Testing TimesPrime Minister
Wellington North Rotary
New Zealand is a small, smart, outward looking nation sitting on the edge of the Pacific rim. We have had to look to the world to make our way but we are realistic that no one owes us a living.
Recent events in Asia have been a wake up call for many which we can ?t ignore. All New Zealanders, Government and the private sector need to be well prepared and fleet footed, ready to respond quickly to changing conditions. In 1998 we are well positioned to do that.
New Zealanders have done nothing wrong. In almost every respect over the last ten years we have all contributed to building the strong economy that will enable us to weather the storm.
The financial turbulence we are facing is being driven largely by external and regional factors and NZ is not alone in having to face up to this, nor are we being singled out.
The Government's fiscal and economic strategy has put NZ in a good position to face the future. We are also well positioned to take advantage of opportunities that will, in time, arise.
The Asian Challenge
As the picture in Asia becomes clearer we can see the extent of the problem.
To quote Asia 2000's summary of a recent high level conference held in Hong Kong:
Worse may yet lie ahead.
The time frame for recovery from the economic crisis is being pushed out further.
The economics are clear, but the politics difficult.
The immediately affected economies - Indonesia, Thailand, Korea - remain in decline, with continuing uncertainty about the outcome of their recovery efforts.
There is deep concern about the future of Japan's economy and its inability to contribute to regional recovery.
Responsibility for recovery needs to be widely shared, including among the United States, Japan and the European Union, as well as Asia.
It is not surprising that the world financial markets see us as vulnerable to the problems in Asia. We are very dependent on trade to maintain our standard of living.
35.6% of our trade is with Asia.
20.3% is with Australia, which is itself highly exposed.
However there are some positive aspects:
Asian economies will recover and because of their large populations they will be important ongoing markets.
Major international events in Australasia such as the Olympics and the America?s Cup
Trade with the US is strong and growing
New Zealand?s Challenges
NZ faces many challenges. While many commentators have focussed on our domestic problems such as the current account deficit, the evidence is clear that the major influence on our economy overall has been the decline in the Yen.
There is an understandable focus on the fall of the NZ dollar against the US dollar - but what is happening to our currency is a reflection of what is happening to the Australian dollar and Japanese yen. In recent years, the NZ dollar has closely tracked the Australian. NZ is not being singled out in particular - rather it is being seen as a part of the region.
NZ must allow its dollar to find its own value, rather than attempt to artificially bolster it - as other countries are finding to their cost, attempts to artificially protect the currency are unlikely to succeed.
Further, domestic commentators often ignore the orderly way in which the NZ economy has responded to this adverse external shock. The impact of this kind of currency depreciation on the economy had it occurred in the early '80s would have had a devastating effect on our country. Today our economy is in a much stronger position to cope.
Over the last 15 years NZ has bitten the bullet and reformed our economy so the fundamentals are sound.
The Government has eliminated its net foreign currency debt. Inflation is well under control. We have fiscal surpluses.
We have a flexible labour market and open economy that is able to adapt to the shocks a small trading nation like NZ will inevitably face.
We are able to respond quickly. Many of our exporters are demonstrating that on a daily basis. We can see that adaptation occurring right now.
Exporters are moving quickly to exploit new opportunities in the US.
Most New Zealanders are being realistic about wage increases and we must be careful that we don?t put undue pressure on the economy at this time.
Domestic house inflation is declining, encouraging investment elsewhere in the economy.
The private and business sectors are responding as conditions change and opportunities or necessities emerge. The Government is and will continue to provide leadership and do its share.
The Government?s strategic leadership in the Budget
Responsible economic and fiscal management were features of this year?s Budget.
The Government is determined to see NZ continue to trade and do well. We need to keep focussing on efficient, effective use of public resources and on productivity. We are continuing to work in a number of areas to reduce the cost to businesses of doing business.
Some of these are complex changes but they are also essential as they will allow NZ exporters to retain or improve their competitiveness which leads to profits and New Zealanders retaining their jobs or finding new areas of opportunity.
Economic efficiencies and competition policies being pursued by the Government will further assist business and our standard of living as a whole.
Further action Government will be taking to manage emerging risks
On a number of occasions I have made clear if circumstances require it, Government will review our spending commitments. The Treasurer and the Minister of Finance have also made this point.
If external pressures mean the economy turns out to be in a more serious state than we perceive currently, we will revisit some of the commitments that are part of the Coalition Agreement $5 billion.
While this will be difficult, particularly for those expecting spending to flow through to their areas it will be more difficult for all New Zealanders if we allow our country to slip back.
Government intends to reserve its position until we have received a number of economic indicators which will make the picture clearer. In the meantime, as a matter of contingency, the Treasurer, the Minister of Finance and myself have already begun work on identifying policy options the Government could pursue. This is consistent with the Coalition Agreement which clearly undertakes to vary our fiscal and economic policies if economic circumstances warrant or require it.
The sorts of things we would look at are areas where we have announced plans but not yet actually begun spending the dollars. We will consider all options if necessary.
Beyond that, we have asked government officials to start looking for other areas of government spending where savings can be made. This work is in the early stages and will provide us with a range of options which will be considered.
Government is determined to continue to deliver surpluses which are really the collective savings of the New Zealand community. But the other part of the equation is individual personal savings. While much has been said about this already, it is true that progress must be made at a personal and at a political level.
The Government and New Zealanders must form a consensus on how we will encourage savings on the part of the baby-boomers who will start to retire beyond 2010. That is the challenge for the Accord parties. In addition we have asked officials to come back to us with information and options.
NZer?s, The Government, and the private sector will need to work together
In economic management terms business has a part to play in partnership with Government in keeping our economy strong. The reality of a lower dollar and higher interest rates is a mixed blessing. The falling dollar has seen significant increases in wool and beef prices and our manufacturers are seeing increasing returns for their exports. This is a positive thing.
The fall in our dollar is making our exports more attractive and helping our international competitiveness. When things do pick up internationally NZ will be well placed to take advantage of that and seize new opportunities.
On the other hand there is pressure on import prices. Rapid change always places pressure on those trading internationally. Part of being successful in business is managing the risks.
Perhaps one of the hardest things to accept is that there are no quick fixes for the Asian situation. There are no foolproof ways of protecting ourselves from external economic influences.
In Social policy terms spending priorities are a matter for Government and community alike.
Short term policy responses are limited, other than looking again at our spending. Many of the options we may consider have medium term benefits and therefore we should take the time to plan carefully.
We will need all New Zealanders to help contribute to riding this difficult period out.
Further action has been required
At my next regular meeting of the Enterprise Council I will be discussing the implications of the current situation with key industry leaders.
While Cabinet has received regular briefings from the Finance Minister and the Treasurer I?ve also scheduled a briefing for the full Cabinet on Monday 29 June. At that time all the economic information will be made available by Treasury and DPMC so Ministers can be given a full analysis and we can assess the state of our economy and the impact the Asian economic downturn is having and will continue to have.
At that stage the Ministers will be able to decide the extent to which a short and medium term response is required.
The Treasurer and I have also established a cross coalition group of Ministers to support the portfolio Ministers to see that the programme that we have already announced is being delivered, in a timely fashion.
New Zealanders have a formidable reputation and in the past we have rightly prided ourselves on our ability to adapt and be innovative. 1998 will require our best efforts. Each New Zealander will be involved.
We have a long tradition of turning events to our advantage and making the most of the circumstances we find ourselves in.
These are demanding times. With a strong response we can ride this out.