Cullen Address: Tokyo Business Breakfast Meeting
Michael Cullen Address to the Business Breakfast Meeting: Tokyo
Thank you for coming to breakfast this morning. It is important at times like this to remind ourselves how important the Japan – New Zealand relationship is to New Zealand.
Japan is our third most important export market, and our third most important source of imports. The Japanese market is particularly important for our dairy industry, for our forest products and for fish and shellfish. Japanese engagement in our fishing industry is assisting with technological, processing and market development.
I am not quite sure why, but investment flows have not been as strong as trade flows. Japanese investment in New Zealand tends to be more confined to timber processing and related to the supply of some products like fisheries, food and beverages and aluminium. There is scope for a much higher level of participation in areas of economic growth that are related to education, information technology, biotechnology and energy.
The people flows between our countries in both the economic and cultural areas are also particularly well developed. Not only are Japanese visitors to New Zealand high in absolute levels, but Japanese tourists tend to spend more than the average visitor when they do come. Japan is the second largest source of fee-paying students, largely based on the study of the English language. Forty-one cities and towns have active sister city relations with Japanese equivalents and there are a number of friendship societies and exchange programmes operating.
The picture is one of a close and deep bi-lateral relationship between our countries, not just our economies, but like any relationship, we should never take it for granted and we need to refresh it and strengthen it from time to time.
That is why two years ago our Prime Minister Helen Clark launched the new level of engagement initiative when she visited Japan. The overall goal of that initiative was to give impetus to the New Zealand/Japan relationship. The initiative was welcomed by then Prime Minister Mori, and was reaffirmed by Prime Minister Koizumi when he visited New Zealand last year.
The new level of engagement involved five areas in which the relationship was strengthened. In tourism, a coordinated and strategic approach combined the efforts of industry and government to rebuild tourist flows after the events of September 11.
Secondly, the initiative recognised the potential of the so-called ‘new economy” and a New Zealand/Japan Science and Technology Coordinator was appointed to help New Zealand universities and research institutes to work more closely with their Japanese counterparts.
Enhancing people-to-people exchanges through and expanded sister cities link-up was the third element of the initiative. The fourth was building educational links, and the Japan Exchange and Teaching scheme continues to be popular. The final part of the initiative was in the forestry sector, where the initiative was based on improving engagement between our countries, particularly in respect to environmentally sustainable forestry.
The initial phase of the new level of engagement has come to an end, and private sector interests continue to advance these activities where they see benefits in doing so. Government agencies are now using the process to sustain the achievements we have made to date, to progress other bilateral issues, and to seek new areas where the bilateral relationship can be enhanced.
I look forward to hearing of more progress in developing this close relationship between our countries, not just because it is in each of our interests, but because we can use the relationship as a force for stability and progress in our wider region.
I will now turn to a brief look at how the New Zealand economy is performing.
In historical terms, my message is unusual. Typically, our small, trade dependent economy followed the international business cycle. If the larger northern hemisphere economies were slowing, the New Zealand economy was depressed: if they were depressed, we were in serious trouble. The state of engine economies like the Japanese economy were critical to our short-term economic performance.
During the last three years, I have been relaxed as I have moved through the various international finance ministerial fora - IMF, World Bank, Commonwealth Finance Ministers, APEC Finance Ministers. The fact of the matter is that our economy has quite atypically not been impacted by international uncertainty and stagnation. Not only has performance been much more stable than that in most other countries, but it has been stable at the upper end of relative international economic performance.
The New Zealand economy is in good heart. It has been one of the best performing economies in the OECD in recent years. The headline numbers tell the story. The economy grew by 4.3 per cent in the year to March 2003. Employment has grown in each of the last twelve consecutive quarters, so we now have an unemployment rate of 4.7 per cent, which is the lowest since 1987 and is very low by OECD standards. To give you a benchmark, the unemployment rate was 6.3 per cent when this government took office at the end of 1999. Inflation is well under control. Consumer prices rose by a very modest 1.5 per cent in the year to June.
This strong performance has not be a result of any fiscal stimulus. We are running strong surpluses, and spending and debt are falling as a percentage of GDP. In the 1999 fiscal year, spending in the core Crown sector was 33.8 per cent of GDP. In the current financial year it is expected to be 31.1 per cent. Gross debt was 33.8 per cent of GDP. This year it is forecast to fall to 25.7 per cent.
These amounts do not take account of the financial assets that are accumulating in the New Zealand Superannuation Fund: a fund that has been set up to help cover part of the pension costs associated with a transition to an older population structure. Those assets are expected to be close to 3 per cent of GDP by the end of the current financial year.
Our economy – like any trading economy – has always been vulnerable to divergence: either the domestic economy moving ahead when the tradeables sectors are under pressure or vice versa. In the period between 1999 and last year, our export sectors experienced very strong income growth as a result of a coincidence of supporting influences: a depreciating exchange rate, strong commodity prices and good climatic conditions.
In 2002 the exchange rate started to appreciate quite strongly – and this has continued into 2003, although at a slightly slower rate. The effect on the export sector has been slow to emerge, partly because many export contracts were expressed in New Zealand dollars, partly because an appreciating currency lowered input costs, and partly because exporters held currency hedge contracts.
Those factors are now fading and export incomes have come off their peaks by about 5 per cent. I stress come off their peaks, because their growth in the three previous years was very strong and they are still high by historical standards.
While the export sector has shifted from an accelerant to economic activity to a brake on it, the domestic economy has picked up and remains bouyant. A large part of that is the strong turn around in net migration, driven by fewer New Zealanders leaving, more returning from abroad and more foreigners seeing New Zealand as an attractive destination for study, work and living.
We have a two-paced economy, but the net effect is that the economy overall is still showing satisfactory growth.
Looking forward, we do expect the economy to slow in the year to March 2004. It has hit a soft spot as a result of the combination of a number of temporary factors. These include the dry weather conditions that impacted on some parts of the agricultural sector and on electricity generation, the slowdown in tourism and export education that accompanied the SARS outbreak, weaker dairy product prices and of course continued uncertainty and sluggishness in the global economy.
Our best estimate is that these are in fact temporary, and current indicators are that they are abating. The net effect is that we expect growth to slow to between 2.25 and 2.5 per cent before picking up again in the 2005 financial year.
Indeed, every time a new forecast comes out the downside risks arising from these temporary factors recede and the estimate of their short-term impact is reduced. Even the world economy seems to be lifting, although results are patchy and it is dangerous to draw too many firm conclusions on its prospects just yet.
As I have said before, whenever I come to meetings like this, I comment on how relaxed I am about the performance and prospects of the New Zealand economy, compared with my more anxious counterparts in Finance Ministries in other countries.
But I am quick to add that while our performance is good, we can and must do better. New Zealand slipped behind developed world growth rates in the latter part of the last century, and if we do not regain some of that lost ground we will struggle to attract and retain skilled and productive workers who might otherwise prefer to take their chances in higher per capita income environments.
The government has therefore constructed a framework within which we can pursue higher sustainable growth through and emphasis on innovation.
This growth and innovation framework has three core elements.
Firstly, we want to strengthen the foundations that are the necessary conditions for successful economic performance in an uncertain and ever-changing world. This means we need sound government finances, a competitive economy, a cohesive society, a healthy and skilled population, sound environmental management, a strong research base and a globally connected economy.
I think that you will find that even on existing foundations, New Zealand is a very attractive inward investment destination. We have a very stable macroeconomic environment, clear and relatively light handed regulation, a foreign investment friendly inwards investment framework, a skilled, hard working and by international standards cost effective workforce and by no means least a safe domestic security climate.
We will build on that.
The second element of the framework is that we will build more effective innovation, through a mix of attracting and developing talent, creating new venture investment funds, making better linkages between tertiary institutions, industry and communities and by increasing global connectedness. Finally, we are developing areas where our natural advantages and aptitudes give us scope to boost growth and innovation. These are biotechnology, information and communications technology and the creative industries. These sector level competencies have applications across a range of industries.
There are clearly areas within this growth framework from which New Zealand and Japan can both benefit in terms of investment and trade. I invite you to think about the opportunities that are opening up in our growing and diversifying economy, and to ask me questions on any matter that I have not covered in this address.