A new green beggar-thy-neighbour strategy

Kia ora,

Welcome to Thursday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news of a green twist in beggar-thy-neighbour economic policies.

But first, in today's review of its policy settings, the US Federal Reserve has changed nothing. It did acknowledge the greatly improved economic prospects, and it said it wants to see inflation running ahead of its target 2% for some time before it will make any changes. And it gave no indication of any tapering its bond purchases and QE support. The equity markets have ignored the statement. Bond markets have seen yields fall, but only marginally.

Some analysts are saying the US economy is in for a sustained rise in inflation, rather than the transitory increase that Fed policymakers are suggesting. And that markets are underestimating the Fed’s tolerance for higher inflation, meaning rates will be kept near-zero until late 2023 – later than many expect – which in turn means that real interest rates will remain negative for years.

Meanwhile, the US merchandise trade deficit swelled to -US$85.6 bln in March, and far above the March 2020 deficit of -US$60 bln. But this one is on the back of fast-rising exports, up +12%, and even faster rising imports, up +22% year-on-year. No doubt, their services surplus will be rising as well, but that is not included in this report.

The new Biden Administration is set to announce a US$1.8 tln program of new spending on safety-net issues like child care, education and paid leave and extensions of some tax breaks. It wants to fund it with new taxes on about 500,000 uber-wealthy Americans. The proposal follows on the heels of a US$2.25 tln infrastructure plan that has yet to be taken up by Congress and a US$1.9 tln pandemic relief plan that Biden has already signed into law. If they all get through Congress, that is fiscal stimulus of almost US$6 tln over a number of years, or more than 25% of one year's US economic activity (GDP).

Canada reported February retail sales and those came in considerably better than expected.

Japan also reported a good retail sales rise, their data being for March. Maybe there is a COVID basis factor here, but the result beat analysts expectations.

Japan’s parliament approved joining the world’s largest free-trade deal, a key event for the Chinese-promoted Regional Comprehensive Economic Partnership (RCEP). Signatories which includes New Zealand, aim for it to come into effect from the start of 2022.

The Asian Development Bank is forecasting that China will grow by +8.1% in 2021, but the following year the expansion will be a more modest +5.4%. It also sees a good recovery in the wider developing Asian countries.

And in a shameless beggar-thy-neighbour policy, China is to lower taxes on steel imports, and raising them on domestic producers. (It's the green version of beggar-thy-neighbour strategies.) The aim is to increase steel imports - so that China can reduce its emissions from an industry that produces 15% of all China's GHGs. This policy will push those emissions on to other countries. Changes were expected but they are more aggressive than expected.

In Australia, their CPI came in lower than expected in the March quarter, even if it was higher than Q4-2020. And that was despite sizable increases in beef and petrol prices. The ABS data show prices rose an average of just +1.1% over the past year. Analysts were expecting +1.4%. This probably keeps the pressure on the RBA and fiscal authorities to maintain more stimulus than they were expecting at this time.

And Australia has recorded a goods trade surplus above AU$8 bln, as imports and exports both increased +15% in March 2021. China accounts for 37% of all exports from Australia, and iron ore helped push exports to the Middle Kingdom up by +17%. (New Zealand exports 29% of its trade to China.) Yesterday, the iron ore price rose again.

The UST 10yr yield starts today at 1.62%, down -1 bp overnight. 

The price of gold starts today at US$1780/oz and that is up +US$3 since this time yesterday.

Oil prices are up +US$1.50 today at just under US$64/bbl in the US, while the international price (Brent benchmark) is just under US$67/bbl.

The Kiwi dollar opens today at just on 72.2 USc and a small firming since this time yesterday. But at this level, it is at its highest since mid-March. Against the Australian dollar we are up at 93.3 AUc and the highest since early March. Against the euro we are slightly firmer as well at 60 euro cents. That means our TWI-5 is at 74.2 and also a mid-March high.

The bitcoin price is now at US$54,918 and a mere -0.1% lower since this time yesterday. Volatility in the past 24 hours has been modest at +/- 1.7%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.