Cullen: Address to Nelson Chamber of Commerce
Wednesday 12 July 2006 at 12.15pm
Hon Michael Cullen: Address to Nelson Chamber of Commerce Business Luncheon: A Hard or a Soft Landing?
Trailways Motor Inn, Trafalgar St, Nelson
One of the very few downsides of an extended period of strong economic growth, such as we have just enjoyed, is that, by the time it comes to an end, our memory of past cyclical downturns had faded considerably.
Those of us who fly within New Zealand are very familiar with literal hard and soft landings, because we experience both on a regular basis. But, in economic terms, we have not had a landing of any sort since the late 1990s, and indeed most of us get to experience only a relatively few economic landings during our adult lives.
It is in that context that media commentators and politicians who should know better start talking about hard landings and recessions without much of a sense of economic history. It is my intention to answer those assertions with some facts.
First of all, the GDP figures for the March quarter released last month give the lie to any talk of a recession. Technically, a recession occurs when an economy shrinks in two successive quarters.
Over the March quarter the New Zealand economy expanded by 0.7 per cent, which is at the high end of market expectations. That means that in the year to the end of March, GDP grew 2.2 per cent.
The economy is slowing after the most sustained period of economic growth in 30 years. The slowdown is due to declining terms of trade (especially from the rising oil price), lower net migration, and a dampening of demand in the latter half of 2005. Budget night forecasts were for GDP growth to fall from 3.7 percent in the year to March 2005 to 2.1 per cent in the year to March 2006, and bottom out at 1.0 per cent in the year to March 2007.
The fact that the March 2006 result has come in slightly above that forecast is encouraging, but we should not make too much of it. GDP quarterly numbers do tend to bounce around and I would expect continued slower growth over the remainder of the year until the lower exchange rate flows through to export growth.
Unfortunately, the Nelson-Marlborough region has not managed to buck the general trend. The region posted a 0.6 percent rise in activity in the March quarter, which is towards the bottom of the regional economic growth league-table. However, that needs to be seen in the context of very strong regional growth over the past six years, with a strong labour market, a growing regional population, rising household incomes and a surge in property values.
What we are witnessing is a New Zealand economy that has over-reached itself and needs to rebalance, a process that is undoubtedly painful for some. We need to weather a few more storms in the 18 months ahead. For example, the March year current account deficit widened to $14.5 billion or 9.3 per cent of GDP, slightly worse than market expectations. That will keep upward pressure on interest rates.
As such it demonstrates the folly of floating the idea of substantial tax cuts and increased public debt as an answer to our difficulties. In the current conditions, any further large scale fiscal stimulus would simply worsen our current account position, and create additional inflationary pressure. Our recent history with tax cuts reinforces this. Whatever else they might have achieved, the tax cuts of the 1990s did not stimulate economic growth, and they did not stop the flow of New Zealanders across the Tasman. I will return to this latter point later on.
It is crucially important that we resist the calls to make radical change for its own sake. What the past six years have demonstrated is that our economy is fundamentally sound and becoming stronger as we diversify our export markets, invest in skills and infrastructure and shift the balance towards high value-added goods and services.
If we look more closely at the current situation, we see that there are a number of features to the slowdown that distinguish it from similar periods in the past. For a start, in the early and mid-1990s the downturns we experienced were genuine recessions, in which GDP fell over successive quarters.
A slowdown to growth of 1 percent is not a hard landing compared with the 1990s.
Secondly, the labour market forecasts do not see the unemployment rate getting much higher than 4.8 percent. Again, this is not a hard landing compared with previous experience. And importantly, it means that we are not facing the kind of downwards spiral we got into in the 1990s, with rising welfare dependency, depletion of skills and the social pathologies that tend to go along with that.
The ongoing strength of the labour market should provide a floor under household spending, ensuring that it will not drop too far or too fast. The domestic economy will also be bolstered by a recovery in exports and ongoing investments by business.
On the first of these scores, we have good reasons to expect that some recovery will occur in export volumes due to the lagged effect of the fall in the exchange rate. This recovery in exports is forecast to happen during the 2007 calendar year.
Solid business balance sheets are also expected to prevent growth falling too far. Firms are expecting a couple of lean years, but medium term expectations are good.
The latest National Bank business confidence survey found that the important ‘own activity’ measure is starting to nudge higher. A net 17 percent of businesses expect conditions to improve over the coming year; up from 10 percent in May. As the National Bank notes, “At the trough in the economic cycle, it now looks increasingly like there will not only be growth, but reasonable growth at that.”
We can see this in announcements like last month’s Kupe Gas Project, which will put around $1 billion into the economy over the next few years. These indicators confirm that the outlook is very sound, and in these circumstances firms will be less inclined to lay off staff.
I will not deny that there are risks to this optimistic scenario. On the domestic front, weather-related problems, chiefly drought, have in the past held back growth. I am not equipped to give assurances that this will not happen again.
Previous hard landings have tended to be associated with external events, such as the global slump that followed the Asian crisis in mid-1990s. We should take comfort from the fact that the current outlook for world growth is strong and this should help support exports.
Nevertheless, the economy is at a
delicate stage. It is important that we take whatever steps
we can to assist our movement back into a positive growth
cycle, and to ensure that that cycle brings a longer and
more balanced period of sustainable growth.
I want to assure people that this is a government, actively engaged in finding solutions to raising our sustainable rate of economic growth.
Later this month Revenue Minister Peter Dunne and I will be unveiling the outcome of the business tax review. The discussion document, I believe, will assess a range of innovative options to deal with the challenge of improving competitiveness with our chief rival Australia and raising productivity.
There are a number of other familiar items at the top of the government’s agenda.
After six years of investment we are still only part way towards providing a world-class infrastructure and only part way towards creating a successful knowledge-economy. Both have been high priorities since the current government came to power in 1999.
Infrastructure investments require sustained attention over a long period of time. In the 1990s we fell seriously behind in maintaining infrastructures like roading. The Labour-led government has increased annual roading expenditure by more than double; including an extra $1.3 billion in Budget 2006 to guarantee the State Highway programme and accelerate some critical roading projects. While the major metropolitan areas get a large share of this expenditure, a number of important regional projects will also be fast-tracked.
Even so it takes many years to regain the lost ground and to bring our road network up to the expectations of a growing population and a growing economy.
Recent events have highlighted the need to improve the security of our electricity supply. It is important that we do not get carried away by talk about ‘third world’ conditions. That shows both a lack of understanding about what goes on in the third world, and a failure to acknowledge that systems failures can occur even in advanced nations, as the people of California and Northern Italy have experienced in the last few years.
The important point is that we now generate more power than ever before and transmit more power than ever before. We have also established reserve capacity that will insure us against the impact of shocks such as a serious shortfall in hydro capacity.
There are some issues that need to be resolved, notably by Transpower and the Electricity Commission. However, there is no reason to believe these cannot be dealt with quickly.
On telecommunications, which is fast emerging as our most crucial business infrastructure, we have introduced the Telecommunications Amendment Bill into Parliament which will give effect to the government’s decision to unbundled the local loop and provide a truly competitive environment for broadband and other telecommunications services.
Moving beyond infrastructure issues, we are continuing to invest in initiatives that propel us towards a high value knowledge-based economy. For example, there will be a $100 million increase in research and science funding over the next four years, including $81 million to support research in key industries and $16 million to accelerate the commercialisation of research. All told we are spending $630 million a year on research, science and technology, which is a 65 per cent increase since 1999.
In the same vein, Budget 2006 put $64.2 million more into market development assistance, helping New Zealand firms crack key overseas markets.
Education and skills training are also important areas for investment. So, for example, the Budget included:
- Funding of $34.4 million to expand the number of Modern Apprentices to 14,000 by the end of 2008;
- A further boost to industry training of $15.6 million, now that we have surpassed our initial goal of getting 150,000 people into work-based training by the end of 2005;
- New initiatives costing $33.5 million in improving the literacy, numeracy and language skills or the workforce, aimed at making many of our lower skilled workers more productive; and
- A major investment of $8.1 million in the Gateway programme, which assists school leavers make a successful transition into the workforce.
We are especially proud of our achievements in industry training over the past six years. When we took office the system was moribund. Many ITOs lacked the confidence of their own industries, and the whole notion of apprenticeships appeared destined for the scrapheap.
We have restored a system of sophisticated, focused industry training and modern apprenticeships, which is serving New Zealand businesses better with a supply of skilled and motivated workers. This morning I had the pleasure of speaking at the Seafood ITO’s aquaculture diving graduation ceremony, and this afternoon I will be attending the Nelson Industry Training Graduation at Seifried’s winery.
The worry that some New Zealand business leaders have, fuelled by the media and the opposition, is that no matter how many skilled people we produce, they will largely end up serving economies other than our own. I need to say that this is little more than a beat up.
Latest external migration figures for the May 2006 year show there was a net migration gain of 10,200 people, compared to 8,800 in the year to May 2005, a gain of 16 per cent. This is significantly above the average of 4,500 for the last twenty years.
Far from a brain drain, this represents a sizeable brain gain for New Zealand. Labour Department analysis shows that highly skilled people made up 47 per cent of migrants compared to 27 per cent for the New Zealand population. In other words, we are getting the cream.
Concerns about flows across the Tasman are a red herring. If we look at history, for a variety of complex lifestyle and economic reasons people have always been migrating across the Tasman. Numbers leaving rose steadily during the 1990s and in fact accelerated despite National twice cutting personal income taxes in 1996 and 1998.
However, unlike migration to New Zealand, the people who migrate to Australia tend to be a cross-section of the labour force. In other words, the net effect is that we are losing lower skilled people and gaining higher skilled ones.
The reality is that we have a common market for labour within Australia and New Zealand, and we need to accept that there will be ebbs and flows. What is clear is that significant numbers of skilled people are coming because they realise New Zealand is a great place to work and raise families. This is an enormous vote of confidence in our economy, and also in our lifestyle and our sense of identity.
It is one more reason why we should have great confidence in the capacity of our economy not only to survive the current downturn, but also to return stronger than before.