Gareth Morgan, Director of Gareth Morgan Investments
That the long term interest rate in NZ has fallen dramatically over the last month could be a source of rejoicing for those looking for an investment lead expansion in GDP. But despite the trend, the upswing in activity is not going to embrace all New Zealanders.
The major purchasers of the bonds have been local banks experiencing deposit growth in excess o the demand for their lending. They are falling into bonds because of a lack of other investment (ie; lending) opportunities. Already we have seen interest rates lung under this source of pressure and yet so far there has been continuing sluggishness in lending to the private sector. AnecdotalIy, it’s apparent businesses are funding investment projects via equity rather than debt, while households too are still reducing debt ratios. The prospect of a liquidity trap wherein the fall in interest rates fails to stimulate demand for borrowed funds, is possible.
We’d expect the sequence to lead to further interest rate falls until finally business investors adjudge that factors, including not only the cost of capital, are conducive to expanding business investment at a rate requiring debt finance. The issue is how long it takes for this point, to be reached, If people prefer to simply l)ile their surpluses into financial assets, driving down interest rates and accruing capital gains in the process, but showing no interest in taking risk by using their surpluses in combination with some debt, to pursue business opportunities and economic growth, then NZ faces a prolonged period of quiet times. In the liquidity trap it matters not what the interest rate is, people are not interested in borrowing, usually because some past or anticipated event has destroyed their appetite for risk.
The past. event is the economic recession and the negative wealth effects that have ensued. The enthusiasm of households to run down savings rates in pursuit of higher risk spending – such as via residential property investment has been pulverised. Note that household spending in NZ is now weakening from levels attained earlier this year – and this despite the fact that the lower exchange rate encourages households to spend more of their dollars in New Zealand.
The anticipated event cramping people’s propensity to take risk, is the prospect of lower disposable incomes that will ensue once government raises taxes – the inevitable conclusion to their current “Think Big” budget deficit policy. Each week Birch announces another employment subsidy he reduces households’ anticipated future income, condemning them to prolonged stagnation.
For the business sector the message remains the same. Don’t rely on a recovery in household spending. The only way to secure reliable expansion in demand is to ensure you ‘re producing internationally competitive products. The demnatid for those products is infinite and NZ is but a very small portion of the market. It’s ironic that under National exporting is becoming a necessity because of Cabinet’s determination to usurp households’ future income now. Politicians / championing big government remain NZ’s achilles heel.