Dr Cullen's Casebook

  • Michael Cullen

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:

vAllows medical and laboratory experiments.
vAllows field trials under strict conditions. All plant material on site must be destroyed or kept secure afterwards.
vBans the commercial release of GM products for two years.
vCreates 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.