The Australian economy is proving resilient, with high demand for goods and services, no anticipation of imminent interest rate cuts, and Aussies feeling more optimistic about their jobs and property market than Kiwis. Meanwhile two of the world’s biggest economies – the US and China – have started cutting interest rates, after NZ, yet the Reserve Bank of Australia remains firmly on hold. Milford Portfolio Manager Katlyn Parker talks to Ryan Bridge about the factors contributing to New Zealand’s economic situation, and what we could expect from the RBNZ at its meeting next week.

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Bridge talks Business: 1 October 2024
Episode Transcript

Ryan Bridge
Kia ora, I’m Ryan Bridge and welcome to Episode 8 of Bridge talks Business with Milford. Today, if you’re wondering whether to fix now or float your mortgage interest rate, stay tuned. We have Milford expert Katlyn Parker on this week’s episode. If you want to know what’s happening with the OCR, ask Katlyn. What’s China doing with its central bank this week? Ask Katlyn. And don’t worry, we will. But before that, here’s your top five business bits from the past week.

1. China steps up, announcing a stimulus package for its economy and property market. A step in the right direction, but the big question, is it big enough?
2. Number two on the top five this week, markets rally all things China related, including China’s shares up 20%, Australia’s resource stocks and the Aussie and the Kiwi dollar.
3. Where the bloody hell are ya? The Aussies are still waiting for a rate cut. The Reserve Bank of Australia continuing to keep everybody guessing, despite mounting political pressure across the Tasman.
4. Oil markets are holding steady despite Middle East tensions. Saudi Arabia’s increasing supply, keeping prices near three-year lows.
5. This week, we watch US labour market data. Have recent concerns about a slowdown in US employment growth being overblown, and what will it mean for the path for the Fed easing?

Which brings us to this week’s feature interview. Interest rates. The Reserve Bank is going to make another announcement. Are they going to change it? Are they going to leave it unchanged? What impact might it have on our economy? And speaking of our economy, why would we seem to be battling so much here in little old New Zealand when compared to the likes of Australia, the US, the Eurozone, England. For these questions and more, Investment Analyst Katlyn Parker from Milford returns to the podcast. Welcome back.

Katlyn Parker
Thank you. Great to be here.

Ryan Bridge
Just a reminder that this episode is informational only and should not be considered financial advice. So good to have you back. I was thinking the last time we spoke would have been right before the Reserve Bank made the interest rate cut.

Katlyn Parker
Yes, the week before. In August.

Ryan Bridge
Remember, we were like, are they going to do it? Are they not going to do it? They have done it. And now we’re potentially looking at more cuts from the Reserve Bank. And we’ll talk about that in just a second. But firstly, why is New Zealand seemingly performing so badly when compared to other comparable countries?

Katlyn Parker
The recession that we’re in at the moment or that we’ve been sliding in and out of over the past 18 months, that is policy induced. So that’s not a surprise to the Reserve Bank. They engineered this. So, they undertook a least regrets approach. We’re one of the first to start hiking interest rates and we did it with gusto as well. And now we’re really feeling the impact of that. So, if we look at GDP per capita, so that’s an individual slice of the pie. And it was how households are experiencing. That’s down close to three percent. And that’s in a period when we’re also getting strong immigration. And then if we look, you know, why are we faring so bad versus the US? Because the US have also been hiking interest rates, similar speed to us. We’re a lot more interest rates sensitive in terms of our economy. So, we fix our mortgages for shorter tenor. And in terms of our household debt to disposable income, we’re a lot more vulnerable than an economy like the US. So, it does hit us quicker and harder. And then if we look at our neighbors in Australia, it really is down to the divergence in policy responses since Covid. In Australia, they’ve taken very much a patient approach. They haven’t hiked as much as us. And they’re now in a situation where they actually should probably hike again because inflation hasn’t been tackled over there.

Ryan Bridge
Yeah, it’s interesting, isn’t it? Because we look at Australia and we say, oh you poor guys. You haven’t had your rate cuts – for those who’ve got mortgages. But they’re like a whole percent lower than us and have been the whole way through this.

Katlyn Parker
Exactly. So, they’re not actually as restrictive as we are here in New Zealand. In New Zealand, yes, we have started to cut, but we’re still from a higher base in terms of the amount of interest rate hikes that we have received to date.

Ryan Bridge
So who had the better approach?

Katlyn Parker
Look, if you’re looking at who’s winning the inflation battle. So, New Zealand has made some headway in terms of getting inflation under control. In Australia, inflation is still quite sticky, especially domestically-generated inflation and services inflation. The Reserve Bank of Australia, they don’t see inflation getting back to their target until 2026.

Ryan Bridge
Crazy, right? Because by the end of this year, we’re meant to be in the target band.

Katlyn Parker
Yeah, look, we’re definitely making headway. And also the Australian economy, it’s doing pretty well. You know, house prices are still experiencing some growth. You know, it has definitely pulled back, but they are experiencing it. They haven’t had that negative equity effect. In New Zealand, our house prices are down X amount. You’re pulling back your spending. Consumption is remaining pretty resilient over there as well. So, that’s also adding to the inflation issue as well.

Ryan Bridge
And the other thing I was wondering about is government policy. They’ve obviously had a Labour government elected over there, probably not opposed to spending as much. Whereas we’ve had a more conservative, fiscally conservative government here. So, perhaps that’s playing into it as well.

Katlyn Parker
Yeah, that’s really definitely helped with consumption, remaining resilient over there.

Ryan Bridge
All right. So, let’s talk about some of the big developments we’ve had in the last week, particularly China. What has China’s central bank been doing? What are they up to?

Katlyn Parker
Last week we had a huge amount of stimulus announced by China, but it was really focused on the monetary policy side versus fiscal spending. And the issue in China is your Chinese consumer is extremely weak. So, in China, the majority of their wealth is tied up in housing, even more so than here in New Zealand. And house prices in tier one cities are down over 30 percent since the peak. That’s a massive amount and a massive wealth effect that it’s having in China, and pull back of consumption. So, there is stimulus announced. Is it going to be a smoking gun? It’s really trying to get the housing market back intact. And that’s where a lot of the issues are. Unlikely. We do need that fiscal spending to come as well, because it’s going to take time. Overnight, we’re not going to see Chinese consumers being more confident that the housing market is going to rally. They’re not going to go and start spending. They’re not going to go and purchase another property. And here in New Zealand, yes, it is positive for us that there’s more of a positive sentiment – because sentiment has been extremely weak. For us, the impact is in terms of our exports. So, Chinese customer in a better position means that it’s good for our dairy exports. Companies like a2 Milk, also for travel, inbound travel. It’s pretty positive. So, we did see our New Zealand dollar benefit last week. So Australasian economies do benefit when the Chinese economy is in a better position. But is it going to change the dial for the New Zealand economy? Unlikely.

Ryan Bridge
Right. OK. Would you have expected them to do more? Because I certainly had expected them to do more. That’s what the Chinese government tends to do, right? Are you surprised at how long it’s taken and how little they have gone with in this stimulus?

Katlyn Parker
Yeah, look, it definitely is surprising how long it has taken them to react. And it was very well received last week, but it was more so because it’s from such a low base. So, you know, we did see Australian companies that deal with exports and commodities. And here in New Zealand, we saw the dollar rally. But it’s because it’s off such a low base. Do we actually think this is going to change the Chinese economy and resolve their issues overnight or in the near term? No, they do need more.

Ryan Bridge
But any news was good news.

Katlyn Parker
Exactly. Any news is good news. But it will take a lot more, and likely need some of that fiscal spending as well to help.

Ryan Bridge
All right. So where does all of us leave our Reserve Bank? They’ve got a decision next week.

Katlyn Parker
Yes.

Ryan Bridge
Next Wednesday. And, you know, will they move? And if they do, could they do a double whammy?

Katlyn Parker
Yeah, look, well, we had the US Federal Reserve. They’ve really opened the door to that. So, we saw them a couple of weeks ago decrease interest rates by 0.5 percent. If the US can do it and their economy is in a much better shape than us, why can’t we? The market certainly thinks so. So, the market is currently putting an 8 percent chance on the Reserve Bank doing a 0.5 percent decrease next week.

Ryan Bridge
Right.

Katlyn Parker
But if we think about what has changed since the last meeting? So, at the August meeting, the Reserve Bank had guided that they would cut by 0.25 percent in October and November. So, what could change their opinion since then? The main data that we’ve received is the GDP. So, on the headline number, it wasn’t as weak as the Reserve Bank had expected. Yes, we have the US now opening the door to those outsized interest rate cuts. And also, we only have two meetings left this year. Right. So, October, November. And then there’s a three-month hiatus. A lot can happen in those three months. There is potential that you see the Reserve Bank front foot and get ahead of it. But look, regardless, either way, the trajectory is definitely lower for the Official Cash Rate. And the risk is that they start to cut a lot quicker than previously expected.

Ryan Bridge
Yeah. And they will be watching, you know, in Australia. I mean, the last thing you would want is to open the door, even ajar to inflation again. Go away for Christmas, New Year, come back. And oh, my goodness, we’re back in the situation we just tried to get out of.

Katlyn Parker
Exactly. That is the thing. And that’s one of the risks with interest rate cuts – they do increase confidence. They increase confidence in the housing market and people start spending again. So, it is trying to manage that inflation issue as well. If people are feeling more wealthy, the more positive about the economy, they are going to spend more. And we know seasonally coming into Christmas as well. It is a big spending season, and also the housing market. February is a big month and in the run up to Christmas. So, there’s a lot of risks for them to balance.

Ryan Bridge
There’s one thing I wanted to pick your brain about, and it’s the output gap between New Zealand and Australia, for example. Can you tell us what is the output gap? What does it mean?

Katlyn Parker
It’s a measure, essentially, of how hot or how cold an economy is running. So, the output gap is your actual output of an economy minus its potential output. Potential output is if the economy is firing on all cylinders – the amount of goods and services that it can produce. So, if it’s in tip top shape. In Australia, it has a positive output gap, which means that the economy is running hot. It’s doing extremely well. It’s achieving beyond its potential.

Ryan Bridge
Is this like going for a run when you’re fully fit and able, versus going for a run when you’re a bit hung over.

Katlyn Parker
Yeah, pretty much. Or it’s thinking that you can only go and run five km and you run seven.

Ryan Bridge
Right. OK, I’m with you.

Katlyn Parker
Doesn’t happen to me.

Ryan Bridge
So, they are running quite hot.

Katlyn Parker
They are running quite hot. And we’re not even starting the race. So, we have a negative output gap. Demand is quite sluggish. Businesses aren’t operating efficiently. And it really is an apt picture, I suppose, in terms of how the New Zealand economy is performing.

Ryan Bridge
So, I guess that’s why … well, is that maybe why we’re cutting rates here and the Reserve Bank of Australia isn’t? Well, one of the reasons?

Katlyn Parker
Yeah, definitely it does attribute to the reason. It really comes down to inflation. So, the Reserve Bank of Australia, they’re keeping rates on hold at 12-year highs. And it comes down to the fact that they haven’t resolved their inflation issue. Also, their labour market is pretty resilient over there, versus here in New Zealand. The unemployment rate is increasing. We have excess capacity, but we have made a bit of a headway in terms of inflation. And then if we look at net immigration. So historically, between Australia and New Zealand, it’s always gone in Australia’s favour. But recently as well, what we are seeing is the amount of Kiwis that are leaving New Zealand and moving overseas. It’s not far off the record highs back in 2011, 2012, when Australia had the mining boom.

Ryan Bridge
Yeah, if you want to know which side of the Tasman is doing better, just look at how full the planes are, right?

Katlyn Parker
Exactly.

Ryan Bridge
Backing those Jetstar flights and getting out of dodge. Hopefully that will turn around at some point. Is that surge of migration from New Zealand – would that have a big effect on how hot their economy is? I mean, that’s extra demand, that’s extra cash that’s going around, that sort of thing?

Katlyn Parker
Yeah, so one of the things that Australia is really struggling with is rents. And housing is a large part of their inflation, in terms of the inflation that’s generated domestically. So that’s one of the issues, is that rents have been increasing there. It’s adding to that cost of living crisis. And it does affect disproportionately certain cohorts in Australia. So, not everyone is feeling fine over there and not feeling any effect of monetary policy. But that definitely is one thing that it is feeding into. But what is surprising is, Australia has been getting record levels of immigration, not just from us, but their unemployment rate has stayed pretty stable. And also, their labour market is resilient. So, that has been something that has been extremely surprising.

Ryan Bridge
Katlyn, thank you so much. Lovely to have you back and I look forward to the next time we have a rate cut, we’ll see you back then.

Katlyn Parker
See you then.

Ryan Bridge
That is Katlyn Parker, an Investment Analyst at Milford, who talks to us about all things interest rates, the OCR, the Reserve Bank. Speaking of the Reserve Bank, that decision is coming your way next week and I’m sure we’ll have more analysis about it then. See you next week.

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