J B Were & Son Auckland Business LunchTreasurer
Thank you for the opportunity to talk to you today. This is my first speech as Treasurer in Jenny Shipley's new minority Government.
I welcome the fact that Jenny continues to command a majority in Parliament.
At this stage of our history, in the middle of perhaps the most difficult global trade situation in 20 years, New Zealand needs stable Government.
We need a Government that knows how to take the right decisions promptly, without putting a party-political spin on everything it does. I believe we do have that now.
Certainly, there is some diversity of views among the MPs who have undertaken to support this minority Government. But I disagree absolutely with the Left-wing cynics who say those MPs were motivated only by self-interest.
Some of them have taken difficult decisions which they know involve significant personal risk, because the want good Government for this country. They have shown courage, and it deserves to be respected.
Enough of politics for the moment. We have a nation and an economy to run. That's what I?m here to talk about today. You are entitled to know how the new Treasurer sees the economy and the policies relevant to it.
Let me say right up front, you can forget about any talk you hear of a lurch to the New Right, or slash and burn policies aimed at the destruction of social equity in New Zealand.
In May this year, the Government brought down a Budget which was exceptionally well-received. It set out one of the biggest programmes of sectoral reform ever seen in any previous Budget in this country.
That programme is not only good for New Zealand on a long-term basis. It is also ideally suited to help the nation to manage its way on an sound basis through any difficulties created for us by the present crisis in Asia.
The urgent priority is to implement that Budget programme without delay. I believe the changes of the past week will permit us to achieve that with less friction than might otherwise have been the case, and with less waste of time.
Secondly, a week or so into September, the special economic outlook which Cabinet on 29 June instructed the Treasury to prepare, will become available, to update our present information on the impact of the Asian crisis.
Based on that data, the Government will, to the extent that the information itself makes it desirable, review the present economic and fiscal policy mix, not to slash or burn, but to help the country through any difficulties that lie ahead.
It's important that people know how the Government sees the Asian crisis. It's important that they know, whether they are employers or employees, what their own role is in helping to deal with any fallout from the Asian situation.
It's important that, as far as practicable, we take the mystery and the mystique out of these things, so that everyone can see them as quite normal human difficulties which happen to be written into our present global script.
There are some politicians on the Opposition benches who are anxious to pretend that there is no Asian situation, and no fallout from it affecting New Zealand, because they do not want to adjust their own policy ideas.
Ostriches may be entertaining in the zoo. They may provide marvellous decoration for fancy hats. But they are not a lot of use in Parliament. Putting your head in the sand is not a good method of formulating economic policy. (With apologies to the ostrich industry).
Exports make up 30% of GDP in this country, and 40% of our exports go to Asia.
Aggregate output in Asia has plunged in Korea, Malaysia Thailand, Hong Kong and Indonesia. It has softened in Singapore and Taiwan, and turned negative in Japan, which is a crucial engine of Asian economic growth.
The problem facing all those Asian countries is a great deal more serious than anything facing us. But New Zealand and Australia both have stronger than average trade links with Asia. We will therefore be somewhat more affected here than the average for other OECD countries.
Consensus forecasts suggest that 1998 calendar-year growth for our top 10 trading partners has fallen on a trade-weighted basis from 3.8%, the expectation in July last year, to a forecast in July this year of 1.6%.
Depressed international prices have, in part, caused a fall in export values. Commodity prices, adjusted for exchange rate movements, were 10% lower in the June quarter this year than they were in the same quarter of 1997, and 75% of New Zealand exports still fall into the commodities category.
Short-term visitor arrivals were falling at an annual rate of 3.8% in June. Asian arrivals were down dramatically. On the other hand, visitors from the US were 18.5% higher than in the same quarter a year earlier.
The most noticeable impact to date has, of course, been on financial markets. The exchange rate is down 17% on a trade-weighted basis from its peak last year. 90-day bill rates, which have fluctuated in the 7-10% range, have fallen to 6.36% this morning, following the Reserve Bank statement yesterday.
The New Zealand stock market has lost 20% in the last 12 months, as investors concerned about Asia/Pacific developments sought what they perceived as safer havens elsewhere.
Along the way, both household and business confidence has taken a battering. Retail spending has been subdued. Firms have shed some labour in their effort to make productivity gains.
Quite clearly, the Asian crisis is not over. There are more downside than upside risks in the global growth and trade situation. Yet the odd thing is, confidence has been growing, not shrinking, in New Zealand recently.
Three major banks, National, WestPac Trust and BNZ, have all published forecasts recently emphasising their expectation that, from the end of this year, growth rising to 3%, 3.5% or better can be expected to resume in 1999.
Both the BNZ and National Bank, surprisingly, see the current account deficit settling 7% plus to between 2% and 3% over the next couple of years. That would greatly reduce what has been a major concern for some people.
In the middle of a major regional crisis, isn't that just a little surprising? What drives that expectation of improvement? The fact of the matter is, these are some of the fruits of economic reform in New Zealand over the last decade.
New Zealand is a small country which exports 30% of its GDP. We are price-takers, not price makers, in the main. Our export markets are subject to supply and demand shocks. New Zealand will always have to deal with that.
Until the mid-1980s, insulation was the way we tried to protect ourselves. It gave an appearance of stability, at the cost of higher taxes, higher consumer prices, lower productivity and much lower product innovation.
Protection did, at a price, give us some protection against relatively minor international shocks, but the rigidity and inefficiency of that system increased rather than diminished our vulnerability to the really big international shocks.
Since the 1980s, we have come to recognise that no country can stand against the trends and pressures of world markets. Instead of putting our heads in the sand, we now aim to adapt rapidly and efficiently to global change.
In our reformed economy, we have deliberately designed systems that react rapidly to global change, and by changing the incentives to all players, facilitate rapid constructive adjustment to change, throughout the community.
The New Zealand dollar has fallen 17% on a trade-weighted basis, and more than 29% against the US dollar since its peaks early last year. That is stimulating export production, and changing the focus of our trade effort.
The forecasts for our non-Asian partners remain reasonably steady. Growth forecasts for the US for 1998 have been revised up. Simultaneously, movement in the kiwi dollar has strengthened our profitability in those markets.
More recently, without undoing those incentive effects, the exchange rate has appeared to stabilise. A continuous major easing in monetary policy has been accompanied by a quite substantial fall in interest rates.
All of these changes are creating opportunities for people to take constructive action on their own account which at least in part and increasingly over time, offsets the loss of export sales created by the Asian contraction.
Consequently, what do we see? After a marked deterioration of business confidence in the second quarter, suddenly the number of manufacturers expecting to increase exports in the next three months has now begun to rise.
The latest National Bank Survey, for example, indicated that a net 42% of respondents expect, notwithstanding the Asian crisis, to increase their exports during the next 12 months. For the second month in a row, optimists outnumbered pessimists in responses to that Survey.
All of these responses are enormously more constructive than anything you could expect in the late 1970s or early 1980s, when producers? primary reaction was a demand for State subsidies to compensate for market loss.
It's often said that Government's are not a lot of use. But the fact is, you have governments to thank for the important changes that distinguish response to this shock from New Zealand's response to previous external shocks.
A floating exchange rate, open capital markets, more flexible labour markets, light-handed regulation based on transparency, low tariffs, an open flexible economy, and emphasis on competition as a means to efficiency are all helping firms to adjust much more quickly to changes in international demand.
Figures for growth in the second quarter have not yet been released, but I think it is fair to say that most analysts think they will prove to be negative, with subsequent initial pickup occurring quite slowly later this year.
The weak international outlook and subdued growth throughout the present year ensure that inflationary pressures remain weak, giving the Bank more scope than expected, to endorse further easing of monetary conditions.
Monetary conditions have already eased by more than 900 basis points since early last year. The latest Reserve Bank statement yesterday projects continued easing down to trough at an MCI of ?225 in mid-1999.
Beyond this year, the Bank's growth projections fully reflect the confidence shown in recent forecasts by trading banks. The Reserve Bank expects strong growth, rising to a peak of 4.7% in the year to March 2001.
Exporters are very well placed to take advantage of the changes brought about by the adjustment process.
At an earlier stage, rising exchange rates forced them to make very strenuous efforts to improve competitive efficiency. The subsequent depreciation greatly improves their ability to capitalise on those gains.
New Zealand's real competitiveness on a trade-weighted TWI basis improved by 11 ½% between the March 1997 and March 1998 quarters.
In the same period, our tourism competitiveness improved by 8½%, and the competitiveness of our non-commodity manufactured exports increased by no less than 15%. That gives exporters a solid launch platform for growth.
Clearly, achieving growth depends on the capacity of individual firms to adapt rapidly to falling demand in Asia by moving the emphasis of their activity into more lucrative stable and growing markets in other parts of the world.
For commodity-based exporters, that's not necessarily easy.
The drought has compounded the supply-side constraints which always exist for primary industries, but milk powders moving into Latin America and aluminium into Europe and the US are examples of what can be done.
Non-commodity manufacturing is likely, however, to be our strongest export sector in the near-term. This highly diversified sector represents 25% of total New Zealand goods exports.
I have talked about the quality of New Zealand's current economic framework, the way it is now creating major opportunities for constructive private sector participation, and the likely response of the export sector.
Let me wrap up the story by talking briefly about the role of Government in managing our way through this global situation, in the period ahead.
Firstly, we have a large and ongoing programme of further reforms designed to help firms to adjust even more smoothly and flexibly by reducing regulatory barriers to competition, and lowering the costs we impose on them.
In the shorter term, that means, for example, ACC reform, airports, electricity industry reform, some sensible privatisations, the Resource Management Act, and the tariff review.
Medium-term, you have to be looking at the labour market flexibility, sensible readjustments of immigration policy, producer boards, the Meat Act, roading, and tax changes just as soon as the fiscal outlook permits it.
Longer term, you can add to that, for example, reviews of the Commerce Act, occupational licensing, the Rating Powers Act, the management of water and waste-water, and maybe a regulatory responsibility bill.
When Treasury reports early next month, we will certainly be looking at a reduced fiscal balance in the short term, close to zero, and possibly even moving into a small deficit. Low growth does impact severely on revenue.
Clearly, there is a strong consensus in the thrust of what private analysts, the trading banks, the Reserve Bank, the Government and I are telling you about the future, based on the current international consensus about Asia.
Equally clearly, if the international scene should change in unexpected directions, then New Zealand will need to change with it. There are downside as well as upside risks, and we will monitor that very closely indeed.
But far and away the most important contribution the Government has to make now is to ensure that it behaves in a way that maintains and reinforces public and business confidence in the quality of its economic management.
This is a time when MPs very clearly need to put the needs of the nation ahead of personal or party political priorities. If they do that, they will make a huge contribution to the quality of the future available to all New Zealanders.
The evidence this week was that a clear majority of the MPs in the House understand that priority, and are committed to give it their best possible shot. As Treasurer, I welcome and respect them for taking that position.