THE END OF THE BULL RUN
Trade wars, sagging business confidence, an end to rising house prices. Is this just the end of the boom or is the next crash on the way?
For most of the decade since the socalled global financial crisis, both the world economy and the New Zealand economy have been growing. The focus of much political debate during that period was about worsening income inequalities and the blow-out in housing affordability. But investors have had a great 10 years, both here and internationally. Wall Street’s bull run has been so entrenched that the occasional correction – July’s US$100 billion ($148 billion) tumble in the value of Facebook stock, for example – automatically attracts a round of speculation that the boom is finally over.
In New Zealand, the last sharemarket bust was in 2007, ending a six-year run during which the benchmark stock-market measure – the S&P/NZX 50 index – rose 153% before falling off a cliff with the rest of the world in the financial crisis. That wiped 44% from the value of the local market, hitting rock bottom in March 2009.
Since then, however, the market has soared 269%, and stripping out the financial-crisis slump, is still up 106%, beating even the 93% increase in Auckland property values over the same period.
But in recent months, the shine has been coming off. With US President Donald Trump flirting with destabilising trade wars, signs the Chinese economy is much weaker than its pumped-up official statistics suggest, and a slump in business confidence in New Zealand from the third-highest in the OECD two years ago to second-lowest, caused, in part, by a new Government, the question is increasingly being put: are we heading into an economic downturn?
Earlier this month, financial commentator Bernard Hickey noted the “worst week of 2018” included a rise in unemployment, a national decline in property values, the failure of two building companies and the most pessimistic business sector in a decade. Indeed, former ANZ chief economist Cameron Bagrie commented that the low business confidence “is a sign that the economy is dangerously close to what we call the ‘stall speed’.” Whereas growth 12 months ago was about 3.5%, at the moment Bagrie believes it is alarmingly close to 1.5%, “and we’re decelerating as opposed to accelerating”. In theory, he adds, “we should be able to transition the growth back”. However, this week the run of weak data – including retail spending falling in
The market has soared 269%, and stripping out the financialcrisis slump, is still up 106%, beating even the 93% increase in Auckland property.
the June quarter – led the Treasury to highlight the risk that “growth over the coming fiscal year may be weaker than forecast in the Budget”.
PETERS SAW IT COMING
Early out of the blocks with such gloomy talk was NZ First leader Winston Peters, who predicted after the coalition Government was formed last October that the world economy was about to worsen and that it would be unfair to blame the new Government for any of that. Former Prime Minister John Key chimed in at the National Party annual conference. “We’re at the end of what I’d say is the economic cycle at the moment. There’s no question that when I look around the world and the things I’m
Survey after survey shows confidence ebbing. now involved in internationally, you can start to see the pressure in the system,” he said on the conference sidelines.
Key’s reason for raising it was to suggest a weaker economy would hurt the new Government, given its shaky early relationship with the business community. However, Finance Minister Grant Robertson was quick to bank those comments. Although forecasts for world economic growth were robust at about 3.9%, the current environment was “not without risk”, he said, quoting Key’s analysis.
“New Zealand always remains vulnerable to change in the international outlook,” Robertson told Parliament. “That’s why we need to remain fiscally careful but also to diversify our export markets and shift to new sources of growth.”
If “there was a shock to the financial system”, the Government could also relax its debt-constraining Budget Responsibility Rules.
In other words, the Government considers itself well placed to absorb the impact of a downturn by spending a bit more, just as the Key administration did after the 2008 crisis.
Peters, meanwhile, has changed his tune and is talking up the ongoing strength of the NZX50 as evidence that all is well, which will only work politically if the index continues to rise. And in a conversation he had with US Secretary of State Mike Pompeo in Singapore last week, the Foreign Affairs Minister says Pompeo was “acutely aware” of New Zealand’s need to trade steel and aluminium with America.
Make no mistake, the stoush between the US and China is reverberating through
financial markets, pushing volatile assets such as stocks and currencies up one day and down the next. The kiwi dollar has dropped 6.4% since protectionist US President Trump officially took office last year – a windfall for exporters, but hiking prices for consumers of imports such as petrol. And a chorus of bank economists is picking tougher times internationally and, at the very least, a pause in the long domestic growth spurt in New Zealand.
ANZ chief economist Sharon Zollner says the economy is “delicately placed”, with firms in a “funk” as confidence sank to its lowest level since May 2008. More worryingly, the ANZ business survey showed a net 17% of firms expect to see lower profits in the coming year as they grapple with rising labour costs, particularly in industries that have low-skilled workforces typically on the minimum wage and that lack the ability to pass those costs on to consumers. “It’s fair to say that the road ahead is looking less assured, and risks of a stall have increased,” Zollner says.
What’s more, the “very mature” run of expansion means “it increasingly feels as if a tipping point is not far away”, according to BNZ research head Stephen Toplis. That’s not to say he’s pessimistic about the local economy. Rather, it’s an acknowledgement that “businesses have to be prepared for a more difficult and variable operating environment as cost pressures increase and uncertainty rises”.
BATTENING DOWN
But even if the economic cycle is on the turn, does that mean New Zealand’s sharemarket might head south too? Professional investors have begun limiting some of their riskier bets, but by and large they don’t seem to think a sharp downturn is around the corner. If anything, it may be a couple of years before markets start entering the “red zone” where prices fall.
New Zealand Superannuation Fund acting investment chief Mike Frith says cheap credit has given momentum to the major economies of the US, Europe and China for some time, pushing markets higher. Even so, all good things come to an end and Frith says prices look “particularly high” and returns won’t be as strong.
“We’ve been saying for the past year or two that returns were getting overdone beyond what we anticipate,” Frith says. That caution is enough to spur headlines speculating about a market crash, which in turn can send small investors into overreaction mode. That’s when wise heads are needed.
Bernard Doyle, New Zealand strategist at JBWere, says investors need to be careful whenever financial markets start chalking up new records. That’s little comfort when stock markets are on the cusp of the longest bull run in post-war history. “We are
“There’s no question that when I look around the world ... you can start to see the pressure in the system.”