"A steering wheel would help", say BERL economists
Business and Economic Research Limited
MEDIA RELEASE
"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 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.
March
2000