News and happenings from the Office of Hon Dr Michael Cullen November 2001

News and happenings from the Office of Hon Dr Michael Cullen

November 2001

War on terrorism - the economic impact

We have made a great deal of progress in
putting in place the building blocks for a 21st century economy. We are
co-ordinating policies relating to innovation, talent and skills, investment and
business growth, excellence in education, and science, research and development.

We know where we were going and how to get there. The stage has been set. New
Zealand's economy was performing far better than was anticipated, across a range
of indicators, and - in the immortal words of the Reserve Bank - favourably out
of sync with the rest of the world.

And then, without warning, the world changed.

With the attacks against America and the war against
terrorism, in the short term, at least, the unknown became the
unknowable.
New Zealanders were shocked and horrified by the
events.

New Zealand immediately pledged support to the United States. We made clear
our commitment to be part of a global coalition directed to combating terrorism
in all its various manifestations.

But what of the economic implications?

Even prior to September 11 there were increasing signs that US growth was
likely to remain weak for longer than many had expected.

And the prospect of an unsteady outlook was mirrored elsewhere, especially in
Japan and the rest of Asia.

It is worth noting that the weaker than expected world growth already this
year has not yet translated through to substantially weaker activity here in New
Zealand.

There are a number of reasons for this. The stimulus to the export sector is
now feeding into the domestic economy with increases in consumption,
construction and investment in plant and equipment. Monetary conditions remain
stimulatory, but inflationary pressures do not appear to be increasing. World
commodity prices have held up despite the slow down in global activity.

What is not so widely agreed is the magnitude and timing of the impact on the
New Zealand economy.

New Zealand is a trading nation. That is how we survive, and while we are
certainly not immune to negative global developments, we do appear to be better
placed to cope than we have done in some of the past periods of global slowdown.
For example:

• The economy grew by 2 percent in the June quarter. Most industries recorded
  increases with the manufacturing sector leading the way with a 4.8 percent rise
  in activity;
• The current account deficit is at 4 percent of GDP the lowest it has been
  for 7 years;
• Unemployment has fallen to the lowest levels in 13 years- 5.2 percent;
• We have fiscal surpluses and government debt that is low by relative and
  historical standards;
• Global demand for New Zealand products is still reasonably good despite the
  slow down the world has experienced over the last year;

But even with these buffers in place, the international environment still
poses a significant risk to the economic outlook going forward.

Opinion is divided as to how much New Zealand's $13 billion tourism industry
will be affected as people around the world reassess international air travel.

At this stage it is too soon to make any firm predictions, but there is the
prospect of any global decline in tourism being moderated by other factors, for
instance; New Zealanders choosing to holiday at home, Australians reappraising
holiday destinations and even south east Asians looking south rather than east
when deciding where to holiday.

The Tourism Industry Association now maintains the overall net effect will be
a 5 percent decrease in international visitors but warns that those operators
who are exposed to the rapidly declining markets like the US and Japan will
obviously face a much larger decrease.

Where we see an immediate impact is in the decline in business confidence.
This is to be expected given the continuing economic and political fallout from
the terrorist attacks on the United States. Australia, too, has tumbled into
negative territory. While the fall has been sharper here, in both countries it
has been driven primarily by the deterioration in world growth prospects.

And it is worth stating again that the government will allow the fiscal
stabilisers to work and we will not repeat the mistakes of the response to the
Asian crisis when a fiscal contraction compounded the downturn.

But overall, I am confident that, insofar as the government can influence the
economy, we are on track for getting the investment and economic environment
right.

The Air New Zealand Crisis

Last month I announced that the government will invest up to $885M in
two stages to secure the future viability of Air New Zealand.

It is important to the economy in general, and to the tourism industry in
particular, that the airline continue to function as a national flag carrier
promoting the New Zealand brand abroad.

The rescue package is in two stages:

1. $300M Crown loan made to Air New Zealand. Around A$150M to be used to settle
   Ansett Australia claims with the remainder used as working capital.
2. A Crown investment of $585M in new ordinary shares will be made between
   December 2001 and January 2002 to provide additional working capital. The price
   of the shares will be determined after due diligence is completed.

The $300M loan will then be converted into preference shares if approved by
the shareholders. Share price will be up to 24 cents. If this same price was
also used for the new ordinary shares then the Government's ownership in Air New
Zealand would be 83%. On that estimation, BIL's ownership stake will fall from
30% to 5.2% and SIA's from 25% to 4.3%.

The GM decision

The GM debate is a passionate one and a universal consensus was never a
realistic outcome. But I believe the government has come up with a safe and
pragmatic result for New Zealand without closing the doors on science.

The economic transformation to which this government is committed must be
built on New Zealand's existing strengths.

It is not about abandoning the farm and the forest for the software design
firm and the feature film, but about adding value and knowledge across the full
range of economic activity.

Eighteen percent of our export income is earned from dairy products, 13
percent from meat and 11 percent from forestry. Resource-based industries will
continue to provide the core of our foreign exchange earnings, and any
successful economic strategy has to protect and enhance that core.

Similarly, the process of economic transformation will have to involve the
development and application of new biotechnologies. That recognition is behind
the government's progressive stance on GM.

The government has largely picked up the Royal Commission's recommendations.
We have found a way to proceed with caution that will allow us to exploit GM
technologies while managing the risks with the care the public is entitled to
expect.

It was important to the building of a knowledge economy that we get the
balance right between safety and progress on the GM issue. I am confident that
we have achieved that.

The decision:

• Allows medical and laboratory experiments.
• Allows field trials under strict conditions. All plant material on site must
  be destroyed or kept secure afterwards.
• Bans the commercial release of GM products for two years.
• Creates a bioethics council.

Our economy is founded on primary
production. GM technologies are already a valuable tool for the primary sector
in the continual quest for improved products and productivity.

New Zealand will keep its competitive edge as a developer of high-quality
biotechnology and biomedical research. The government will manage the risks of
GM technology cautiously and wisely.