BERL urges Cullen to pursue export-friendly route
A call to change the Reserve Bank's current macho stance on inflation towards a more 'export-friendly' policy environment has been made in an open letter to the incoming Finance Minister, published as part of BERL's post-election assessment of New Zealand's economic prospects. The economists however, do not see a need to change the Policy Targets Agreement - but do stress that "a change in the attitude and behaviour of the central bank authorities" is criticially required.
BERL's outlook hinges on the maintenance of the exchange rate at its current level which helps the export recovery to continue and, ultimately, translates into an economy-wide sustainable recovery.
"We thought an export-led recovery was on its way twelve months ago however", explained BERL Forecasts editor Ganesh Nana, "but it fizzled-out in the face of the inexplicable appreciation of the Kiwi during the first six months of this year. We are worried that will happen again, particularly as the RB seems intent on tightening monetary conditions despite the fragility of the current recovery".
For some time BERL has taken the view that, despite the Reserve Bank's forecasts, the exchange rate will depreciate to and then stay fairly close to 50 US cents (and about 54 on the TWI). If the new government gains credibility for stability of the present competitive exchange rate, then this and the generally positive stance could bring stronger growth forward into late 2000.
"On the contrary, our assessment will need to be drastically revised (in the negative direction) if the Kiwi does in fact appreciate by the 10% forecast by the Reserve Bank", warned Mr Nana.
With a competitive exchange rate though, growth is expected to accelerate from a 2.0% average in the year to March 2000, to 2.6% and then 3.3% in the following two years.
The change of administration provides a unique
opportunity for a re-think in the operation and
implementation of monetary policy. In our view, there is no
need to change the Policy Targets Agreements - the words are
already there. It is a change in the attitude and behaviour
of the central bank authorities that is required to shift
the current macho stance on inflation towards a more
'export-, growth- and employment-friendly' macro environment
to the benefit of NZ businesses, producers, employers and
workers. We confess to experiencing an eerie feeling of
déjà vu when preparing this forecast. Not dazzling, but
respectable growth in merchandise exports is beginning to
emerge and we are forecasting moderate but sustainable
export-led recovery. Twelve months ago however, we were
reporting similar signs of an imminent export-led recovery.
That recovery, however, was subsequently snuffed-out by the
inexplicable appreciation of the Kiwi during the first six
months of 1999. That experience only serves to illustrate
the paramount importance of the 'market mechanism'
delivering an appropriately competitive exchange rate to
ensure an orderly adjustment process in the face of a
persistently large external account deficit. We urge the
authorities to not stand in the way of such a process and,
in particular, we are severely critical of both the Reserve
Bank's and the Treasury's recent forecasts which incorporate
an appreciation of the currency over the forecast
horizon. On the basis of the Kiwi remaining at its present
competitive level, we forecast a tradable sector revival
with GDP growth averaging 2.0% in year to March 2000,
accelerating to 2.6% and 3.3% in the following two years. In
this favourable outlook, sustainable employment expansion of
the order of 1.9% (or 40,000 new jobs pa) by the end of the
forecast horizon is projected. Given a continued, but
declining, migration outflow this moves the unemployment
rate down to 5.2% in June 2002. CPI inflation jumps in the
short-term as the surge in world oil prices translates
through to petrol prices at the pumps. On the assumption
that crude prices remain near US$25/bl, consumer price
inflation remains well within the 0%-3% target range at a
projected 2.1% pa over the medium term. NZ's trading
performance remains problematic over the medium-term, with
the merchandise trade balance deteriorating rapidly in the
June 2000 year due to the delay in the export recovery as
well as 'one-off' frigate imports. Thereafter, with
import growth beginning to slacken and export performance
improving we see the current account balance stabilising
near 8.5% of GDP over the forecast horizon. Nevertheless, an
orderly "market adjustment" process through the maintenance
of a competitive exchange rate should see this decline in
the medium to longer term. AN OPEN LETTER 02 December
1999 While our analysis of
the short-term prospects for the NZ economy remains
principally unchanged from that in our previous forecasts,
we nevertheless believe the change of administration does
provide a unique opportunity for a re-think in the operation
of monetary policy. In light of the recurrent
monetary-induced downturns experienced by the NZ economy
over the past decade or so (refer to our analysis in
September 1999 BERL Forecasts Feature "Which way now?"), the
time is ripe for a shift in the current macho stance on
inflation towards a more 'export-friendly',
'growth-friendly' and, most importantly,
'employment-friendly' macro policy environment. We
unequivocally urge you to pursue this issue as a matter of
urgency. Indeed, we were heartened by your comments prior
to the election, "We want to ensure that the Reserve Bank
pays appropriate attention to the need to minimise the
adverse impacts on the real economy, including excessive
appreciation of the exchange rate," Dr Cullen said. We would humbly remind you
however, that this road has indeed been travelled before.
Recall, in December 1996 the then incoming Treasurer, Mr
Peters, managed to successfully modify the Policy Targets
Agreement (PTA) by broadening the inflation target range to
0%-3% and, crucially, adding the phrase, Unfortunately, in our view, the RB negated the
intention of these modifications through their narrow
interpretation of the changes. Indeed we would go as far
as to say that there is no need to change the PTA - the
words are already there - it is a change in the attitude and
behaviour of the central bank authorities that is critically
required. We believe success in reforming the actions of the
RB has the potential to be your administration's single most
influential impact on NZ businesses, producers, employers
and workers. By viewing the broadening of the range in
1996 as just shifting the mid-point target from 1% to 1.5% -
and further arguing the only contribution of monetary policy
to sustainable economic growth to be the achievement of
price stability - the monetary authorities revealed an
unnecessarily short-sighted outlook. We would argue a
longer-term horizon is needed. The principal long-term
weapon against inflation is to protect, enhance and expand
the productive capacity of the economy - through investment
in both people and natural as well as physical resources.
Sadly, the impact of the recurrent monetary cycles and the
uncertainty as to future prospects takes its toll in
progressively eroding the economy's productive capacity. So,
while inflation may remain under control in the short-term,
little is done to tackle the fundamental problems facing the
NZ economy - and hence, its people. The structural deficit
that needs to be confronted is no more graphically
illustrated than in the accompanying chart. One response
to this apparently insatiable appetite for imports and the
consequential external deficit, is to harangue the NZ
populace for spending too much and not saving enough. An
alternative line of thought, rather than lament our
inability to save, places emphasis on the need for NZ to
earn more. In order to do so, the requirement for NZ
industry to be able to compete externally is paramount. A
'business-friendly' environment, where export and
import-competing industries are not ankle-tapped as soon as
they get to their feet and break into a jog, would be an
ideal start. Oh, and by the way, congratulations! And
welcome! Yours sincerely,
PAINTING THE PICTURE
December
1999
DEAR DR CULLEN (cc Dr Brash)
The
Dominion 11 November 1999
"…so that
monetary policy can make its maximum contribution to
sustainable economic growth, employment and development
opportunities within the New Zealand
economy."
BUSINESS AND ECONOMIC
RESEARCH
LTD