Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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CAMERON BAGRIE

Cameron Bagrie has been an economist for 20 years, including Chief Economist at ANZ, and stints at National Bank, Treasury and Statistics New Zealand. Through his career, Cameron has gained a reputation for taking an uncompromising stand on even the hardest of economic issues.

What interests you about economics?

The economy and economics is part of everyday life. It covers areas ranging from complex business issues to key macroeconomic economic variables such as growth and interest rates. It also covers key social issues such as housing affordability, education and poverty.

Was a career as an economist always your first choice?

As a kid I was going to be an architect. Then an accountant, then I did three-quarters of a law degree, and ended up an economist. At university, economics was just the thing I seemed naturally better at, probably because it was the one subject I was most interested in.

Are there any economic theories you align with more than others?

I’m more a pragmatic economist than a theoretical one. Theories come and go. It’s hard to align yourself to an economic theory that talks about rational and optimising behaviour when we know the world, and individuals, are not always rational or optimisers!

In the last few decades a lot of work has been done on the role of the financial sector in the economy. Prior to that the financial sector didn’t really appear in economic models and the literature.  Economics is evolving again as people seek to understand more about the linkages with the social side of the ledger.

In your opinion, what are the main risks to the global economy in 2018? 

For a start, how the global economy navigates the transition to a more normal interest rate environment, and this will include the unwinding of quantitative easing (QE).

The world has more debt than prior to the global financial crisis and we’ve seen a sharp build-up in debt across some major emerging market economies such as China. Turkey may be the test case of things to come.

Abundant liquidity courtesy of low interest rates and QE has supported asset valuations and growth. As the process of normalising interest rates takes place and QE is slowly unwound, the world will need to transition to an investment mantra that is more driven by fundamentals.

QE, record low and, in some cases, negative interest rates was a big economic experiment but necessary given the nature of the GFC. Unwinding that is necessary… but won’t be easy.

Society is pushing back against the process of globalisation. It’s disappointing because globalisation and trade have been sources of growth, helping to lift incomes and lower poverty. Some parts of society haven’t seen the spoils - well actually they have, through cheaper goods but they don’t acknowledge that - and now we’re seeing political blow-back.

Finally, there are fears we are set for a trade war with the USA and China squaring off. There are plenty of things to watch.

To what extent are New Zealand’s economic prospects tied to the global economy?

Well, we are a small trading-centric nation that has borrowed a lot of money from offshore. Wherever the global economy goes we will follow. We’re “coupled” via trade and investment flows and also the cost of capital.

Traditionally, New Zealand has been hit hard when the global economy turns down though some of that has also been of our own making.  The good news is that New Zealand does not have the excesses at present that we saw prior to the Asian crisis and Global Financial Crisis (GFC) so any global downturn shouldn’t hit us as hard as the Asian crisis and GFC experience, though that also partly depends on the nature of the downturn. A China-centric one would hurt more.

New Zealand also has policy manoeuvrability. The Reserve Bank will cut rates under such a scenario. The government’s books are in great shape so they could stimulate the economy by borrowing. The New Zealand dollar also has scope to fall to help the export sector.

Longer term, New Zealand will not get rich selling stuff to ourselves. We need to be globally connected if we are to raise incomes and living standards. New Zealand does not have too many really large businesses and the ones we do need to be doing well both domestically and offshore.

Let’s talk about the global economy. What should New Zealand investors be most concerned about right now?

First up, the fact interest rates in the US economy have risen is a good thing. It’s a sign of robust and good growth. But there is a ‘but’ – it’s going to present challenges in a world of high debt, weak fundamentals in some parts of the global economy and no shortage of geopolitical risks. We are seeing rising protectionism and whether that develops into a full-blown trade war remains to be seen.

At Treasury, you considered the long-term fiscal impact of an aging population in New Zealand. What did you conclude from that research?

I concluded that current fiscal policy settings are unaffordable. There are currently more than 4 people aged 15-64 for every retiree. By 2055 that ratio will fall to just over 2 to 1. That’s a massive shift.

Treasury’s current fiscal projections, based on a continuation of current policy settings, shows net debt hitting $3 trillion. That makes Steven Joyce’s $11.7 billion hole look like small change.

Of course, we’ll be forced to act before debt starts to build but the longer we take to make the hard decisions, the larger the hit or change is going to be to current policy settings.  We can shift taxes up, crunch other parts of government spending such as education to maintain superannuation in its current form, but someone pays.

Ideally we’d get the economy going well and strong growth helps make the fiscal numbers look more affordable. 

George Bernard Shaw wryly suggested that “if all the economists were laid end to end, they’d never reach a conclusion”. As an economist, how important is it to be right?

I need to be right more than you are wrong, otherwise I’d be unemployed and doing something else. A lot of what I do is talk about the risks, whether it’s a low or a high risk environment. The truth is that economics is an inexact science.

In your opinion, what is the optimal political approach to growing a healthy economy?

When I worked at Treasury a former Minister of Finance gave me a piece of advice: “the best policy option is usually the third or fourth one offered.”

That perplexed me, but then I understood.  The best two policy options might be the economically “pure” and best on theoretical grounds but often won’t last beyond the election cycle and you can’t sell it to the electorate. 

Businesses need stability and certainty, and a slightly less economically pure policy might have a couple of holes, but will offer that stability. That doesn’t mean we rush in policies with a lot of holes, but we just need to be pragmatic.  And sometimes we need to make the hard choices too in order to grow a healthy economy.

After many years as a respected Bank Economist, why did you decide to establish your own consultancy?

I think there is going to be huge demand going forward for truly independent analysis and research.

I spent eleven and a half years as Chief Economist at ANZ and had a ball meeting and working with some great people. That’s a long stint and it was time for me to do something else, and give someone else a crack. I’ve always wanted to run my own research firm and it was time. It’s given me more flexibility to spend time with my family.

I’ve also got the opportunity to give back, so I’m on the board of the Life Education Trust programme – you may have seen the mobile classrooms with Harold the Giraffe. I’m really keen on getting financial literacy into the program. If we are serious about improving outcomes for children we need to make them more financial savvy and literate.

Cameron Bagrie

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