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"A steering wheel would help", say BERL economists

Business and Economic Research Limited
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"A steering wheel would help", say BERL economists

In releasing its latest assessment of NZ's economic performance and potential, independent researchers BERL have criticised the sole use of a 'stop-go' mechanism (ie interest rates) with which to drive the economy.

"Our current policy framework does not provide a 'steering mechanism'. We know who is in charge of the accelerator and the brakes - but who is holding the steering wheel ? Or, indeed, is there a steering wheel ?" asks BERL Forecasts Editor Dr Ganesh Nana.

New Zealand has been through a period with a number of phases when business was 'restructured' or squeezed out by exchange rate fluctuations. This reliance on a 'stop-go' policy has resulted in a mindset of contraction in infrastructure and related services.

"A significant shift has recently occurred, however", explained Dr Nana. "We appear to be engineering - by accident, if not design - a high interest rate and low exchange rate environment. In contrast to many other forecasters, we clearly reiterate our previous forecast of the Kiwi remaining near 49 US cents for the rest of the year, if not longer. Indeed, the exchange rate needs to stay where it is if the NZ economic recovery is to deliver more than an illusory transitory upswing."

During work for several regional assessments over the past twelve months, BERL has met almost universal awareness by regional bodies, that economic and employment growth was unlikely to occur 'by chance'. Consequently, several Economic Development Agencies (EDAs), local bodies and some of the progressive WINZ regional commissioners have been developing and implementing programmes to support businesses and business growth.

"Future economic and employment growth in the regions will doubtless depend on these local initiatives being supported by central government bureaucrats and politicians," noted Dr Nana.

Successful approaches overseas include strong business incubator programmes in that 'bastion of the market-mechanism' the United States - as well as those in the oft-quoted Irish 'miracle' - and others. These programmes involve wide-ranging management, administration and financial support for new and growing businesses. Similarly, there are industry supply-chain management approaches in the Netherlands and Australia. Furthermore, there is the apparent Australian success of providing infrastructure and facilities, thereby attracting population and, in turn, creating further jobs. This contrasts with NZ's approach, which could best be described as one of infrastructure attrition.

As a way forward, the BERL researchers point to the example of the Auckland Regional Council and its Regional Growth Strategy. If government were to follow this example and set policies and projections for population growth, the consequent change in mindset could well result in the very infrastructure and facilities which would encourage and generate growth. The shape of an economy and society generated by a population of 7.5 million by 2040, may provide an attractive proposition for many investors - like, for example, the recent commitments announced by Saturn/Telstra.

Short-term prospects for the NZ economy are encouraging, with merchandise exports showing industry finally reaping rewards from a competitive exchange rate. However, the stalling in non-housing investment at a particularly early stage in the economic cycle is worrying.

"We retain concerns as to the impact of higher interest rates on business investment and profitability, and caution the authorities to temper their tightening bias given the absence of significant inflationary pressures," warn the BERL forecasters.

Steady job growth of 35,000 to 40,000 jobs pa would result in unemployment falling below 100,000 by June 2003. Alleviating the higher incidences of unemployment amongst Maori and in the regions however, will take some years for real development to take root and grow.

"It is evident monetary policy should no longer be alone as our sole mechanism to drive with. Fiscal policy, regional policy, industry policy and population policy need now to re-enter our vocabulary. Together with a more steady balance on the monetary tiller, NZ could well be poised to see several years of moderate economic and employment growth. Our projections reflect such a scenario," concluded Dr Nana.

PAINTING THE PICTURE
March 2000

Our forecasting Panel toyed with the headline "the recovery is here", to describe this forecast. But our assessment of the downside risks associated with the external trade imbalance underpin our reluctance to adopt the phrase.

A significant shift has occurred over the past three months. We now appear to be engineering - by accident, if not design - a high interest/low exchange rate environment. Despite other forecasters predicting an appreciating Kiwi, the Panel clearly reiterates its previous forecast of the NZ$ remaining near 49 US cents over the forecast horizon.

Indeed, the exchange rate needs to stay where it is if the NZ economic recovery is to deliver more than an illusory transitory upswing. Although we retain concerns as to the impact of higher interest rates on business investment and profitability (including farming), this 'high interest/low exchange rate' environment provides the framework for the relatively favourable medium-term picture presented here. The current account deficit remains over 6% of GDP - a legacy of accumulated debts and the subsequent financing and profit flows abroad. As a consequence, the risk for the currency remains on the down-side and we note the possibility that the Kiwi could drift lower during the course of the year.

Recent merchandise export trade data, show industry finally reaping the rewards from a competitive exchange rate. Total goods export revenue in the December quarter was 8.4% up on the same quarter a year ago, with annual earnings in 1999 3.7% higher than in 1998. This provides encouraging evidence that the export-led recovery is beginning to take root and may translate into a longer-term upswing. On this basis, GDP is set to grow over the forecast horizon in the 2.5% pa to 3.5% pa range.

One concern from recent data is the stalling in non-housing investment expenditures at a particularly early stage in the economic cycle. This component of expenditure GDP has declined for two consecutive quarters.

This is not a good sign, remembering that investment in new capital is the principal means to expand capacity and thus alleviate inflationary pressures in the long term. In such a context, an overly aggressive interest rate tightening does not bode well for our ability to expand capacity and improve productivity. As before, we caution the authorities to temper their tightening bias given the absence of significant inflationary pressures.

Steady job growth of 35,000 to 40,000 jobs pa would result in unemployment falling below 100,000 by June 2003. Alleviating the higher incidences of unemployment amongst Maori and in the regions however, will take some years for real development to take root and grow. And this will require positive, co-ordinated regional initiatives - many of which BERL has already identified during regionally-based research undertaken over the past year.

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