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NZ’s Economy Needs To Change Gear

The New Zealand economy must change gear, from being export-driven, to consumer and investment-led over the remainder of 2001 and beyond, say WestpacTrust economists in their June 2001 Quarterly Economic Overview.

“The outlook for the global economy remains dour, highlighting risks to the recent growth in New Zealand’s export sector,” said WestpacTrust Chief Economist Adrian Orr.

“At home, export revenues have struggled to grow beyond the impact of the low exchange rate, good growing conditions and cyclically high commodity prices. This is a disturbing trend, given that these factors cannot be relied on going ahead.

“The United States manufacturing industry is in recession while the overhang from past exuberant consumer and business spending continues to act as a drag on growth. Meanwhile, Japan has given up its gains of 2000, with little scope remaining for policy stimulus beyond difficult structural reform.

“The remaining Asian economies are also being hit hard by the US slowdown, with their GDP growth falling off substantially. Now, even European economic growth is showing signs of slowing, but there is also a reluctance to cut interest rates given the low euro and near-term inflation pressures,” said Mr Orr. “It is only the recently improved vital signs in the Australian economy that has brightened the trade horizon.

“Meanwhile, New Zealand’s export volume growth is less than in previous economic upturns and losing market share. Investment levels outside of the food processing industries are also historically weak. It thus appears that the cost of capital imports and global uncertainty are deterring manufacturing investment,” said Mr Orr.

“Given the tougher export environment brewing, more domestic spending growth will be needed. Consumer spending and housing investment are expected to continue to pick up over 2001, supported by past export revenue growth, ongoing employment and wage growth, and the recent interest rate reductions. These trends are consistent with about 3% annual growth for the 2001 year, down slightly on previous predictions.”

“But, although consumer spending and residential investment looks to be picking up, it remains constrained by debt. Domestic spending has been slow off the mark this year, and unlikely to prove inflationary.

“In such an uncertain environment, a further interest rate cut from the Reserve Bank appears sensible. However, this cut is not guaranteed and unlikely before the Reserve Bank’s August statement. Meanwhile, longer-term interest rates are on the rise, suggesting it is a reasonable time to consider fixing mortgage interest rates,” said Mr Orr.


For further information, please contact: Adrian Orr WestpacTrust Chief Economist 04 470 8250 025 914 935 Email:


The design of New Zealand Superannuation is the most crucial element determining its future, not its funding, according to WestpacTrust’s economics team

WestpacTrust economics has reviewed the Government’s proposed super fund in its feature article in the June quarterly Economic Overview. A more detailed discussion also comes in Westpac Institutional Bank’s latest Occasional Paper.

“While the proposed super fund is one means by which to partly pre-fund the growing burden of New Zealand Superannuation (NZS), it brings with it considerable risk and opportunity cost,” said WestpacTrust Chief Economist Adrian Orr.

“At its peak, the super fund will only cover 14% of the total NZS commitment. Meanwhile, the total burden of NZS will grow from 4% of GDP now to around 9% in coming decades. This means improved economic growth remains the key means by which NZS will be affordable in decades to come, which in turn depends on people’s incentives to invest and work smart. It is thus the design of NZS that is most crucial to its future, rather than its funding,” said Mr Orr.

“The challenge for government is to provide a retirement income that the genuinely needy can live on, while ensuring private saving and investment incentives remain strong. Policy alternatives to the super fund that better boost economic growth and thus secure future retirement income, include reducing tax rates or government debt, or increasing spending on education. These policies can be pursued while still providing an adequate level of NZS to those in need,” said Mr Orr.

“In order to secure the retirement income for the future, public discussion is necessary on NZS delivery, qualification and generosity. In addition, more efficient and possibly equitable means of providing a public retirement income exist. For example, the Government could mimic employer-based retirement schemes, matching an individual’s saving dollar-for-dollar until a savings target is reached. NZS could then be left for those who have no or little income, ensuring no one misses out,” argue WestpacTrust’s economists.

Several concerns about the super fund are also discussed in the Overview.

“With the super fund, the Government is taking financial risk onto its balance sheet for no obvious risk-adjusted gain, while incurring costs such as parliamentary time and focus, management and salary costs, and other compliance issues. Moreover, it is difficult to see why the fund would be modified in the future to include individual accounts, since the incentives for individuals to invest will remain the same in the absence of changes to the design of NZS,” said Mr Orr.

“Since it is future taxpayers that will bear the brunt of NZS decisions today, a bipartisan political approach to NZS change appears necessary. The Retirement Commissioner is capable of leading the NZS debate going forward. Meanwhile, the super fund is neither the make nor break of NZS provision in the future,” concluded Mr Orr.

ENDS For a more detailed analysis, see for both the Economic Overview and Occasional Paper “Saving and Investment in New Zealand, and the Super Fund”.

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