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Cullen Address: Wellington Chamber of Commerce

Michael Cullen Address to the Wellington Chamber of Commerce: Economic Outlook and what it means for Wellington.

Thank you for the invitation to speak to you this morning. I have been asked to give an economic update and outlook. “Update and outlook” are typically seen as related. The outlook is very much conditioned by where we have come from and where we stand at the present. Unfortunately, at this stage they appear to have been decoupled. Trends and uncertainties mean that we could well be seeing the maturing of a particular phase in our economic development, so that the recent past is not a good guide to our near future.

I don’t want to make too much of this. One thing I have learned during my years in the finance portfolio – in opposition as well as in government – is that the mainstay of the economy chugs on largely unaffected by the changes taking place at the margin with interest rates, the exchange rate, overseas prices, wars, droughts and all of those things. When we look at the outlook for the economy, we can safely say that well over 90 per cent of what happens next year will be the same as what happened this year.

The important thing about change is that it compounds: it is the difference that 3 or 4 per cent a year makes over ten or fifteen years that really makes a difference to our condition of living, and in particular to how that compares with other countries. The second important thing about change is that it matters greatly what the starting position is.

In this regard, our strong performance over the last three and a half years has left us in a strong position going into a period of uncertainty and even turbulence. In addition, by focussing on those factors that make a small annual difference to performance, but sustain it over a long period of time, the government’s growth framework seeks to make the material difference.

As for the national economy, so for the Wellington region.

Let me start with a summary of the factual position and our best estimate of what is likely to happen going forward.

The economy has grown at 4.4 per cent, unemployment is hovering around 5 per cent, inflation is running at 2.5 per cent and we have a current account deficit of 4 per cent of GDP. The government’s accounts are strong, reflected in a solid operating surplus and falling government debt. That is all very solid.

What, then, can we say about how the Wellington region fits into all of this? The economic expansion that most commentators pick to have peaked around March this year was driven by two factors in two stages. The first was the so-called rural recovery, stimulated by good weather and strong commodity prices and a lower exchange rate. That later morphed into a house construction, immigration, export education and consumer led recovery in the cities, particularly Auckland.

Wellington’s regional economy is roughly one-eighth of the national economy, so it is unlikely to exhibit marked differences in performance compared with the overall average.

The expansion didn’t exactly pass Wellington by, but it was not grounded in the core sectors that sustain economic activity in the region. The result was that in relative growth rates, Wellington lagged behind the national average. The latest National Bank regional economic activity survey suggests that the region was the slowest growing of all regions in the year to March 2003, with growth of 2.5 per cent.

One of the good things is that if you are not dependent on the current drivers of growth you are less likely to suffer when those drivers lose momentum. I would also repeat my observation that a lot depends on where you are starting from. 2.5 per cent growth is not all that bad if the starting position was a modestly sound economy. Wellington seems to have escaped the volatility that a number of other regions have experienced. Despite what may appear to be a soft economic performance, unemployment rates in the region remain low. In 2001, unemployment rates in the region were a half to one percentage point below the national average. A relatively soft 2002 saw Wellington’s unemployment rate move back to around the national average. But Wellington remains well above the average for per capita incomes. The Wellington economy is also showing some short-term resilience. The National Bank survey indicates that economic activity in the region rose for six consecutive quarters: slow and steady as the saying goes. In the March quarter, Wellington had the second highest regional employment growth, the third largest rise in retail sales and the third highest level of consumer confidence. It also had the largest fall in new dwelling approvals and in the number of job advertisements, so work that out! (It’s a mixed bag).

It isn’t possible to spend large amounts of time in Wellington and not be aware of the concerns about the hollowing out of its non-governmental corporate core. Tranz Rail has shifted its head office to Auckland, as has Westpac. Wellington has lost ENZA, and with the creation of Fonterra the Dairy Board is no more. CS First Boston quit New Zealand, and therefore Wellington. An oblique reference to this exodus by Mark Weldon had the Wellington media in a funk that he was contemplating shifting the stock exchange north as well. Media speculation that the National Bank was for sale had the new - actually “a” new owner – even speculatively – doing the real estate rounds in Queen Street. Looking at the economic outlook means that we need to distil out short-term risk and volatility from the underlying trends. As for the national economy, so for Wellington.

The economic outlook is dominated by the longest global bear market in fifty years, weak investor confidence, uncertainty about the post-Iraq war reconstruction, pessimistic forecasts about returns to dairying, SARS, questions about the cost and supply of electricity, worries about the exchange rate, the effects of dry conditions in parts of the country and frosts in other parts, and I suppose everyone in the audience could add two or three items to that list.

This is certainly one of the most unpredictable environments that we have encountered since the stagflation and Third World debt crises of nearly twenty five years ago.

If you look at that list, it is possible to split it into two: those items that, on best estimate, are temporary, and those that are more fundamental.

Wellington will probably escape the worst impacts of a short-term, soft-spot slow down. It is not as dependent on either the generation or use of electricity, or on agriculture. SARS and global uncertainty may impact on tourism and export education, which will touch the regional economy. Uncertainty may affect finance market activity, and soft dairy prices will limit corporate activity in those areas, but then haven’t we just established that those are the sectors that have exited Wellington?

The key question is what is the longer-term, underlying strength of the economy and Wellington’s place in it.

The Wellington Regional Council produces an excellent publication called Regional Oulook. If you haven’t read it, take time out to do so. I am not going to read it aloud. I will lift one quote. The February edition starts with as bold a statement of Wellington’s risks, opportunties and challenges as I have seen in recent times.

Let me quote.

“Wellington is struggling to transform itself from a centre for large corporations into a hub for education, the arts, tourism and innovative small to medium-sized enterprises. Growth in these new sectors has been encouraging. But there have been many departures of the region’s head office businesses over recent years, and employment growth has slowed almost to a standstill over 2002. However, it is important not to overreact to these structural changes.”

Exactly.

Economic change is a process of creative destruction. Like the shark, if economies stop moving they die. The fact of economic life is that typically resources flee dying industries and creep into growing ones. The real challenge for economic policy is to nurture the growing industries, not simply accelerate the withdrawal of resources from stagnant ones. That, if anything, was the overwhelming lesson of the restructuring of the eighties and nineties.

In order to nurture the industries that will replace those that shrink during the process of change, the government has adopted a growth framework. It has three core elements.

Where does Wellington fit into this? The regional economic strategy as outlined in the Regional Council document identifies six main development engines that will replace the corporate head-office functions that are being lost. They are business services, including information technology consultancies; film; tourism; science; education; and new cluster development in specialist areas like optics.

That regional assessment of its potential aligns very closely with the government’s assessment of where the long-term growth engines are located.

The only word of caution I would add is to be patient. In the past, too many good opportunites have been lost through herding: an overexpansion of activity in areas where short-term profit opportunities are seen to exist. Examples in the agriculture sector were kiwifruit, deer, ostriches and the like. In urban economies the stock market and commercial property boom and bust of the late 1980s are a case in point. A viable economic transformation of the regional economy has to be measured and balanced. It is important to avoid overconcentration on a single product in a single market. By way of example, a solid, sustainable and expanding education sector is more than three month English language courses for Chinese students.

The second thing I would say based on my own past experience as a resident in and MP from Dunedin is beware of talking yourself down. The more local leaders say Wellington is declining [untrue though that is] the more likely it is to become true.

People are not going to be attracted by a locally painted picture of gloom and doom. In Dunedin, it was when we finally stopped talking ourselves down and began to explore and utilise our real strengths and comparative advantages that the turning point came in lifting morale and performance.

And Wellington has plenty of those – not least the solid core of high value employment provided by central government, its educational facilities, its potential for further film production, its cultural life and so on.

Nor should you be looking for some cavalry to come riding over the horizon. That sort of economic cavalry is now part of our history, not our future.

So the only thing that remains to be said is how do we get from now to then? The answer is in steady order and good condition.

It is hard to predict what sort of effect the more fundamental factors that are driving the global economy will have on ours, and how long they will last. The timing and strength of any global recovery, what it will do to commodity prices and our terms of trade, and how it will impact on the exchange rate are all factors that are largely beyond our control.

We can take comfort in the fact that we approach an uncertain future with significant policy headroom and a range of policy options. Corporate, farm and household balance sheets are in a reasonably healthy state. We did not have the tech stock or even stock market asset bubbles that other countries did in the 1990s, so there has not been quite the same degree of wealth loss to shake consumer sentiment.

We have taken steps to expand trade opportunities, to plug some of the gaps in the venture capital market, to upgrade our training programmes, to align immigration policy more closely with skill needs and to rebuild the infrastructure: all factors that will make it easier for New Zealand firms to find their way in troubled times.

I am relaxed about the short-term pressures that the economy faces. I think we are well placed to work through them. I am confident about our longer-term prospects. We have the building blocks in place to construct an exciting future. I think Wellington has a lead role to play in that future, and it will adapt and change and prosper and thrive and be the vibrant and exciting community it has been ever since humans inhabited these challenging coastlines.

Thank you.

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