023, and 2025 will be better than 2024. Survive ‘til ’25.
Chatter in the room: we have confidence with a caveat.
Put 200 clients in a room and you’re bound to pick up on a bit of business chatter. And we love to hear how things are tracking on the ground for businesses rather than just focusing old, lagged, dodgy data (excluding the Kiwibank spending tracker of course). There was a great mix of clients across a range of different industries. And there was one theme that really stood out - businesses are doing it tough, and everyone is holding out for rate cuts. It’s a challenging environment right now, and while many believe the worst was over, they also didn’t see things picking up much for the remainder of 2024. Apparently, there’s even a saying going around property developers that they just need to survive until 2025. Its sound’s gloomy, and it is, but there was optimism in the room too. Businesses are hopeful of rate cuts in the near future, and for a much better 2025. They’re not wrong. The delivery of rate cuts will see the return of improved business and household confidence, stronger investment intentions, and stronger demand across the economy. Our pick is that the Reserve Bank will be in a position to start cutting rates this November. And growth should pick up from thereafter but until then activity and output will remain subdued throughout 2024. You can read more on this in our latest GDP preview. See: ”A cruel summer, and a cruel year. Kiwi growth flat on the surface. But fundamentally in decline.
Moving towards more industry specific insights, the mood for the housing market has improved. Chatter amongst the room were suggestive that we were in the early stages of a bull market with growing expectations of house price growth. Sales remain low but listings are high and picking up. The sentiment of a quiet housing market remains but the view that it seems ready to pounce was quite prominent. And following on from that positive note, word on the street is that tourism has also noticeably ticked back up over the past few months. Since reopening up our border two years ago tourism has still struggled to return to full pre-covid strength. Instead, tourism has long held at about 75-80% of pre-covid levels. But it sounds like we may be finally breaking past that point, and we heard today that the increased flows are being felt across both tourism and hospitality businesses.
Overall, the feeling is one of greater confidence, but with a caveat. The outlook has improved, and the change in Government has contributed. But “we’re just waiting for rate cuts” rang true across many conversations.
