There’s much to be glum about.
Finance Minister Bill English listed some of the worries in a speech: after shocks from the global financial crisis affecting the world and in New Zealand we’ve had two earthquakes, finance company collapses, blizzards, drought, PSA in kiwifruit, the costs of leaky homes and schools, loss of life in the Pike River mine and more recently the potential cost of support for AMI policyholders.
But difficult as all that is – and obviously more difficult for those directly affected- the news isn’t all bad.
I’m confident that we are on the right track and there are some good reasons to be optimistic for the next few years.
These include a sound financial system and growing economy; export prices at record highs and trading partner growth is strong – helped by strong ties to Australia and Asia.
Our trade is moving quickly towards Asia. In the year 2000, the United States took 15 per cent of New Zealand’s exports, and China 3 per cent. By 2015, it will be almost the other way round. Exports to China have almost doubled since the free trade agreement took effect in 2008, with dairy and forest products to the fore.
To sum it up, the merchandise terms of trade jumped 10 per cent in 2010. This equates to a lift in national income of more than $4 billion – a boost to the economy equivalent to the full annual value of the October personal income tax cuts.
Our competitiveness with Australia is near an all time high. This is primarily because the New Zealand-Australian exchange rate is at a 20 year low.
In turn, this largely reflects the strength of Australia’s minerals boom. So we are an indirect beneficiary of that boom.
We have reinforced that advantage through the changes to our tax system; a better regulatory system; through our infrastructure programme; via our new financial markets framework; and around our policy process which will continue to make progress year after year.
We also note that:
- Floating mortgage interest rates are at 45 year lows (5.7 per cent) and have halved in the past three years.
- Inflation remains low – setting aside the GST rise, for which everyone was at least compensated.
I appreciate things are tight for many families. But the facts are that after tax wages, as measured by the Quarterly Employment Survey, rose 6.8 per cent last year, compared with annual inflation of 4 per cent.
Since September 2008, real after tax wages have risen a total of 10 per cent. This is very significant, when you consider that in the nine years before that, real after tax wages rose only 4 per cent in total.
And let’s not forget that despite all of our significant global and domestic challenges, the economy has grown in six of the past seven quarters – albeit pretty modestly.
Given all the handicaps that is no mean achievement and there’s more good news: the government’s strategy to lift national savings and make the eocnomy competitive are working:
This recovery is fundamentally different to previous recoveries in New Zealand.
It is not built around consumption, taking on more debt or increased Government spending.
It is built around lifting national savings rates and reducing debt, including the Government’s debt. This will shift resources back towards sectors where we have a competitive advantage and activities we are good at – allowing us to earn our way in the world.
This is a fundamental and much needed change after decades of spending more than we earn.
We have genuine competitive advantages in agriculture and other primary industries. We are a great destination for tourists and we have world-class companies in high-tech manufacturing, education, software, film and other industries.
But collectively, their output has fallen 10 per cent since 2005. We have halted this slide, but we need to accelerate the process and get them growing faster.
The economy is now part way through this adjustment. Private savings rates have lifted sharply and New Zealanders’ appetite for more debt has diminished.
We can see this from looking at credit growth, which is close to zero even though the economy has been growing for eighteen months.
In the short term, higher savings is a headwind. In the longer term, it is required for faster and enduring growth.
I was pleased to see this neatly set out recently by Bank of New Zealand economists. They said gross household savings as a proportion of disposable income is on track to reach more than 5 per cent in the current March year – the best result since 1992.
As BNZ’s economists noted, the process will be a bit painful in the short term, but it is laying the foundations for lasting, quality economic growth over the medium to long term.
Primary industries are already seeing an improvement. This is the best season in decades for lamb, wool, beef and dairy; crop prices are up, horticulture is improving and returns from forestry are also better than they’ve been for years.
Most farmers have used the better than expected income to pay off debt which is why the money isn’t filtering far beyond the farm gate yet, but it will.
The speech then looked at improving government operations, looking at the mix of state assets, the impact of the quakes, the support package for AMI policyholders and why the government doesn’t favour an earthquake levy then concluded:
I’m confident that New Zealanders understand the challenges we face. They are supporting the Government’s direction to be more sensible and disciplined because it is what they are doing themselves.
The challenge now is to build confidence and get on with building a faster-growing economy. The global financial crisis was a major shock.
But on closer inspection the glass is more than half full. For example, by world standards we have:
- low tax rates and generally a sound tax structure
- a flexible labour market
- generally improved regulatory regimes
- certainty about our emissions trading regime
- a financial sector that has remained sound
And on top of this we have strong terms of trade and solid growth in key trading partners.
Now is the time to build on this early momentum. The next year or two will be about getting out of a survival mentality and into growth mode.
We’ve been going in the wrong direction for a long time.
Policies introduced in the last couple of years are starting to get us heading back in the right direction and there is a bright side to look forward to as economic growth accelerates.
Rather than the boom-bust cycle we’ve been used to the fundamental changes from borrowing and spending to investment, saving and exports mean the improvements won’t be temporary.