Q + A - Paul Bloxham interviewed by Simon Dallow

Q + A

PAUL BLOXHAM

Interviewed by SIMON DALLOW

PAUL Well, it’s an exciting situation if the Kiwi gets to the same level as the Aussie dollar in part because it hasn’t happened for so long. It would be the first time in 42 years that we’d see this happen. In fact, when it happened on the 18th of October 1973, it only happened for a few hours and then the Kiwi fell back below the Aussie dollar. So I think part of the excitement, of course, is the competitive story of Kiwis always competing with Australians and thinking their currency is stronger is something that really gets people geed up, I think. But also it just would be very unusual. It hasn’t happened for such a long time.

SIMON It’s certainly got people geed up this side of the Tasman. Do Australians care?

PAUL I don’t think Australians mind that much in the scheme of things. They certainly would be happy that in lots of various sporting events, we seem to be doing okay at the moment, so I think they’d be— that the currency’s probably the least of their worries. Although, it may have some effect on Australians’ willingness to come and ski in New Zealand, for example. The tourist flow might slow a bit.

SIMON Is it the new normal? Can we expect the situation to stick around for some time?

PAUL Well, we think it’s going to stick around for a while, yeah, because the New Zealand economy’s doing very well. In fact, we’ve been describing the New Zealand economy for quite some time now as a bit of a rock star. It’s been outperforming almost all of the developed world over the past 18 months or so. And the Australian economy, by contrast, is not doing so well. We’re at the end of a mining boom, mining investment’s falling, and the economy is so-so, think the unemployment rate’s been climbing. So it makes sense that the New Zealand dollar is strong relative to the Aussie dollar, and we expect that situation to persist for some time.

SIMON There is an element of win-win, though, here, isn’t there? I mean, it’s cheap travel for us New Zealanders to go over to Australia, where you get to benefit from our spending.

PAUL Well, absolutely, so a stronger Kiwi means it’s more attractive for New Zealanders to travel elsewhere in the world and to come to Australia in particular, of course, if they get through parity. And also potentially for New Zealanders to consider buying things in Australia – buying assets, moving money over here. Investing in Australia is another possibility. But again, this is just really a reflection of the fact that the New Zealand economy’s doing very well. It’s a positive thing to have a strong currency. It means you have more purchasing power over international goods, services and assets.

SIMON So it’s fair to say, then, that a strong dollar means a strong economy?

PAUL Well, it is a reflection of the fact that the New Zealand economy is strong. It’s a reflection of the fact that New Zealand is outperforming every other OECD economy over the recent period. And as I say, that’s why we’ve been describing New Zealand as a rock star. It was the fastest growing economy of the 34 OECD economies in the last year. And we think that situation’s going to continue this year as well. You’ve got a very strong construction upswing that’s going on in Canterbury as the rebuild happens. You’ve got a strong upswing in construction happening in Auckland. The housing market’s booming in Auckland as well. And those domestic factors are more than offsetting the weaker external conditions coming from Australia and leaving you with an economy that’s still growing above trend.

SIMON There’s a downside to the strong dollar, though, isn’t there? Exporters, of course, have more difficulty selling their products, which are more expensive overseas now.

PAUL Well, that’s certainly the case. High currencies obviously have strong positive effects and they have negative effects as well. The negative effect, of course, is it does make your exporting industries a bit less competitive. It’s going to put some pressure on exporting manufacturers. What’s interesting at the moment, though, is that if you look at the data, actually, most of the exporters are still doing fairly well. Most of the industries are still doing fairly well. In fact, over the last year if you look at GDP, which is the broadest metric of activity in the economy, 15 of 16 industries all saw an expansion over the past year. So despite all of the hand-wringing we’re getting from the policymakers in New Zealand, from the RBNZ, from the Prime Minister even, suggesting that the currency may be too high or it’s constraining activity, actually, at the moment the data are telling you that the economy’s still growing at an above-trend pace.

SIMON So the RBNZ and the Prime Minister both calling the economy— sorry, the dollar unjustifiably high, unsustainably high, you don’t agree?

PAUL Look I think there’s a reason why the currency’s high. I think it is justifiable on the basis that New Zealand is outperforming pretty much any other developed world economy at the moment. And, of course, when that’s the case, it means you’ve got higher interest rates than elsewhere in the world. Of course, the RBNZ’s been lifting interest rates while everyone else has been cutting interest rates. And those higher interest rates are attracting more capital. If the economy keeps growing as it is at an above-trend pace, you’d expect to see even more capital flow towards New Zealand, so I think it is a lot more justifiable than the policymakers are suggesting.

SIMON You called New Zealand’s economy the rock star economy. That was about a year ago, but since then, dairy prices in particular have collapsed. Why do we still deserve the label? You endorsed it yesterday.

PAUL Well, this is a really good point. Absolutely, dairy prices are down very sharply, and they fell through last year, but you’ve got to take it apart. There’s a few elements. The first is a key reason why dairy prices have fallen is because a lot of volumes have come on to the global market. There’s actually a lot of production coming out of New Zealand in particular. And the second fact you’ve got to keep in mind is dairy is, sure, an important sector for New Zealand, but it’s not the whole economy. In fact, the domestic economy is doing very well. As I said earlier, you’ve got an upswing in construction going on in Canterbury and in Auckland. Those domestic factors are more than offsetting the negative impact, the drag that you get from those lower dairy prices and leaving the economy still growing at a rapid pace.

SIMON Falling commodity prices, yet huge growth in property values – this applies to both Sydney and Auckland, yet the economies are heading in different directions. Why are we doing well when you’re not?

PAUL Well, certainly— Well, I think that the story is a little bit different in New Zealand than it is in Australia, but there are some similarities. Interest rates are still below what you’d call neutral in both countries, that is they’re below the level that you typically have when the economy is growing at trend. And so in Australia’s case, that’s because the mining boom’s at its end and the RBA is trying to support the mining sectors of the economy, trying to support the economy overall, and that’s driving a housing boom in Sydney. In New Zealand’s case, the RBNZ has actually been trying to slow the housing market down by lifting interest rates last year, by putting in place clamps in terms of mortgage lending – what we call macroprudential tools – and trying to slow the housing market. But, of course, the economy’s picking up so quickly that that’s not been enough to slow that housing market. There’s one other common element that’s really important, and that is, of course, the foreign buyer. There is a lot of activity in terms of foreign buyers, both in the Sydney market and the Auckland market, and that’s driving up house prices as well.

SIMON So you combine that, what, with cheap credit and GDP growth, and that means both housing markets are red hot despite the other factors in the economy?

PAUL Well, that’s right, and I guess the other element you’ve got to keep in mind is New Zealand’s economy is picking up broadly, and that’s driving the housing market, particularly in Auckland, while in Australia, what we’ve got is a very diverse story. We’ve got Western Australia and Queensland seeing much weaker conditions because the mining boom’s over, but New South Wales, which, of course, is where Sydney is, is actually seeing much stronger conditions, because interest rates are low and the economy is shifting towards the New South Wales economy. So, yeah, Sydney and Auckland house prices are rising very quickly.

SIMON The role of foreign buyers in those housing markets – is that as controversial there as it is here?

PAUL It’s certainly something that gets a lot of coverage, for sure. I think the challenge here is a few things. The first thing is it’s very difficult for people to identify exactly how big that role is, partly because we haven’t got very good statistics on foreign purchases of domestic properties. I think the other thing that you’ve got to keep in mind is both of these cities, both Sydney and Auckland, have got very large foreign populations, actually, so there are a lot of foreign migrants who come into both of those cities, and, of course, it’s very hard to separate what is a foreigner and what is someone who’s actually a domestic resident when there’s a lot of new migrants in the economy. So, sure, it’s something that gets a lot of attention. I think it is part of the story, but it’s not the full story. The full story is interest rates are still very low in Australia and still probably low enough to be supporting the housing market in New Zealand as well.

SIMON In Auckland, the housing market’s grown more than 14% in the past year, double-digit growth, I think, in both markets annually. Do you foresee a sharp correction or a soft landing?

PAUL Look, I think that there are growing concerns that the Auckland housing market’s picking up too quickly, that it’s an unsustainable pace of growth. It’s picking up faster than income growth in that city, and certainly the RBNZ is looking at that. They’re looking at potentially extending the suite of measures that they’ve taken, the macroprudential tools to try and slow things down. And in the end, they may also have to lift interest rates again. We’re of the view that the RBNZ is unlikely to cut interest rates this year.

SIMON And that’s going against the trend, isn’t it?

PAUL We think if you look further forward—

SIMON That’s going against the trend.

PAUL That is—

SIMON Why?

PAUL That is going against the trend. Well, we think the New Zealand economy’s still doing very well, and we think you are going to start to see a pick-up in inflation as time goes by. At the moment, inflation is very low, and, in fact, you can think of the RBNZ being in a plum position, that is growth is strong, it’s running above trend, the unemployment rate is trending lower, but inflation is exceptionally low. It’s below the bottom edge of the RBNZ’s target band. But we think that strong growth will eventually lead to more wage pressures, to a pick-up in inflation, and that will mean that the RBNZ is more likely to sit still for the rest of this year. And, actually, we think on balance the next move for the RBNZ is more likely to be up than down, partly because the housing market, of course, is still picking up very strongly.

SIMON If you’re a prospective home buyer, would you buy in this market?

PAUL Look, I think it’s a tricky thing to assess. I do think that you’ve got to be very careful when house prices are rising as quickly as they are that potentially if you get in at the wrong moment, of course, things could correct or you could even see capital gains stop for a period of time. But, really, those decisions come down to which particular house you’re buying, which particular market you’re in and your individual circumstances.

SIMON Five years from now – get your crystal ball out – how will Australia and New Zealand economies compare, do you think?

PAUL Look, I think five years from now you are going to see that New Zealand will have had a slow-down at some point in time. It’s a five-year horizon after all. And Australia, which is showing weaker conditions at the moment, will probably have seen a bit of an upswing. I think the broad point is this – the broad point is both of these economies are very well placed globally. In fact, if you look at the last five or six years, which is, of course, since the global financial crisis arrived, both economies have done much better than the rest of the developed world. And I think the key common factor here is quite simply that both these economies are highly tied to the Asian economies. Those Asian economies have still got a long way to go in terms of developing, which means they’re the fastest growing economies in the world. So both Australia and New Zealand benefit from the fact that their strongest ties are to the Asian economies, which are the fastest growing economies in the world. This is something that Europe would love to have but doesn’t really have at this point in time. so we are very fortunate.

SIMON And in a sense, this is the new normal?

PAUL It is the new normal that Asia is going to be the fastest growing part of the global economy. The emerging economies are driving global growth. China is still catching up on Western living standards and still has a long way to go, and it’s not just China. It’s a whole range of other Asian economies as well. And again, we are running on the coat-tails. We get to run along this story, and we get the positive support from demand for our various products. In Australia’s case, it’s been hard commodities, and it probably will be soft commodities further down the track. In New Zealand’s case, it’s been dairy products and tourism. In particular, you’re seeing a very sharp rise in Chinese arrivals into the New Zealand economy at the moment because of tourism.

ENDS

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