Speech To Chapman Tripp Economic BriefingFinance
Chapman Tripp, Grey St, Wellington
Thank you for inviting me here this evening. What a difference a month makes.
Not long ago, towards the end of 1998, there were enough signs of resumed growth for me to be able to say that we would weather the Asian storm and that a strong export led recovery was underway - although at that stage, you may have still had some doubts.
Subsequent data through December and continuing this month have all now confirmed that although the first half of 1998 was difficult, growth resumed strongly in September and we now have an excellent foundation for continuing growth.
In a nutshell, the prospects for 1999 are very good.
Every new piece of economic information we are receiving is positive:
September GDP figures showed growth of 0.7% in the quarter Business confidence in December was at 44%, the highest level in four years. Consumer confidence also bounced back to optimism in the December quarter. The ANZ job ads series is showing strong growth, with advertised jobs up 1.5% in December. · The Crown's November Financial Statements showed revenue tracking slightly above forecast. GST sales increased 2.2% in the September quarter The sharemarket has been making strong gains with the SE40 now back around 2200. November's trade figures show a continuing rise in exports, with some very large gains into the US and Europe. ANZ's commodity price index showed an upturn in November. December house sales were at their highest level in three years according to the Real Estate Institute. Through all this good news the December CPI figure shows inflation at its lowest level in 30 years. And interest rates are at similar 30 year lows.
These figures aren't simply the result of a change in calendar years. Many of the international risks which were around in 1998 are still present now. But whereas this time last year some Asian economies were in turmoil, log markets and tourism, for example had dried up, and we had a severe drought down the entire East Coast, 12 months on the Asian region has stabilised, talk of a world recession has passed, and most parts of New Zealand have now seen some rain.
It was impossible for us to be immune from the Asian downturn which turned into the largest world trading shock in 50 years. New Zealand depends on trade. In a normal year, New Zealand exports 21% of its GDP (total annual output), compared with about 8% for a country like the United States and more
than a third of total New Zealand exports have gone into Asia in recent years.
With the New Zealand economy heavily dependent upon the fortunes of the global economy world growth settings are a critical judgement for forecasts. That is why throughout 1998 we saw continuous downward revisions to forecasts for world and hence New Zealand's growth.
One factor that remained constant through last year, however, was our belief that New Zealand was as well-equipped as possible to deal with economic shock.
Basically, we knew we had a framework which would allow our economy to rapidly adjust to the testing circumstances.
Through the 90s this Government has developed a framework of five fundamental policies for growth: an open competitive economy, low-rate broad-based taxes, price stability, flexible labour markets, and a fiscally disciplined government. Our framework, based on economic common sense, has delivered real gains for New Zealanders.
From the end of 1991 when the Employment Contracts Act took effect up until the end of 1997, New Zealand experienced 20 quarters of positive growth out of 21. This strong economic expansion, with low inflation, saw businesses prosper employing over 250,000 more staff - unemployment fell to 6% - and strengthening their balance sheets.
As I said, we weren't taking a blind punt, nor were we being ideological. We had a plan. It was a commitment to a framework which we knew worked.
No matter what economic scenario eventuates, our framework means that firms are well placed to deal with uncertainty stemming from the global environment - and to take any opportunities on offer.
Compare the results last year to the impact of the oil shock of the 1970s, where a move occurred into a cycle of growing Budget deficits, rising expenditure and rising debt that took 17 years to break.
Even in 1987, following the sharemarket crash unemployment climbed steadily for four years to peak at 11%.
Last year, by contrast, in the face of the biggest international shock for decades, our economic policy framework actively helped the economy without the sort of dislocation seen in New Zealand in the past.
We haven't had the shocks of sudden currency devaluation, sharemarket and business collapse, rapidly escalating unemployment, and high inflation.
What we have had is a very rapid, smooth bounce back to growth.
Lower interest rates and a lower exchange rate, adjusting through normal market processes, are the key factors driving the recovery.
Our dollar has dropped from highs of over 70 cents US early in 1997, to les than 50c last year and around 54c now. That makes our goods much cheaper overseas and easier to sell and is why we have seen a huge pick-up in trade.
In the year to October sales into the United States increased by 28%. This means an extra $509 million of NZ goods were sold in the US in those 12 months. The gains to the US alone, nearly offset the losses in Asia.
Over the same time, sales to Germany were up 22% ($115m), Italy 34% ($110m), and Belgium 54% ($187m). Total export sales over the 12 months were up an overall 4.8% or $1 billion.
Meanwhile, short term interest rates have dropped from 8.2% at the end of June to around 4.2% this morning, leading to sharply lower lending rates. This fall in floating mortgages fell 11.25% to 6.5%, is saving $70 a week for families with a $100,000 loan on their home. These low interest rates are also one of the key factors behind the very positive business and consumer confidence being registered - which in turn is important for investment and job creation.
And the mix of exchange and interest rates appears favourable for some time ahead. As Treasurer, I am not about to predict the path for either the dollar or mortgages, but the Reserve Bank has signalled that monetary conditions will remain easier for some time and the latest CPI figure will help this.
It is also impossible to overlook the fact that this year sees an unprecedented international focus on New Zealand with our country hosting APEC, the largest ever conference to come here, and the America's Cup, along with a wide range of Millennium events. All of these, going through to the Sydney Olympics, will bring increasing international focus, more tourism and more investment to New Zealand.
The Government too will be continuing with its programme to improve our economic performance and lower costs to businesses and consumers. Under National, we have produced Budget surpluses for the last five years, which has seen us cut in half net public debt, at the same time as leaving $3 billion more in taxpayers' pockets, boosting family support, and spending billions more in health and education.
We have been able to produce that mix through growth and careful management of our own books, and we will continue to do that, running a surplus again this year.
Risks do remain internationally, with Brazil the most recent country to be affected by uncertainty. There are still question marks about the performance of Japan, the world's second largest economy, and other individual Asian countries, although the region as a whole has stabilised. The EU economies are predicated to slow this year. On the other side, the key US and Australian markets are still performing well, and the world economy is predicted to consolidate, not deteriorate, this year.
New Zealand appears to be moving ahead of the world trend.
Treasury's higher growth scenario from the DEFU looks the more likely path now. This shows growth building from late last year to reach 3.0% through 99/2000. That scenario means we would only have one year of (small) deficit. That's in line with the Reserve Bank's last estimates of growth of around 1%
in the first two quarters of this year leading to growth of 3.4% in 2000 and 4% in 2001. You would have noted that at the end of last week private sector forecasters were also revising up their expectations of growth for this year to around 3%.
The DEFU forecasts did anticipate that September would mark the turning point in economic activity but the GDP result was clearly stronger that both Treasury and the markets expected.
As this briefing is to encompass the political as well as economic outlook I should say that the Government's Budget preparations are well advanced and progressing very smoothly. I will be presenting the Budget in May, well before an end of year election.
What that election will be about this year, 1999, the end of the millennium, is about which political party is best placed to take New Zealand forward to the next century.
I have no doubt that the National Party is the party for New Zealand's future.
The test imposed by The Asian crisis was a test of the robustness of our economic policies and framework. It has come through with flying colours.
All commentators, with a possible exception of the weak-kneed left wing in Parliament, have fairly acknowledged that without the reforms of the last decade New Zealand would have faced severe damage through high interest rates, high inflation, high debt and high unemployment but for the fundamental framework which is now in place.
The National government fairly agrees that there's still much to be done in terms of continuing policy development in education and health in particular, and improvements in the welfare system. But the lessons of 1998 strongly confirm that any changes to the fundamental policy framework that allows us to deliver these services would be extremely unwise.
During this year I intend to set out very clearly why National has been able to achieve more in the 90s in terms of economic growth and job growth and stable prices than any government this century.
I also want to explain why that sets an excellent foundation as we enter the next millennium and what further work should be done by a National government to enhance the policy framework further.
Labour is very welcome to put its record when in Government against ours.
In fact Michael Cullen can put his record in Opposition on the line if he wants. This is the man who said in 1993 he would eat marzipan and marmite if the government achieved 3% growth. In the year to March 1994 growth was 6.2%, in 1995 5.4% and in 1996 3.6%. He didn't eat the marzipan and marmite and he didn't admit he was wrong.
In 1996 Dr Cullen was decrying the tax cuts that have left $98 a week, $5096 a year, more in the pay packet of a single income earner on the average wage, not just because Labour wants high taxes, but because they claimed it was going to drive interest rates up.
Tax cuts are there perennially, while interest rates fluctuate, but he may just have noted that they are presently at 30 year lows - and quite considerably lower than the 20% plus mortgage rates people had to pay under Labour.
Even more importantly though, Dr Cullen and the left wing were trying to say that the impact of last years' Asian Crisis meant all the reforms - even the useful ones Labour initiated - were worthless.
Well, it's quite clear he's wrong again.
The Labour Party and the Alliance are not the modern face to take New Zealand forward to 2000 and beyond. They still can't even agree on what our history was.
This year they will not be let off the hook. The public will want to know how higher taxes, more government spending and debt, more union power, and more inflation with higher interest rates help an economy deal with a shock - or prepare it for the future.
The left have had nine years in which to harp and be negative while National has worked to build the economy, living standards, social spending and opportunity. This year, the moaners have to put their plans on the table.
Meanwhile this Government, will continue to build on the framework which has worked so well for us through the 90's, and is confident we can provide higher growth, more jobs, and higher incomes for all New Zealanders who want a better future.