BERL economist Dr Ganesh Nana has released a report highlighting the impact of “non-tradable” versus “tradable” pressure on NZ’s economy.
Nana’s research has focused on the five years since the global financial crisis. He examined key areas of tradable versus non-tradable inflation, investment, finance and activity.
Tradable activity is any product capable of being sold or bought overseas, while non-tradables are typically services and provisions that cannot be imported or exported, including costs like electricity and rates.
Nana’s aim was to study how successful NZ was in rebalancing the economy back towards a more sustainable tradable, focused macro-economy.
His analysis showed a positive rebalancing since 2008 had occurred only in the area of export receipts versus import payments. This was largely thanks to better commodity returns to 2008, then imports falling faster than export returns from 2008 to early 2011.
This had resulted in export receipts increasing on average 1.3% a year since 2008, while import payments had declined .5% a year in the same time, moving towards Nana’s “rebalancing” at a rate of about 1.8% a year.
However, the use of interest rates, and ultimately the exchange rate, to control inflation had resulted in imbalances between other areas of the tradable versus non-tradable sector, Nana said.
The most obvious was with inflation in the tradables sector. This had averaged 1% a year since 2008, while non-tradables inflation had averaged 3% a year.
“Our inflation is targeted with a focus on interest rates and therefore the exchange rate. A higher exchange rate hits inflation in the tradable sector, but makes it more difficult for a tradable producer to achieve profitability.
“It makes it hard to convince your bank you should set up a business in the tradable sector.”
In general, economic activity, including employment, had moved away from tradable business to non-tradable activity, Nana said.
He acknowledged farming had been the exception in recent years, with banks happy to lend relatively generously on secured land for dairying.
Coupled with some windfall gains in commodity prices, it could seem agricultural incomes earned largely from dairy and logs could leave the agri-sector immune from the creep of non-tradable inflation, he said.
However, the success had been a double-edged sword. While agriculture had contributed positively to tradable export income, focus had narrowed to dairying, almost to the exclusion of other tradable agri-investment.
“We have this narrow base just within the tradable export sector and it is basically logs and dairy.”
In the meantime, continued use of interest rates to control inflation was only going to squash competitiveness there, by keeping the exchange rate high.
He said the inflation-focused policy had become fraught with political concerns over what a weaker exchange rate might mean to a largely non-tradable, income-earning electorate, and a focus on using interest rates simply to cool housing demand.
“Farmers are fully aware of the benefits (of a lower exchange rate), but the government is aware a lower rate will have households protesting over higher fuel and import costs, so the politics are also influencing the policy.”
He agreed with the International Monetary Fund that the Kiwi dollar was overvalued by 15-20% and that the dollar should be sitting nearer US65c to maintain competitiveness in the tradable exporting sector of the economy.
Nana advocated a basket of solutions to dealing with overheated housing markets, including tougher loan to value ratios, greater control on credit and tighter restrictions on bank lending ratios. He also advocated a capital gains tax.
“These could enable interest rates to be lower and to be the outcome, not the control, and encourage better investment in long-term, tradable-type businesses.”
While sceptical about the government’s willingness to adopt such measures, he was encouraged by greater understanding after the Budget about NZ still carrying an external deficit, despite the government pushing books towards Budget surplus.