“Bad news such as record inflation or increased unemployment makes the front page, so how about some good news headlines for a change?”
He quoted me from last week’s column:
“There have been some positive data in the past few days which hint at both a re-emergence of economic growth and the possibility that we may have seen inflation peak.”
Well, John, fair call. I personally can’t stand the phrase “cautious optimism”. It’s a wishy-washy oxymoron.
But I’d have to say the economic optimists have taken a beating in the past few years, so please pardon my caution.
As for making headlines, I’d love it if the economic news was more prominent, but I’d also have to concede that there is a media bias towards the negative.
This isn’t a new phenomenon in the media.
“If it bleeds it leads,” was a phrase popularised in the 1990s in newsrooms.
It comes from a 1989 article about the negativity of local TV news in the US.
The phrase “bad news sells” is much older – reaching back into the early days of newspaper publishing.
Science makes a pretty strong case for a negativity bias in humans as an evolutionary advantage.
We are wired to pay closer attention to threats and things going wrong rather than things that are going right.
Without going too deep behind the curtain of news publishing, it’s safe to say the detailed internet metrics delivered to newsrooms in the past decade or so haven’t diminished the negative bias.
They are, after all, showing us exactly what the public clicks on.
Thankfully, what makes headlines isn’t quite as simple as just throwing the most negative news at a website.
To be taken seriously, a news brand has to champion truth and balance.
All the journalists I know still take that stuff seriously.
Commercially, it’s crucial for the long-term health of the brand.
Anyway, the upshot is that just how positive or negative to be is a dilemma I deal with every day.
I’m not alone in this. Other economic commentators and the major economists all wrestle with the tension.
There is a risk that negativity can become self-fulfilling, but equally we can’t be cheerleaders for an economy in need of policy changes.
If in doubt, it helps to fall back on the data. Data doesn’t care. It is what it is.
But more often than not it is mixed.
The points in time when everything is unambiguously humming are few and far between.
I’m optimistic. I feel the tide of recovery turning again. I have no doubt that New Zealand will find its way back to a period of sustained growth and that we’ll see the labour market improve, house prices pick up and consumer confidence return.
That won’t solve all our economic problems, but it could give us some breathing space to deal with them properly.
But I’m not yet convinced it’s time to be shouting about recovery on the front page.
I think we need to be very sure about it this time around.
Let the Reserve Bank decide
If there’s any kind of official referee in the “how cheery should we be” debate, I guess it might be the Reserve Bank.
Politically independent, it carries added weight because its views set monetary policy and that really can be self-fulfilling.
So with that in mind, we can look forward to a full Monetary Policy Statement (MPS) from the RBNZ, complete with new forecasts, next Wednesday.
Market pricing has another Official Cash Rate hike – taking it to 2.75% – baked in as a near certainty.
Economists seem to be leaning that way too.
With the neutral OCR (that neither stimulates nor slows economic growth) generally regarded as sitting at 3% (or possibly 3.25%), the RBNZ is still in safe territory hiking and leaning against elevated inflation.
But what will be fascinating next week is the RBNZ’s assessment of the economic recovery.
Bear in mind that an upbeat outlook on growth probably translates to a more aggressive rate track and vice versa.
That’s reflected in a preview from BNZ this week.
BNZ’s head of research Stephen Toplis says: “It is our view the cash rate will rise 25 basis points at each meeting until it reaches 4% in May 2027.”
That probably sounds terrible if you are a mortgage holder or a small business struggling with debt.
But actually it reflects a fairly bullish outlook for the economy.
Toplis notes that inflation remains elevated but also that “it looks as if growth will be at least as strong as the RBNZ had been expecting”.
In its May Monetary Policy Statement, the Reserve Bank forecast growth of 1.7% for the year to March 2027.
Toplis also provides a few caveats in the form of black swan-type events that could conspire to undermine our recovery efforts yet again.
These include a recession caused by a major El Niño drought and a big global market meltdown.
He throws in election outcome uncertainty for good measure and notes that a change of Government and a return to a dual mandate (unemployment and inflation) as proposed by Labour might slow the pace of hikes.
This week ANZ economists published what they called an “RBNZ MPS starting-point surprise chart pack” (catchy title).
It runs methodically through how key data points have landed relative to the RBNZ’s May forecasts.
It notes that first-quarter GDP growth was slightly weaker than the May forecast but second-quarter inflation also came in slightly weaker than forecast.
The unemployment rate was higher than the RBNZ’s forecast, but employment was too, and wage growth was also slightly stronger.
Meanwhile, oil prices have actually remained below the RBNZ’s May assumptions – despite remaining volatile (and too high for most people’s liking).
The dollar (on a trade-weighted index) is close to the forecasts.
So is that good news or bad? Does it look like a recovery?
“Developments in recent weeks have been mixed: there has been some good news on how inflation is shaping up in the near term,” ANZ chief economist Sharon Zollner says.
“But also some data has suggested there may not be as much spare capacity in the economy as the RBNZ has been assuming.”
She argues that makes sense for the RBNZ to keep on the path towards a neutral OCR (she says 3%) “in the face of upside risks to inflation and a starting point north of the target band”.
Beyond that it all gets a bit more nuanced, Zollner says, making a case for the RBNZ to pause after October and see how things pan out over the summer.
I’ll have a full preview with a full suite of economist forecasts next Monday.
NZX50 – return of the total return debate
To recap, last week I responded to a reader (Rob) who argued that I was wrong to refer to the NZX50 being at a record high.
He noted it was only a record on the total return index, which is promoted by the NZX50.
On that basis, the NZX50 index went through 14,000 points for the first time this month.
But that’s a measure that includes the return with all dividends reinvested (tax-free with no broker fees or transaction costs).
Rob argued that’s an unrealistic and misleading measure.
If you use the price return index (sometimes called the capital index), we are still a long way shy of the record that we hit in the post-Covid surge.
That shows a peak at 5681 points in January 2021. On the same basis, we’re still about 16% down.
I asked for reader feedback, and Julian didn’t disappoint.
He disagrees with Rob…
Q: Hi Liam, I’m a little perplexed – there should be no argument here. Capital return is an interesting statistic, but your total return is what matters with any investment for any investor.
The stats illustrate how important dividends are in an investment portfolio.
When you compare various asset classes and relative returns, ignoring income is plain dumb. If you extrapolate that out into a bank deposit, for example, it would be fair to say a term deposit will return nil.
When fund managers calculate their performance fees, do they compare fund returns with the capital or gross index?
The funds they invest in will receive dividends; however, using the capital index simply lowers the bar when calculating performance fees. Oldest trick in the book!!!
Regards, Julian M.
Thanks, Julian. The answer to your question is that most New Zealand equity funds do actually use the gross (total return) index, not the capital index.
The FMA doesn’t specifically mandate this but does say that they should use the index that best reflects the risk of the investments.
So the upshot is that the industry has more or less settled on “total return” as the norm – probably because (as you suggest) using a capital-only index would be so favourable to the manager that it would fail the FMA’s broader tests.
Don’t forget to check out the Herald’s new podcast, The Economy of Everything, with Liam Dann and Tamsyn Parker – thanks to CMC Markets.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.
He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”.
For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.