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Welcome to Shared Lunch.
I'm Garth Bray.
Well, the Reserve Banks made another call on the official cash rate and that has implications for our whole economy. Will it provide the stimulus that we need. One of the earliest voices calling for stimulus to get things running again? Here we Banks chief economist Jared Kerr. He takes us through why he sees the need for this right now. But first, some important information you should always consider when investing.
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Here is a man who thinks that stimulus might just be the answer. Would that be fair to say? Oh?
Absolutely. I think it's pretty clear that the economy needs a little bit of encouragement right now and we're just not getting it. I think interest rates haven't reached that level. Well, I know they haven't reached that level where you know, investors and businesses feel like they want to take a punt on something.
We've launched straight into without even saying welcome to Charesis and thanks for being that's all right, no mucking around, and straight into it. So what is it that makes you think that there needs to be a stimilatory track to monetary policy? And for someone who just wants to speak in single syllables, what does that even mean?
It means that interst rates have not yet reached a level that are exciting people or are that encouraging businesses. So we have this theoretical rate called the neutral rate, right, and we think it's around three. It's a Goldilocks rate. It's not too hot, it's not too cold. Right. We know that the cash rate at five and a half percent last year was way way too restrictive, right, and that drove the economy into a recession. They've cut the cash rate from five and a half to three and
we haven't seen that, you know, inspire anyone. What it has done is it's given relief to people, but it hasn't really triggered them. We think it needs to go down to at least two and a half and just to give people that incentive.
So much to unpacking there. I guess some would say your head for the neutral rate will get you to the place where it's up to you to make the decisions to take the risks, all that sort of stuff. Why are we relying on a central bank and a monetary policy to try and fire things up if they aren't already ready to go.
Yeah, well, I mean that's their job, right, so they let's go through it. They overstimulated during COVID. They you know, they purchased a lot of government bonds, so they printed a lot of cash. Central banks around the world printed trillions of dollars, and we came out of it firing on all cylinders right because governments were spending central banks were printing cash. Next minute, we had an inflation rate of over seven percent. Okay, they overdid it. They had
to get that back down to two. So they lifted into shraps from their zero settings to quite aggressively high settings, and that really hurt households and businesses, drove us back into recession. And we haven't gotten out of that recession yet. We're still like crawling out of this hole that the central bank poured us into last year. And I think you know, just using the car, you know, example, you've had your foot on the heavy on the break, you've
taken it off, You've put the car in neutral. It's just idling. We're saying, just put your foot on the accelerator, not hard, just get the economy gone.
Is that a consensus view? Are you guys? Are you on the outer on that?
We were? I mean we were calling this a year and a half ago. We were well outside of the consensus calling for a two and a half percent cash row. Now there are a few more. Most economists are around that sort of two seventy five three level, so we're only arguing over fifty basis points.
There was a sort of a split decision back in May, although there was a consensus around holding steady in Wellington. On the most recent one you had I think that in the US the first time in about thirty something years that two governors said we want to express our descent with the rest of what you guys are coming
up with the Bank of England. I'm just telling this for the people that haven't been paying attention, you know this is it getting harder to work out what's going on in that room, what they're deciding and how they'll pick. Is this just part of the cycle.
Yeah, I think it does get a little harder when you're towards the end for starters. So from the Reserve Bank of New Zealand's point of view, they've gone from five and a half to three. You know, there's not a lot left and they're just kind of feeling their way down to the bottom, and the bottom's near right. You can say the same thing for other central banks
around the world. But you know, let's not forget we've had this tariff war of sorts over this year that's really thrown a lot of things up in the year. We know it's inflationary for the United States, so that's why you're getting that sort of mixed feel from the from the Fed governors, and we think it's deflationary for us, but it's yet to feed through. So you know, there's a lot of balls in the year. There's a lot of volatility, there's a lot of question questions that need to be answered.
And we've got another complication because we've got an acting governor at the moment and possibly a permanent replacement coming through sometime soon. Does that mean that the Bank's going to be saying, well, the Monetary Policy Committee are going to be saying we will leave it to the new boss.
No, I don't think so. I don't think so. They've got a job to do. They know what the job is. It is a it is a committee now rather than a sole decision maker like it used to be. So you've kind of you've spread that a little bit. And Christian Christian knows what he's doing. Christian has been around long time.
This is Christian Hawksby.
Christian Hawksby who's acting governor at the moment. He's been at the Reserve Bank, I'm not sure about six or seven years himself. He was working for Harbor Asset Management, so he knows the markets very well. And he also worked at the Bank of England prior to that. So I'm going to talk about credentials. He knows what he's doing. So there's no excuse, Oh, we better wait for the next governor to come in. They just need to do what they need to do.
A lot of people are saying it's not so much about whatever the decision has been, it's more about where we're headed from here. Absolutely, what the shape of that curve looks like when we're going to see rates start to rise again, where that bottom is. Do you have strong views there?
Yeah, so our So, like I said, we're at two and a half. Market's kind of around two seventy five ish, So we're not arguing over a big difference. But from our point of view, that extra twenty five is meaningful, and it would just get mortgage rates, you know, that little bit, that little bit lower than where they are today. Whereas if we stop at two seventy five or three, then mortgage rates that that's them done, that's that's the bottom. And I just don't think that's stemmatry enough.
All right, So we do get to two point seventy five or even two point five, what does that mean for a mortgage customer?
So very simply, the cash rate is what the banks deal with the central bank, right, the central bank is the banker of the bank. So we're dealing at at say three percent, but that's not where we've fund ourselves at. Like we're all offer a term deposit rate. I think we've got one out there at like four point one at the moment, So that's quite a bit higher than
the cash right. That's because we're trying to get money, you know, in the door, and then we lend it out right, and then we're and then we're charging you know, five percent on a on on a mortgage rate or above. So you're all these rates, but the cash rate influences everything above it. So you drop that cash rate from five and a half to three, and what you've seen is mortgage rates go from seven and a half to five.
So roughly lockstep doesn't happen precisely, but it has over the over the year, we've seen that that whole lot being being passed on. What does another fifty basis points mean? Will those five percent rates or slightly above go into the mid floors and you get that little bit of extra a little bit of extra bang for buck and delivering that that extra fifty basis points in the in the cash rate term deposit rates four as well. So there's a lot of savers out there that go, oh,
I didn't realize it so well. Actually, you know, we've been talking about rate cuts for over a year. You could have been preparing yourself on the way down. We always talk about the household with debt, you know, your mortgage rates falling. Actually, if you're if you're a retirement you know, if you're in retirement and you're getting less on you on your nest egg.
And that fixed income suddenly isn't quite so attractive. You need to look at diversification.
Do you do this is precisely so. Putting the cash rate at five and a half, you're trying to attract savings right dropping it down, you're trying to get savings to go out into more riskier assets. You want to get them out into either simply buying shares or getting businesses to put money out the door to buy you know, investment like tractors and stuff.
I mean, if we look around, there's been a lot of worry about debt. I mean, there's been a lot of talk about debt this week. I think one of the major papers saying, look, we're on track to a trillion dollars worth of combined public and brother big number. Does a big number like that give you any pause, any concern?
Well, the big number, you know, shows a lot of private debt, a lot of household debt right as a percentage of income, it's gone sideways for a while, but it's at a very high level, you know, comparatively speaking. So we've got a lot of debt on the private side, but we don't have a lot of public debt and this is something that we need to smash, smash wide open in the New Zealand public.
Smashing it down, you look about smashing it up.
I absolutely no smash the perception that we've got too much debt as a government. I don't think we do. I don't think we do it all. I think we can take on a lot more debt to tackle the infrastructure problems that we've got. That I would argue that we have not only disappointed the New Zealand public, but actually haven't fulfilled what we should have done as a government over the last thirty years. We have not kept up our infrastructure spending with our population. Right, that's just
a simple, simple message to everyone. You know, it takes us forty minutes to drive tea case in Auckland.
Right.
Wellington looks more like Venice than it does anything else. With all the water running down the streets. I mean, you know, the burst pipes. There's so many examples, and then the good examples christ Church. Look what happens when you build back beautifully. It's a cool city. People are a lot more upbeat down there, and it's because you know, they've got the infrastructure, not.
Just because the regional economy is strong and you've got a lot of farming and something happening there and that's supporting it, whereas other.
Places Wykado and other areas not as upbeat as christ Church. Right, they've got that farming base, you know, that's that external sector that's doing well. You're getting high dairy price is high meat prices, tourisms bouncing back. But the South Island seems to be a lot more upbeat than the than the North, and you know there's something going on there.
If you look at farming and agriculture in general. I think the total agricultural debt is down at the moment, So at a time where those prices are great, where farmers are making bank, they're choosing to retire that rather than to invest. What does that say?
Yeah, And I think they've been asked to do that too, because they've taken on a little bit too much. So I think the couple of the major banks have been asking, you know, actually maybe you should repay a little bit, which is prudent. But what we're seeing and is that farmers are spending on the farm, so they may have sort of run down their maintenance a bit. Now they're back up to where it should be, spending more on animal welfare, spending more on the farm, but not past
the farm gate. So they might be buying a tractor, for example, but they're not buying a use. They might be doing their fences, but they're not going on a holiday. And I think that just shows you how cautious they are, even though things are pretty good and they're getting a very high payout, they're spending on the farm, they're not spending outside of it.
And then if we're looking at business, I think the business landing as well. You know, business borrowing in the UNA was sort of up just a fraction, not even a full percentage point. Again, that's you say, because it's not stimulatory enough or companies just don't see the reward justifying the risk.
Same same thing, even with the investment boosts.
What happened to the investment boost so right off a larger portion of a capital purchase, we're not seeing that play through.
No, no, we're not, And that that just proves the fact that we're still in this recession, I believe. So we recorded quite a sharp contraction last year and we're going sideways, and it looks like in the current quarter where and now we might we might record another contraction. So it's pretty weak out there. Businesses aren't taking on debt because they are cautious that they're worried about what does all this tariffs mean for us? You know, the
New Zealand households not spending yet. You know, you're very cautious as a business right now, and we're noticing that in in our lending. That investment boost helps, but it's not driving you to make the decision. And businesses aren't making that decision at the moment. You ask them are you investing? And you're getting quite a mixed response. Most of them are saying no. And you ask them, are
you hiring people? Again, most of them will say I actually go through a bit of a restructure still, So until that turns and we see it going positive, and there's signs that it is, such.
As sidelined, but there's signs there isn't. I mean, the Performance of Services index I think came out this week and it was the twentieth month in a row.
Less negative but negative.
Yeah, but the employer right that's been in the dumpster for twenty months now, twenty months, Yeah, that tells you, I suppose that if you're a services business, which is sort of what two thirds of the economy. Yeah, that's a lot of businesses out there that are weary about hiring. H landing. Who's getting hit by that?
Oh well, you know, it depends what industry you're looking at. Like I said, the agriculture side's doing well and they're finding the workers that they need, so there's definitely not a shortage of workers anymore that we had just a couple of years ago. There's actually a bit of an oversupply. And then you go across, like you say, most of the services side, they're not hiring. I gave a few
presentations to quite large groups recently. One was in Wellington and there were about two hundred people in the crowd and I said, are you investing? Are you hiring? And about eight people put their hands up. I counted them eight. And then I went to christ Church and at least a third, maybe forty percent put their hands up, So still less than fifty, but Jesus a massive difference between Wellington and christ Church and Auckland's kind of in the middle.
About twenty percent people put their hand up. So when I do that and I sort of gauge a crowd. I sort of walk out going okay, that's you know, depending on where you are, it's worse. But overall it's still quite weak, even in the hot spots like christ Church.
But then as cutting if there's that much gloom, as cutting interest rates really going to provide people with the stimulus because they're still going to be nervous about taking action.
Right, better than doing nothing, It's better than leaving the cash rat restrictive or neutral, so you're effectively not not doing anything.
We talked about tariffs there, and I would just want to ask you have we overbaked the concern around the trade war and the tariffs and that kind of thing. With US tariffs, I think US experts are about two percent of our GDP. There's plenty of other places we're doing business.
Right, and talking to exporters, they'll say, you know, the US is actually one of the most profitable markets that we that we export into, so they can actually wear a bit of that tariff themselves. Kiwi dollars come down a little bit as well. I hope it goes a little bit further, and again that helps, you know, it helps from the the US side. There's fewer US dollars
they need to buy Kiwi. So you know, we definitely got panicked at the start when Trump came out with these massive numbers, but we all turned to each other and said, that's a negotiating in tact. He's going to water it down. He warded it down a lot more than what we thought, and I think if we look at the impact, most of it's going to be on
the US consumer. I would love New Zealand to get a ten percent tariff rather than a fifteen percent, but you know, it's not going to end the New Zealand story. They are a very very big export destination for US, but we export meat and they're not going to stop eating burgers, and they'll wash it down with a Kiwi wine as well, So I'm not too worried about that. To be fair, we thought, what does it mean for
the rest of the world. It's a world that's slower and trading less with each other, but not to the extent we were worried about. In April. There's a slow down there. China is already diverting some of their exports into Europe and elsewhere. I think that's a bit deflationary, you know, that slower growth, that diversion of trade. So from our perspective, we actually think it's deflationary. It's going to add to inflation dropping below two percent.
Of these people will worry that, like you said, it was going to be a widespread tip for tach kind of reciprocally, people haven't sort of done the tack right.
Typical analysts like ourselves, you know, you go down these rabbit holes, you go, well, this is what we've seen. It could spiral off over here, or it could calm right down, and we were worried more about the spiraling into uncharted territory, whereas it just at the end of the day, the tariffs are a tax take. It's all
mostly what it is. It's let's just, you know, take ten to fifteen percent, and when you model what the impacts of tariffs are going to be ten to fifteen percent, you actually generate quite a bit of revenue for the government thirty forty fifty percent. Tariffs don't generate much revenue because it smothers the trade exactly, people divert their trade elsewhere.
It actually changes behavior. If you're a government and you want to take you want to generate revenue, you don't want to change behavior, and that's where we've ended up on most of these tariffs. So I'm looking at it and going, Okay, he's done a whole lot of negotiating, He's done a whole lot of things behind the scenes, but he's kind of he's just wanted to generate some revenue. I mean, he's got to pay for the tax cuts that he brought in in his first term.
Someone asked to I mean we worry about this, I suppose as a nation, going back to what you said about our debt levels and whether we've serviced the needs of our society. Around economy, there's a lot of pressure on governments to return to surplus quickly, and a lot of scolding gets applied to whether it's national or labor holding. The Treasury ventures about that return. I think at the moment, even Fitch, one of the ratings agencies, when it reconfirmed that New Zealand's got a I think.
It's a double a plus under them.
I think, great credit school to have to borrow, but please don't do any borrowing instead of almost the thing. It's nice, but don't take it for a drive because they're saying you keep pushing down the road to the point at which you're returning to surplus. And they're saying that to worry. I mean, you've worked in international money markets and you know you've got to heed those people, haven't you.
Yeah, yeah, oh absolutely, it's a it's a big deal. And New Zealand's got a triple A rating under under Movies, right, that's as high as it gets. I kind of wish we didn't have that, to be fair, and it was double A and that was all we were all we were going for. But yeah, no, there's there's a there's an op x versus capex thing here. So there's running a deficit because you're spending too much and you're not collecting enough revenue and you need to think about your taxes.
You need to think about your spending, and you know this government's doing doing that. But then there's the well, if we went out to the market and issued an infrastructure bond and said hey, we want fifty billion dollars and we're going to issue that and it's going to go towards infrastructure, then most people will turn around and go okay, fine.
New Zealand.
Good risk would put how money there Singapore going into building as sets people. There's going to be a return on it, hopefully, you know, it might be a toll road, it might be whatever. Get the private people involved, you know, do what you need to do to build the infrastructure. I don't think the rating agencies or investors would even blink. It's like, yeah, okay, you're finally playing catch up for thirty years of not doing enough, cutting taxes, spending more
on on on beneficiaries or whatever. That's what gets the rating agent's more concerned building a bridge, building a road or whatever. That that's not a that's building in the productivity of your economy. And we sit here looking at these really disappointing productivity numbers for New Zealand and elsewhere, but for New Zealand in particular, and we just go, you know what, A lot of that's just the lack
of infrastructure. We haven't invested in ourselves, and governments need to realize that if you think about the long game, and unfortunately they're only thinking about three year games, if you think about the long game, spending more on infrastructure today, we'll give you a harder, faster, stronger economy. Oh and that's a larger tax base tomorrow. We don't seem to be able to think in ten twenty fifty year chunks.
We're only thinking in three yearly chunks. Look at this government now that they haven't been in there that long. They're kind of halfway through and they're already looking to next year, going jeez, we've got to deliver in order to get voted back in. It's not enough time, not enough time for either side of government.
We might get to decide on a four year term at the next selection.
But it's like you want to give them a four year term with the expectation to get in two almost like the US, you kind of expect them to get two terms and you've got them in there for a chunk of time and you can kind of get stuff done over that over that time frame. But three yearly and then and then the complications of coalitions, it's just, you know, it really inhibits their ability to get stuff done.
Well. It provides ideas, yeah, possibly, but I mean you get ideas. You get minority parties like Act with the Greens that are living in sort of slightly saltier suggestions like we should run hard on that deficit or we should, you know, really pull the chucks out and go for an extremely simultary position and that what what function does that have?
Well, I think you get you get these two centralist parties, and then you get some on either side recommending the more extreme, and a lot of odors will look at the two central parties and go, you know what, they're not really either size, not really giving me something. So I'll go to the ones that are a bit more extreme, and we and we see that. I just wish we would have a better debate about the type of debt that we could issue and what that money would be
used for. If we went out to the investment community and said, give us fifty billion dollars we want to do these projects over the next ten years, will you fund us? Absolutely? They would absolutely. They are looking for ten twenty thirty year debt. ACC is a great example. Insurance companies. They want long term bonds to invest into, so they would be you know, itching to buy twenty thirty year bonds.
Were the world champions of comparing ourselves straight to kicker, who's doing it better than us? Right now?
I think Australia is definitely uperforming us at the moment. And that's because they are, and you know they're. Their central bank didn't go as hard on the rate hikes, so therefore the Ossie economy didn't slow down as much. They didn't record a technical recession. They've got a recession in per capita terms, but it's quite shallow compared to ours. So we just look at the Aussie economy and go, oh man, it's just growing nicer than ours. The labor
markets tighter, wage growth is more. They're just more buoyant than we are at the moment, and that's why we've seen a net forty three thousand kiwis leave in the last year.
People are heading there, mostly.
Didn't going to Australia, so we've seen seventy odd thousand kiwis leave and then some coming back, but that net forty three is huge. That's a lot of kiwis leaving. It goes in cycles, and we saw it in twenty and twelve when the Aussie mining boom was really in full flight and people were going over driving a truck and per for like two hundred thousand dollars. Not so much of that these days, not so much of that,
but definitely better prospects at the moment. Otherwise we wouldn't be seeing the numbers of kiwi are leaving to Australia.
How much of it is off savings and just a stronger, you know, a better national superinnuation structure so that people are putting more money aside.
Oh, I mean that's been a strength of Australia for a while. Now. They've got I think the fifth largest sovereign wealth fund on the planets for an economy, which is less than two percent of the global economy. To have that sort of savings there, and do you know what, they don't think they've got enough. They are still increasing their compulsory I think it's gone up to twelve percent now.
It was nine percent when I was working there. I tell you what, working thirteen and a half years in Australia, I've actually got this nice little nest egg sitting there that I wouldn't have had Otherwise. There's no way I could afford to put nine percent away over that entire period. But it's sitting there and it's great. We're doing it here now. Should be compulsory should be a much higher rate. But you know, some things Australians just do do better
than us. They dig holes better than us, I can tell you that much. But we grow stuff on top much better than them. One thing they are pretty good at, and particularly at the state level, is the big infrastructure stuff. You know, they just seem to get stuff done. And I use Sydney as a classic example, where you've got this bridge and it's got heaps lanes, it's got a train track gone both ways, so trains can go across, you can walk down one side, you can cycle across
the other side of it. And that was built, you know, fifty years ago. That's not enough. Their cities grew and they've got a tunnel going underneath. Now you've got theories. You've got plenty of ways to get across the Sydney Harbor. Right here, You've got a bridge that was built in the sixties, I think, on the cheap. On the cheap, it reached capacity five years later, so we tacked on some clip ons and we've done nothing since. The only other way to get across is with maybe a fury
if you're lucky, or a kayak' that's your option. Strong swimmers need strong swimmers exactly. I think it just highlights the difference between us. They can they can deliver these big projects in Australia and they can think a lot further ahead for some reason, and I just wish we would snap out of it.
Let's look at we're in the middle of earning season at the moment. What are the economic themes, the macro themes, the big bits of or clues you're getting about the state of the world and the state of the economy from some of the results that we're starting to see through. We've had you know, like I think a two milk and a couple of the big gent Taylor's here, ass he's had the some of the resources reports in the
last couple of days. Does that help color your understanding of what we're going through?
Yeah, it does? It does you know, you get a flavor as the house. You know, certain certain businesses are fairing and you know it doesn't match the data yet kind of does There's certain external businesses that are exporting stuff, they're doing they're doing okay, tourism related stuff, some some other things are bouncing back. But generally looking across the whole economy, if you actually go beyond the listed companies and you look at say corporate tax that the government's collecting.
It's very very weak, very soft. So you know it's still it's still you know, better than last year, but not good. And we're still sort of feeling our way out of this of this recession. You know, earnings overseas have been okay, but you know, I'm not shooting the lights out.
And you've got a lot of I D based liquidations. They're already coming cracking down.
They have just gone like that, and it's like, you know, we see we sit there and go, you know, I'm sorry, but that's exactly what you see in a recession. People hold on for as long as they can and then if the if you're not recovering quickly, which we're not, then unfortunately a lot of these businesses go bust. And we have seen quite a lift in receiverships, liquidations, you know, all that, all that horrible stuff that we don't want to see. And again we look at that and say, hey, yeah,
there's a lot of pain out there. What are we doing as a country? Government's not stilatory, central banks not stilatory. We've been through this huge recession. Where's the where's the helping hand?
You've been quite interested in understanding money and finance and the economy for quite some time. How did that spark start?
Yeah, pretty much my my my whole sort of adult life. Like it started at school and like many students are completely useless at English Mass, you know, I was getting like you know b's and c's and stuff. And then I had this fantastic economics teacher who's now teaching at with Slate Girls, Dan Rennie, and he just brought it to life. He got me reading the monetary policy statements from the Reserve Bank at like the age thirteen fourteen, and I've been reading my whole life. That's my whole life.
I've been reading these monetary policy statements. But my best mate he went on to be a lawyer, so he was dreaming about being a lawyer and I'm dreaming about being an economist. And we both get together these days and look back and laugh and you know we were we basically have done what we said we're going to do it, like age fifteen.
How do we get people fired up about that interested in those things?
Is it just or yeah, try it out. I Mean there's some cool things that I wish that I wish were around when I was at at school. There's a system or a program called Banker, which is so cool. They get students, you know, really involved in finance and making decisions as if they're adults and you know, running a home, running a business, buying shares, that sort of stuff,
and they get them involved in it early. I think, you know, financial literacy is something where I don't think it requires a lot and I'm glad the government's tackled this and said, you know, we need to do this. I don't think it requires a lot of teaching to give you just a real basic understanding. I'm always saddened when I hear of people being so scared to walk into a bank. Oh, I don't want to talk to them.
They're not going to approve my loan. It's like walk in there, slap it on the desk and say I want my loan, you know, and if they say no, go to the next one. Go to the next one.
You know what.
The bank's there. They want you as a customer. And it's that financial literacy. You know, if you if you're not there and you and you're you're not comfortable in your own understanding, you are going to be nervous walking into a bank. And that shouldn't be the case if they had had proper bit of training on on on just how to do simple things and putting money away into it into a shares your account I think is part of that.
Right, money makes it matter.
Yeah, yeah, they'll be scared of it. Just just start doing it right.
Well, let's see if that attitude will infuse itself out after this podcast and we'll start to see those green shirts. Jared Kre thank you very much for your time here, and thanks very much for your attention for listening in. Whatever you made of that, let us know, let us know if there's something else that we should be covering here on the Shared Lunch. That's us for now,