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Cullen: Horticulture Export Sector Product Group

Hon Dr Michael Cullen
Deputy Prime Minister, Minister of Finance, Minister for Tertiary Education, Attorney General, Leader of the House

24 March 2006 Speech Notes

Address to the Horticulture Export Sector Product Group Strategy Meeting

War Memorial Conference Centre, Napier

A strategy meeting is an opportunity for you as participants to consider the major forces which will shape the environment for the horticulture export industry over the medium to long term. My contribution this afternoon will be focused on three areas:

- First, the economic outlook for New Zealand, and particularly for the export sector;

- Second, the government’s agenda for economic development this term; and

- Third, the objectives of our trade policy and what that means for horticulture exporters.

On the economy, I hope it is now clear that the current slowdown in our rate of economic growth is firmly in the soft landing category. The consensus of economic forecasts shows us heading towards a trough in the economic cycle which will bottom out at GDP growth of around 1.5 percent.

If that isn’t a soft landing, then I don’t know what is. In recent decades, economic downturns have seen growth rates dropping close to zero. I think we need to realise that an important indicator of underlying strength in an economy is not merely how fast it can grow at the peaks, but how resilient it is at the troughs. In that regard, we need to congratulate ourselves, albeit briefly, before we move on to the task of restoring and sustaining a higher growth rate.

What we are seeing is an economy which has achieved significant growth in the last six years, but in the process it has developed some serious imbalances. These are evidenced by our historically high current account deficits, an unhealthy concentration of wealth in residential property, and, until recent weeks, an overvalued exchange rate. Those factors need to be re-balanced, and that will not be without some measure of pain in terms of job losses and reduced profits.

So what the latest data shows is that the labour market is easing but that it still remains tight by historical standards and is contributing to strong wage growth. In spite of that wage growth, lower employment growth should mean lower growth in total labour income for the household sector. That in turn is likely to dampen growth in private consumption - and so GDP - over the coming year.

For some time confidence in the household sector has been high relative to the business sector; however, that has changed recently. That fall is being driven by high interest rates, rising petrol prices, the exchange rate, and now slowing employment growth. Lower consumer confidence and slower growth in labour income should flow on to a further easing of housing market activity.

Surveys are showing deterioration in business confidence, reflecting falling profit expectations. These stem from a combination of slowing economic activity and rising costs in the form of higher labour, raw materials and investment costs.

However, one needs to be careful about placing too much emphasis on business confidence measures. In particular, it is a mistake to use business confidence as an indicator of where the economy is heading over the longer term, when it is, at best, a confirmation of short term intentions.

As I have been at pains to point out recently, business and consumer confidence surveys have been a poor indicator of economic growth in the past. In the last five years, business confidence has averaged negative 16 percent, while GDP growth has been running ahead of trend at an average of 3.7 percent. And if we look at the five years prior to that, business confidence averaged a positive 12 percent while GDP growth averaged a decidedly below trend 2.8 percent.

We need to remain alert to the downside risks. By definition it is hard to predict exactly how imbalances in an economy will work themselves out.

That said, most forecasters are sticking to a medium term expectation that growth will pick up again in late 2007. That is beyond the timeframe of most business confidence surveys, and we have no reason to believe that those respondents who are expressing pessimism about the next 18 months do not recognise that conditions are likely to improve beyond that time horizon.

Turning to the latest export figures, these confirm an ongoing weakness in export performance which, in combination with another strong month for imports in January, has contributed to an annual trade deficit for the year to January of $7.1 billion, the highest as a percentage of exports since 1976.

This is clearly a matter of concern; however, there are good reasons to believe that the necessary rebalancing is starting to occur. Of most interest to the export sector is what is happening with the exchange rate, which seems at last to have come unstuck from the unrealistic heights it has sustained since late 2003.

Since peaking just over 74 US cents last year, and hovering around the 70 cent mark for several months, it now appears firmly headed below 64 cents.

There certainly appear to be sufficient downward pressures to maintain that trend. The Reserve Bank Governor has signalled clearly that we are at the peak of the interest rate tightening cycle. Meanwhile, overseas central banks are beginning to tighten monetary policy after a prolonged period of looser settings. In addition, it appears that global commodity prices, which have been sustained at very high levels, have now peaked.

Cumulatively, these factors indicate that the road ahead for the New Zealand dollar is pointed south. How far and how fast we travel is not something I care to speculate about, although it is important to remain cautious, especially after the false dawn we experienced in mid 2004.

Nevertheless, the signs are looking good for a significant boost to competitiveness across the export sector, particularly in manufacturing which has been hit fairly hard. That of course is counterbalanced by the impact of a falling exchange rate on the price of imports and hence on inflation and real household disposable incomes.

The falling dollar is only one of a number of reasons why we can look with some confidence beyond the short term pain to a more optimistic outlook. Very importantly, the growth outlook for our trading partners is good, with consensus forecasts expecting a return to growth of approximately 3.5 percent per annum, consistent with the medium term trend.

Buoyant global growth is likely to mean that while the prices received for a number of our exports (for example, meat and dairy) are likely to fall, they should remain relatively high by historical standards. Of course, markets for horticultural produce have their own set of drivers, and I will return to those later on.

On the domestic front, there are a number of factors that augur well for a speedy recovery. First, despite the recent trends we still have a very robust labour market, with unemployment at 3.6 percent, which is the lowest in the OECD (for countries with a comparable measure). While unemployment is expected to rise over the next few years, by historical standards it is expected to remain below 5 percent. That compares with Australia's current unemployment rate of 5.3 percent.

Second, the relatively tight labour market is expected to support wage growth, contributing to reasonable income growth for households. In addition the roll out of the Working for Families package will boost household incomes by providing targeted assistance to three hundred and fifty thousand families.

Third, New Zealand households have experienced considerable wealth gains over recent years with strong house price growth a significant factor. While house price growth is expected to ease significantly, and house prices may experience some nominal price declines, this is not expected to be significant.

For these reasons, the smart money is on a return to strong growth over the medium term in line with our strong fundamentals.

Turning to the government’s economic development agenda, my focus, and that of my colleagues, is on investing in a range of measures that will improve our overall productivity and enable New Zealand to sustain a positive growth cycle at least as prolonged and stable as the one we have just left behind.

For a start, that means investment in things like infrastructure, skills and new technologies. To focus on the skills issue for a moment, the government has progressively increased funding for industry training and for modern apprenticeships.

We have also sought to engage particular sectors on how best to create the future workforce that is needed. In our work with the Food & Beverage Labour and Skills Working Group (which has representation from Horticulture NZ) a number of key priorities have emerged. These are:

- Improving labour market information about the sector;

- Fostering a more strategic approach to investments in training; and

- Making the food and beverage sector an attractive career destination.

It is fair to say that we are still in the early phases of responding to these priorities; but we are getting some runs on the board. For example, late last year Cabinet increased agriculture degree and non-degree student component funding by $5.8 million and natural and physical sciences by $22.4 million from 2006. Massey and Lincoln Universities have also been funded to establish an Elite Performance Academy for Agriculture and Life Sciences.

On the question of short-term skill shortages in the horticulture and viticulture industries, we agreed to pilot a new seasonal work permit for overseas workers in regions identified as experiencing labour shortages during peak season. Around 1,000 permits have been granted this year, and in response to feedback from growers we have agreed to extend the scheme from its current end date of 1 July 2006 to 30 September 2006.

In addition to focusing on skills, the government is addressing the need to boost productivity by improving our taxation and regulatory regimes, especially as they apply to small to medium enterprises, which I believe encompasses a good portion of the horticulture export sector.

Despite the fact that New Zealand is rated by the World Bank as the easiest of 145 nations for doing business in, my government is committed to an ongoing active process of examining compliance costs and taxation issues.

For example, we recently received the second set of recommendations from the Small Business Advisory Group suggesting changes in regulations which they believe will assist small businesses. This group does not pull its punches, and we have never asked it to.

A number of measures in Budget 2005 were made in response to their first set of recommendations, including:

- Making $6.5 million available for additional mentoring and for advisory boards;

- Spending close to $10 million on improvement of the biz.org.nz portal;

- Introducing double declining balance depreciation that will more closely match the economic life of capital items;

- Changing the FBT regime to allow business owners to calculate FBT on the depreciated value of a vehicle. The depreciation rate has also been lowered from 24% to 20%.

Last year’s Budget also announced a range of measures affecting equity investments, payroll agents, and provisional tax which will benefit small to medium sized enterprises to varying degrees.

A particular focus is assisting SMEs to strengthen their export performance. What our recent economic history shows is that our economy grows to a large degree by growth in small to medium sized companies, and establishing and expanding export markets is key to that kind of growth.

While governments cannot drive that growth, they can facilitate it. Last year we launched the new Enterprise Development Grant Market Development Assistance Scheme (MDAS) which is targeted at providing assistance to SMEs in implementing international sales and marketing plans.

NZTE has in the 2005-06 year to March spent over $48 million on business development and growth programmes, most of which goes to assist SMEs, with export strategies an important focus.

More broadly our moves to create a Single Economic Market with Australia should assist in effectively expanding our economic base.

The issues go beyond the traditional areas of access, and the Single Economic Market provides an opportunity for freer investment flows and for creating more trans-Tasman businesses which use a domestic market of 25 million people as a base for export.

This brings my to the question of trade access more generally. You do not need me to tell you that global trade in horticulture bears strong resemblances to a low level guerrilla war. Trends in consumer choice are fickle; this year’s niche product can become next year’s commodity. New players are constantly entering the market, and offering high quality product. New technologies such as SmartFresh are re-orienting long-established patterns of seasonal supply. And governments the world over have difficulty resisting the urge to provide levels of protection to farming communities that defy logic.

You have estimated that tariffs cost the New Zealand horticulture industry between $160 million and $200 million per year, and constitute a significant barrier to New Zealand's trade in a number of important high-value markets, including the European Union and a number of Asian markets.

Clearly, horticulture exporting is not for the faint hearted. Nor does the government have any easy fixes.

Our strategy as a small trading nation has to be to pursue liberalisation of markets wherever and whenever we can. We are strong supporters of the multilateral processes. Having seen the benefits of the Uruguay round of the WTO start to flow, we are active proponents of the Doha round, which in its current scope has even more to offer New Zealand’s primary industries.

That said, the multilateral process moves at a slow and uncertain pace, and we would be foolish to give away prospects for the more limited but speedier benefits of bilateral and regional agreements. Over the past twelve months there has been considerable movement on this front. Agreement was reached with Thailand and in the ‘Trans-Pacific Strategic Economic Partnership’ (P4) with Chile, Singapore, and Brunei. Negotiations are also underway with Malaysia, the ASEAN countries (in conjunction with Australia), and China.

These negotiations have the capacity to deliver significant benefits to the New Zealand economy. The duty paid on New Zealand exports to Chile last year was $2.9 million and for Thailand in 2003 an estimated NZ$33 million in duty payments was levied on New Zealand exports, at an average rate of 9 percent.

I am aware that horticulture exporters have a number of concerns about how their interests will fare in these bilateral negotiations. I cannot give specific assurances, except to say that agriculture in all its forms is very high on our agenda. The whole point of the negotiations from our perspective is to find solutions that reduce tariff and non-tariff barriers, boost trade and investment, and create a broader constituency at the multilateral forums for the successful completion of the Doha Round.

In summary, the strategy you formulate during this meeting needs to address an uncertain environment. In terms of the global trading environment, one can only say that there are both risks and opportunities aplenty. In terms of the general economic outlook, you need to factor in a year to 18 months of slower growth, but with much of the momentum of recent years carrying us forward.

And in terms of government support, I believe we have been active in our support of the sector, and of exporters and small businesses generally, as always within the limits of what can be done. 2007 has been designated as the Year of Exports and we look forward to working with yourselves and other key export stakeholders to make that a success. Thank you.


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