China, banking rules, global growth - Scott Morrison and Jacinda Ardern have plenty to worry about. Photo / AP
COMMENT:
There will be at least three barely quiescent "elephants" hanging about the room during next week's meeting of Australian and New Zealand business power brokers in Auckland.
These elephants — which may ultimately have the capacity to disrupt today's relatively cordial Australasian relationship — are: the strategic impact of the big power game between the United States and China; the battle between the NZ Reserve Bank and Australian banks over proposals to force them to increase their capital in NZ; and some hard choices that will have to be made by this country's biggest investor — Australia — as the limits to monetary policy run their course worldwide.
The formal agenda of next week's Australia New Zealand Leadership Forum has a strong focus on the Australasian single economic market (SEM) — a raft of policies which working groups are developing to make transtasman business more efficient and increase economic integration.
Eighteen months ago, the forum's Australian co-chair Ann Sherry was happy to report that sensible, necessary economic integration had been greatly advanced through continued pursuit of the SEM agenda. Sherry pointed to how regulatory harmonisation had improved, enabling talent, innovation and capital to flow more smoothly across the Tasman.
And yet there are major discontinuities which are already disrupting this happy state of affairs.
Park Prime Minister Jacinda Ardern's jibes about Manus Island and protests against Australia's practice of deporting NZ criminals back here. While Ardern gets under the skin of some Australian politicians, the reality is that New Zealand's policy-makers are not currently held in awe by Australian business.
After an embarrassing merry-go-round of prime ministers, they finally have one they can deal with in the Liberals' Scott Morrison. The frank admiration many in business had for John Key and Bill English stopped there.
Business opinion is split in New Zealand over Reserve Bank governor Adrian Orr's proposal to force banks to increase their capital. The most vociferous — and personal — opposition has come from Australian banks based here and their parents back home in Australia.
The argument comes down to basic economic sovereignty (though that is not how the central bank dresses it up) versus the banks' property rights.
At its most basic, the Australian banks resident here say they will increase the cost of capital to business and ration it to particular sectors like dairy and SMEs to offset the Reserve Bank's proposals. Their parent companies may also reduce the amount of capital they make available for NZ operations.
It would be trite to call it a game of chicken. But it is not easy to pinpoint where bluff ends and reality kicks in.
The upshot has been a lot of negative headlines on both sides of the Tasman and a reluctance by Australasian treasury ministers to step in because Orr has statutory independence (although NZ's Grant Robertson has asked both sides to play nicely).
Even this week, ANZ Group CEO Shayne Elliott was reported by the Australian defending his hardline position on the capital reforms.
"What we've said to the Reserve Bank of New Zealand is that they're asking for a very gold-plated bank insurance policy ... that's okay, but somebody has to pay the premium, and we're saying that some of the payment will have to come from the NZ community — our customers."
This heavy-handed approach is starting to get under the skin of business here, with some muttering that the profits the Australian banks take out of New Zealand are already excessive given the low cost of capital.
The strategic rivalry that has openly emerged between the US and China also has the capacity to increase transtasman friction if it results in the US removing its security blanket for Australia and both countries having to invest more in their own defence.
The first forum in 2004 was punctuated by claims from the Business Council of Australia's then-chair Hugh Morgan that New Zealand was a freeloader on Australia when it came to defence.
That claim was buried long ago. But if the visiting Australian strategic studies academic Hugh White is right with his claim that the assumptions on which New Zealand defence policy was built are no longer valid, there will be considerable angst on both sides if we have to rebuild new and expensive military capacity, effectively doubling current defence budgets.
He contends that the slogan that framed Australian policy for a long time — that "we don't have to choose between America and China" — has essentially run out of play.
That convenient diplomatic mistruth had been punctured by US Secretary of State Mike Pompeo, who told the recent Ausmin meeting in Australia, "you can sell your soul for a pile of soybeans or you can protect your people".
White quoted conservative Australian Treasury estimates that by 2030 the Chinese economy will be US$42 trillion and the US economy will be US$24t.
"If economic weight is the foundation of power — this is a very powerful country indeed."
The third issue is the reality that policy-makers are worried about the global economy's vulnerability to shocks and are trying to lift activity through accommodative monetary policy.
Orr says the Reserve Bank's recent rate cut reflected an expected decline in trading partners' growth, lower NZ inflation expectations and a global swing to lower rates. It also reflected the ongoing funk that global and domestic business confidence is in.
"Geopolitical uncertainty is paralysing decision making — trade tensions, Brexit, Hong Kong, North Korea and so on — have all meant investment is lower than normal."
Orr went on to say lower rates stimulate investment. Income derived from savings in the bank is lower, prompting more active investment decisions. Asset prices rise as the present value of their future earnings rises.
And spending — government and public — becomes more affordable, at least until consumer prices start to rise again. And a lower NZ dollar will promote export earnings.
Feedback from the Herald's Mood of the Boardroom survey currently under way indicates it is not that simplistic. Australian companies are in aggregate this country's largest source of foreign direct investment and will also be grappling with where to place their investment budgets.
The forum has yet to release the names of all the Cabinet ministers who will be in attendance next Friday. But the event will include leading officials from both the NZ and Australian governments.
Christopher Luxon, who steps down as chair of the Prime Minister's Business Advisory Council this month following his resignation as Air New Zealand chief executive, will join Robertson in discussing how to get a step change in SME productivity.
But the two panels which have the capacity to grapple with the big emerging issues are one on the "state of investment in Australia and New Zealand" and another on "from SEM to the world", which is essentially a trade discussion. That's where the elephants should be let loose.
The Vietnam deal includes an option to buy 50 more jets later.