NZ’s economy is recovering. So why doesn’t it feel like it?

0:00Welcome to the economy of everything brought to you by CMC markets. Tamsin, we've just had some new stats out today on how tough things are for the hospitality businesses out there. When's the last time you went out to dinner? Well, I was actually just a week ago for a family birthday, but I have to say it was pretty grim. I was at a restaurant in Brown's Bay and it was only half full and literally they squashed us all into the back half of the restaurant. The make it look like it was probably doing better than what it was, but pretty quiet for a Saturday night. There's no question that people will have picked up the vibe. It's been tough in Auckland, it's winter, we've heard lots of stories of hospitality businesses going under. What are the stats telling us? So we've got some data from St. Tricks, it's just come out showing that actually nearly 3,000 hospitality businesses cease trading in the last year.

1:04And that's quite a lot. Wow, I guess we're not just talking about restaurants, must be every bar. This is everything. This is restaurants take away bars, anything in that sector, but that was a 38% increase on the year before. In terms of how many are going under. Well these aren't going under, these have just ceased trading. Sure. So the ones that have gone under, that's about 420 around about companies in the hospitality sector that have gone into liquidation that was up from 297 a year earlier. But basically if you're a hospital business, you're about three times more likely to be going into liquidation than other average businesses. Wow, and I mean it's a fine line between going under and just going out of business because there must be owners out there who are just hanging on, hanging on, not making enough money going, we're just going to walk away from this lease or something like that. I mean that's where some of those stats will be coming from.

2:04I mean it doesn't paint a great picture of the economy, it does it. I mean we'll get into this later but we started to hear the economists sounding a bit upbeat again. Yeah we have, I guess we had, we've had a little bit of data come out of A&D and haven't we with business confidence showing that things are a little bit upbeat, they're sort of indicating that the expectation is things are as bad as they've gotten, they're getting better. But I don't know if a lot of people would be feeling that yet. Yeah I mean I noticed Westpac and their chief economist Kelly Eckold, he's kind of wrapped up everything that's been happening, the high frequency data and and concluded that the recovery is underway. I've been a bit hesitant to come out with a big story saying the recovery's back, green shoots or whatever because we've just been burned so many times and I know we're in central Auckland here and perhaps it's a bit more lively in some other parts of the country but, you know, Jaya Hope Spring helps pick things up because if you're out and about in town and at the moment it doesn't feel like an economic recovery is underway yet.

3:09No, it doesn't definitely not and, you know, hospital, hospice down but, you know, obviously retail's doing it tough as well. I don't know about you but my local mall has lots of empty shops in it, they sort of, you know, try and cover it up, make it look like there's a front there but, yeah, so hospice retail construction, you know, they're all feeling it. That centric starter did also show that construction was the construction sector had the highest number of liquidations over the last year but that isn't growing as fast so that sort of seems to have stabilized so maybe that is, you know, some reduced. Yeah, well it will be jobs, why not? And the trouble is, you know, it creates a mixed picture for people trying to get a sense from the media of what's happening with the economy because the economists do look at front end data and they say, well, that's a bit positive, the confidence looking forward is positive, you know, but then there's this other stuff that the liquidation numbers

4:10which we're talking about here, you know, and overall the unemployment rate, these are the numbers that take longest to turn. So you'll get economists talking about things starting to improve and say, well, there's economic growth, we might even see GDP growth but out there at the cul face, people are still feeling, you know, the blunt force of, you know, the labour market downturn and all that sort of stuff. So that'll take a while to turn. Yeah, I think there's going to be a long tail of liquidations. I don't think that there's any sign of, you know, that stopping anytime soon. I think there is a lot of companies that are just kind of struggling, hoping things are going to get better, really hoping for a pick up but, you know, if that doesn't happen or, you know, they just can't stay on top of their debt levels then, you know, sometimes the only option, you know, is to go into liquidation or wind up just because they can't keep paying their bills and after a while, you know, the people like they inland revenue

5:13come calling. Absolutely. I mean, I think it is important and okay to lean into some of that optimism and good news at the front end of the economic data because that helps boost the confidence that will eventually help the, you know, the rest of it turn because if we stay down beat then it becomes self-fulfilling. So I guess it's a difficult balance but, you know, perhaps, you know, we're going to hear sort of two different stories, particularly leading up to the election and it will become quite political which story people decide to put the foot down on whether it's the sort of the recovery's underway. It's all going well, which I'm sure we're going to hear from the government or the liquidation and the unemployment, you know, we're in terrible shape which you'll probably hear from the opposition. Yeah, that's right. And of course the truth will lie somewhere, you know, in amongst all of that. It's a little bit of both, I'm sure. And we are getting really close to that election will, I guess, West all, you know, quite a

6:13few weeks out, but in terms of, you know, the parliament breaking up, that's fast approaching. There's not been any certain days, you know, left down there now. So I think we're going to see, you know, the political policies and rhetoric stepping up. Yeah, I mean, I think it's going to come down to rhetoric because I don't think, you know, even with some of the early signs of recovery and things, I don't think the average person average Joe, whoever he is, is going to feel it, particularly because it's, you know, in the end, that sort of sense that the economy is better than it was, usually comes down to sort of your wages getting ahead of inflation. And I think that equation has still got a way to go before it, it sort of turns to sort of wages being ahead of the inflation rate. Yeah, definitely, you know, you're, you know, you're not feeling richer, you're not feeling richer from your house price going up either. So, you know, there's not many things to make you feel like, oh, everything's getting better. Well, yeah. Well, I mean, interesting you mentioned the house prices. I think we will touch on this next, but, you know, people, there's been an upside to

7:20the downturn, if you like, in terms of what's happened to New Zealand's debt picture. So we've put out our nation of debt series this week and, yeah, when we come back, let's dig into that. Definitely. Welcome back to the economy of everything podcast brought to you by CMC market. So, Liam, nation of debt, we've been doing it now, the series for 10 years. What have we found this time round? Yeah, so this is the series where we tell you up all of the gross national debt. So this is important to emphasize. So it's all of our mortgage debt, all of our personal finance debt credit cards, local government debt, and central government debt, and business debt and agricultural debt. And we throw that all in to get a gross figure, which always makes a big scary number. And it's, you know, no different. We're approaching a trillion. So I was thinking it was $937 billion, something like that, is the gross figure for our national

8:26debt. But interestingly, what it shows is that in a particular, in a couple of key areas where the Reserve Bank had been very nervous about precarious debt levels, that was mortgage debt and agricultural debt. Things have started to balance. The rate of growth in those debt areas, debt sectors has really flattened out because, well, I guess in the ag sector, it's all good news. They've got commodity prices are high. Well, they had this big injection of money, didn't they? Yeah, they helped them bring their debt down. They paid down debt, and that's good. Housing market, not so amazing. It's more a case that the house prices have fallen. The market's really sluggish. People just aren't borrowing as much. The banks aren't lending as much. So the rate of mortgage debt growth has slowed, and there's seen stabilization there. But that's still probably pretty good if you think about it. What the Reserve Bank used to worry about was a sudden collapse where people went into

9:29negative equity and couldn't repay the debt. So I think while there's been examples in the media of people who bought houses in that period, 2021, when things were booming, who are really under water, beyond that there was a bubble in 2021, and the prices have eased back and are now just tracking sideways down a bit when you've thrown inflation in. But a lot of people already had equity there. There doesn't seem to be the level of sort of distressed mortgages and mortgage e-sales. I don't know, have you seen numbers around that? Yeah, I have. So it looks like we're on track for around about 400 mortgage e-sales so far this year. That's pretty low. After the GFC, we got up to something like 3,000 in one year, and that was the peak mortgage e-sales period. And I guess what happened after that is that the Government, the Reserve Bank, a lot of

10:29changes were brought in things like Alvr's loan to value ratios, which basically limit how much the banks can lend to people with low deposits. And more recently in the last few years debt to income caps, so that you can only borrow say up to six times your income or five times your income, which I think is great because that does mean when we have a slowdown or things go backwards, that fewer people have borrowed, I guess, to the extremes and to the point where they can't cope. Well, they have to say, and this is something the banks have always told me as well, that the key sort of determining factor on whether you can pay that mortgage is your job. Yeah, unemployment is a big one. But 400 mortgage e-sales, you say, and it was up to 3,000 after the GFC. Well, I think broadly when we step back, we're talking about an economy that is struggling

11:30as much as we were after the GFC. And in a lot of ways, I mean, people starting to talk back to some of the problems we went through in the late 70s and early 90s when it comes to an extended period of downturn. The GFC was more of a short, sharp shop, though, wasn't it? It hit hard, and then there was a bounce. Yeah, it did hit hard. I mean, I remember back to that time, and I do remember a lot of people losing their jobs, or also, I guess, having their hours scaled back, all those kinds of things that flow through, and that would have made it that much harder to pay a mortgage. So I'm sure that was part of it. But it was tricky as well. I guess a lot of that time in New Zealand, we didn't have the banks collapsing, but we did have the finance sector collapsing. So that flow through to people with deposits that were secured with finance companies. I guess as we talked about earlier, some of the issues in the economy now are more in

12:34that sort of retail, hospitality, small business, and on the housing side, things have come off really sharply since the steep peak end of 21. But just look at the way the population is aging. There is a large pool of people with a lot of positive equity, or even have paid off their mortgage, just older people. So it's important to remember when we look at that gross national debt figure, as horrible as nearly a trillion dollars looks, is this actually something like a $2 trillion of net household wealth in New Zealand. So most of that is housing stock. Our key we save a will count, and some wealthy people with some other managed funds will count. That housing stock, we do as a nation, have positive equity in our housing stock at least, which means that when the ratings agencies look at us, we are still roughly on the right

13:37way round in terms of the debt equation. Yeah, that's right. I think Standard and Paws recently did an assessment that basically looked at us and said that things were looking okay, looking on track, not too many worries, no big changes, because obviously if they downgrade our credit rating, that means it makes it more expensive for our government to borrow, which is obviously not helpful given, we do have quite a bit of government debt at the moment. Yeah, I mean, we're working through in the debt series, the different sectors. We've already run business debt, which is a bit of an odd one because that's sort of an area where you want to see a bit more debt because you want to see businesses borrowing to invest and expand, and healthy businesses are often quite upbeat about taking on debt, and that really hasn't been the case, right? It's been pretty flat, a little bit of a comeback, there was about 5% growth. Yeah, that's right, about 5% growth in business debt.

14:37In some suggestion that is a little bit of an indicator of confidence, but I think some people also believe that a bit of that debt might have been linked to the investment boost policy that the government announced where you could buy something new and then write off. Right, so the new you, or whatever. Yeah, yeah, yeah, exactly. So maybe some of that investment brought forward a bit because of government policy, so maybe it's not going to be longer term. But yes, I guess there is also a bit of division, maybe bigger businesses, able to borrow bit small businesses, maybe are borrowing to keep themselves going, keep themselves afloat. Stay alive, stay alive. That's not great, that's the wrong sort of borrowing, that's not really sustainable, is it? No, well because the thing is once you run out of headroom and you don't have any way to pay that debt back, then you get into real trouble. Yeah, sure. And just to come back to housing, because we've got a more in depth look at that coming out or is out today, I think the RBNZ is more or less feeling pretty good with the way that it's come off.

15:38I mean, I know if you bought a house in late 21, you wouldn't be happy with where you're at. But I think given that the Reserve Bank has those tools around restricting lending in its pocket, if things start to come back and that the rate of mortgage growth is subdued, they must be feeling okay. Yeah, I think the estimates are around about 2% of all mortgage debt is in that negative equity, so where people potentially have more debt than the value of their house, so it's pretty small and that would keep it contained. I guess that's the plan is not to let it get out of control. I know there is starting to be a little bit more of a rise and people say buying a house with a smaller deposit, so not having a 20% deposit, having a 10% or a 5% deposit, so I'm sure the Reserve Bank will be keeping a very close watch on that to make sure it doesn't get above the limits that it's set.

16:39And they can move those restrictions around, right? So at the moment they're not really probably bumping up against the restrictions too much because there just isn't the huge demand for borrowing out there. Yeah, that's right, those restrictions, they move around all the time. I think they do an assessment on the me very six months or so, but obviously they're a lever that they can pull if they see it getting out of control. Yeah, and other parts of the debt equation, the obvious one, and we're going to be running this shortly is government debt, crown debt. I mean, everyone's got a view on that. It's highly political. I guess we're going to hear a lot more about that in the run-up to the election, aren't we? Yeah, we definitely are. Welcome back to the economy of everything. Thanks to CMC markets, so Liam, a topic that's going to become pretty talked about and the next few weeks likely is government debt.

17:39I know you've already written a column about it, but obviously it's New Zealand's government debt has really crept up in recent years. Yeah, and I think it is sort of the thing that stands out is not greatly improving in the latest state series to quote Durginatribshaene, our Wellington business editor who's done the deep dive for us. The books are still in a bad way six years on from the pandemic, and I think those who worry about government debt would argue that neither of the major parties are really going that hard at paying it down. Netcore Crown debt is something like 41.3% of GDP, and I think there's sort of different timeframes from Labour and National as to how, and when they get it down to about 40% of GDP, well when you think back to the Michael Cullen in Bill English years, we were aiming

18:39for 20% of GDP. So that was a lot lower, and it was a lot more of a conservative approach. There was a sense that you needed money in the tank for a GFC earthquakes or a pandemic, which as it turned out, we did. And now some people may be concerned that we need to move a little bit faster in case there is another major shock. We actually got down as low as 18.6% of GDP in 2019 before the pandemic hit. So it's up a lot since then. Yeah, I mean, I've played Devils Advocate here and say maybe too low. You could, you certainly, if you looked at say, it's the state of hospital schools and infrastructure and things, you'd say, well, maybe the foot should have been down a bit more on spending on some of those areas earlier, but it probably has paid off. So one of the issues that I've been very hot on is that, you know, what we're going to see in the next few weeks is that both all the major parties put out these fiscal projections

19:45and they're going to pick each other to bits and they're going to say, now you've got a fiscal hole, you've got a fiscal hole. There's going to be policy everywhere. Yeah, yeah. And a lot of it's to do with just to do with the time frames and the way that they define the debt and there are a lot of different ways you can cut it. And so that I think is just an accounting debate and it drives me crazy. What I think is, where I think the issue is because you've still got people saying, look, we should be borrowing more because we can borrow cheaply investing in infrastructure and building the things that we need because obviously if you borrow money at a low rate invested in something productive that earns you more at a higher rate than what you're borrowing, that's a productive investment. Yeah, and it creates jobs, you know, you know, we build a new bridge, whatever. There's got to be people to do it. It's easy to say that. I just think there is a lack of trust in the government of any stripes to achieve that. So people are nervous about taking on more debt and seeing, you know, this idea that

20:47it'll kind of go into projects and things that just don't seem to result in any payoff down the track. And I'm not sure if that's entirely fair, but after the past decade or so of back and forth on infrastructure, you know, there was a lot of necessary COVID stimulus, but then there's a lot of debate about how long that stimulus went on and whether the money was wasted there. I think the public is skeptical about governments spending efficiently. And I think that's what's important with that is how you spend the money you borrow. If you take out a student loan and invest it in an engineering degree or a medical degree and you become a doctor, it's going to pay off or an engineering degree. But if you take out a student loan, do the most fun arts degree, you can imagine. And start and spend some arts degree, yeah, well, that's me.

21:47But in spend, you're all that money going snowboarding or buying band equipment or something like that, it's not necessarily going to pay off, you're going to, you know, so, you know, those are just personal examples of things that can go wrong. But you know, it's about how the money is spent. And I think that's where the debate needs to be in the next few weeks. Yeah, I guess there's a lot of worry that, you know, we're boring for lollies to give out. We're boring, you know, for lots of reports and things to be done. And, you know, and the money isn't going to be used wisely. I know there's been other things like funds, growth funds that are invested in startups, tried to back winners when it comes. Picking winners. And, you know, a lot of that hasn't turned out either. So it's pretty difficult for governments to get it right. And yeah, but I do think, I do think that New Zealand, given its, you know, small size

22:48distance away from everything, we do need, I think we do need to be prepared for the next disaster because there will be some next thing. I don't know what it's going to be. And I do think we need to get our books into a better shape. I don't know how we do that. It's not really up to me. Well, I guess it's a long-term strategy at the moment. I've been nationals talking about taking several years to get down and under control. I count them these act numbers. Labor is talking about taking a year longer, but being in a cash surplus sooner, which again is a sort of an accounting trick. If you think of, you know, the way you might run a household, you put it on the mortgage so that your overdrafts paid off or your overdrafts, you know, not there anymore, I don't know. I'm not supposed to talk about governance as households, but I mean, it does seem like there are a whole bunch of different ways to cut it that don't really always pan out in terms of, you know, reality regardless of what the politicians are saying ahead of an election.

23:48Yeah, definitely. I mean, yeah, that's right. I mean, you know, paying down debt is good, but not if you can't afford to, I don't know, do the infrastructure that you need to build or, you know, keep people employed that sort of thing. Yeah, they've got to think about how we keep doing that, I guess. You know, maybe, you know, some of the reasons that you Zealand, you know, precarious position on mortgage debt and agricultural debt and those things, could, you know, could have put a bit more pressure on government debt. So perhaps with the private debt not looking quite so bad, that does give the government a little bit more leeway. I mean, my understanding is the ratings agencies do tend to step back and look at the whole New Zealand picture. And of course, the other thing they care about is the ability to serve a state and, you know, New Zealand is still in pretty good shape on that one, as you say, you know, not too many mortgagey sales. The ag sector is booming and so those guys are in good shape.

24:50The government, you know, there are people who argue the government will face a real crunch if it doesn't deal with it at some point because, you know, you're not allowed to talk about increasing taxes really either. So if you can't increase taxes, you know, how do we get the debt down and we're not going to cut services, we could grow our way out. But, you know, that's what we all hope. But it's a big sort of, you're putting a lot of weight on the economy out growing our debt. And obviously we have these kind of looming things like an aging population. So health care is going to get, you know, going to cost more, superannuation is going to cost more and those are sort of the longer term issues that we, you know, haven't solved yet. Yeah, well, you know, the longer to, the more you look longer to them, the more problems there are and the more worrying it can all seem. And I think that is, you've got to be careful about that. I think that's why some of the people who, you know, send me comments and things are so worried because they are looking out to the next problem and the next problem.

25:51I think, you know, for now, I think we should, you know, we need to get the trajectory, you know, things heading in the right direction. But debt isn't quite at crisis territory. So that's good news. And, you know, hopefully we see an economic cycle turn in the next few months that just, with the added growth that just helps us get ahead. Sounds good, Leon. Yeah, I've got to stay positive. Yeah. Great. Thanks. Well, thanks for joining us and thanks to CMC Markets. We'll see you here next week.