Cullen Address to Business 2003 – NZ Herald Lunch
Cullen Address to Business 2003 – NZ Herald Luncheon
Thank you for your welcome.
To preface our discussion today, I would like to make some comments on the economic outlook for 2003 and the priority areas in the Government’s long-term economic growth strategy.
For quite some time now, I have been using the term ‘cautious optimism’ to describe my outlook on the New Zealand economy. I am happy to say that during 2002 the optimism has proved more accurate than the caution.
During this year our economy has managed to sidestep the worst effects of global turbulence post-September 11. The flow-through effects of high export prices and volumes have supported an exceptionally strong level of economic activity in the first half of the year.
Indeed, the recent OECD report put the annualised growth rate for the period at more than 4.5 percent. I do not need to remind you that this is the growth rate that, if sustained over a 5 to 10 year period, would more than likely return New Zealand to the top half of the OECD.
Before we bring out the champagne, let me stress that I think we have a long way to go before this kind of growth rate is established as the trend. In 2002 it appears that many of our economic ducks have been in a row, due to a combination of good timing, good fortune, good weather and – last but not least –good management.
Looking ahead to the prospects for 2003, I am, once again, cautiously optimistic. And it appears I am not alone in this. The latest National Bank Outlook shows business confidence improving for a fourth consecutive month.
The headline confidence figure is now up to 0.1 percent negative, which means that we need only one more optimist to put us into plus territory; a classic case of being one swallow short of a summer.
I was especially encouraged by the all-important own activity index, there has been an 8 point jump from last month to net 31 percent positive. This augurs well for the economy’s ability to cope with the volatile international environment.
The rebound is echoed in a strong increase in profit expectations over the same period, while other indicators – such as investment and employment – remain buoyant.
The labour market remains very tight, with employment and participation rates still at 15-year highs; and this despite a turnaround in net migration, which has added to the labour force.
Of course, some of the economic ducks have already broken rank. Export prices have already declined, with dairy being particularly hard hit. The exchange rate provided a temporary cushion by staying below its long-run trend; but that effect is now diminishing. Consumption growth is projected to slow significantly in the current quarter.
Meanwhile, the cold spring weather in the South Island, and some localised catastrophic weather events in the Hawkes Bay and Nelson/Marlborough, suggest a lean year for some parts of the primary sector. The benefits to the Auckland economy of the America’s Cup regatta will also come to an end early next year, although hopefully a victory for Team New Zealand will leave the prospect of another round of racing in a few years’ time.
The global economy faces the challenges of sluggish performance in the US and parts of Asia, and of course the uncertainty of the situation in Iraq and the threat of destabilisation by international terrorism.
Nevertheless, the OCED is predicting that our export volumes will follow the global trade cycle and pick up towards the middle of 2003. GDP should also follow this pattern, slackening in the second half of 2002, and opening up some excess supply. This will set the scene for the re-establishment of robust, and non-inflationary, growth in mid to late 2003.
The Government’s growth strategy is of course designed for a longer timeframe, and is about increasing our capacity for growth and innovation. While it is gratifying to see evidence of resilience in our economy, we are still a small and geographically isolated nation attempting to box above its weight.
Our vision has to involve achieving by intelligence, innovation and coordination what other economies achieve by virtue of their size, concentration and proximity to markets. This means:
Attracting and keeping a highly skilled labour force;
Earning a greater proportion of our income through our intellectual property;
Using high-speed internet technology to make our exporters ‘virtually’ present to their markets;
Finding ways of overcoming the 'thinning' of our capital markets;
Stimulating an entrepreneurial ‘infrastructure’ connecting ideas and innovations with structures and processes that will grow them into successful businesses; and
Streamlining our regulatory processes, without losing sight of their function.
Clearly this has to be a joint effort between business and government, both central and local. I believe that in the last three years we have won the intellectual debate on the question of the legitimate role of government in nurturing economic growth. Prudent fiscal management and monetary policy settings aimed at low inflation are necessary, but not sufficient, conditions for growth. I do not think there is any further argument to be had over whether Government also has a role in improving coordination amongst the productive sector and in making strategic investments in skills and public infrastructure. It does have a role to play, although how that is played out in detail is a matter for experimentation, debate and refinement. The key planks of our growth strategy remain the same:
Partnerships with business in the key areas of biotechnology, information and communications technology and creative industries, aimed at better coordination and the attraction of investment capital into those sectors;
A skills strategy based on a better focussed tertiary education system that is responsive to the skill requirements of New Zealand businesses;
A complementary immigration policy, aimed at attracting skilled migrants with the ability to fill the immediate and longer term skill gaps;
Investment in infrastructure – in particular in the area of roading – as one of the essential pillars of productivity growth;
Investment in those public services – health care, education, policing, environmental protection and others – which make New Zealand an attractive place for people with skills and ideas to live; and
Promoting free trade amongst our major trading partners.
2003 should see advances on all these fronts.
The Growth and Innovation Advisory Board and the three taskforces on biotechnology, information and communications technology and creative industries are up and running. We are also establishing Investment New Zealand as an independent unit reporting to the Board of Industry New Zealand, to attract more productive foreign direct investment, and we are building up the NZ Superannuation Fund, and promoting diversification of GSF and NDF, in order to deepen capital markets.
coordination front we are providing better resourcing for
the Environment Court, developing whole of government
approaches to overcoming administrative and regulatory
hurdles, and working with local government to identify
In the area of skills development, the tertiary sector reforms will begin to steer our universities, polytechs and other institutions away from unnecessary duplication and an obsession with student volumes, and towards better quality education. ‘Quality’ in this context means not only intellectual rigour, but also greater integration with the projected skills needs of New Zealand businesses, and the generation of intellectual capital through research partnerships.
Elsewhere on the skills front, the recent rash of xenophobic utterances around Asian immigration has been very unfortunate. It has given an undeserved prominence to the views of a fringe element in New Zealand society. And it has also risked overshadowing the reasoned debate on how best to manage immigration policy.
For example, the review of business immigration policy that has been under way since the beginning of the year found that migrants with only a basic level of competency in English have great difficulty settling into life in New Zealand, and end up living a passive, shadowy existence in our communities, or else return to their countries of origin to find work. This is not a good outcome for anyone.
The decision earlier this month to raise the level of English competency required for new migrants is, in this regard, both practical and compassionate, and not, as some have sought to portray it, a buckling to political pressure. No-one benefits when migrants are ill-prepared for life in New Zealand, and English-language competency is the best indicator there is of a successful settlement.
On the infrastructure issue, I believe it is important that we quickly consign to history the recent false start on the question of public-private partnerships, or PPPs, as they are commonly known. I do not believe that PPPs offer any sort of panacea to our infrastructure ills. They provide alternative ways of managing the risks associated with major investment projects; but they do not, in themselves, reduce those risks.
I do not believe a purely ideological debate on PPPs is either necessary or likely to be helpful. The fact remains that, during the 1990s, New Zealand did not invest sufficient capital in public infrastructure, and now, with the economy performing better, we need to remedy that. What we need is engagement between central government, local government and the finance and construction industries on the major infrastructural challenges facing the country. This must be guided by a spirit of pragmatism and cooperation, and must, of course, exclude any suggestion of an inside track for some players.
In the area of free trade, recent events in the delicate diplomacy of trade relations have also been very encouraging. The US Trade Representative, Robert Zoellick, made it clear in a recent statement that a US-New Zealand free-trade regime is on the agenda alongside America’s free-trade agreements with Australia and Singapore. This is the result of years, if not decades, of patient, diplomacy; and it will no doubt require several more years of persistent work before we see concrete progress. But while the benefits are likely to be some time in coming, a favourable agreement will mean a significant and sustained boost to the New Zealand economy.
So, to sum up, we are seeing the momentum of the 2001 commodity price boom petering out, and as a result will have to negotiate a period of reduced export incomes and a dip in domestic demand. However, if the consensus amongst forecasters proves correct, this situation will start to turnaround in the middle of next year. We may need to hold our collective breath for a while; but there is little likelihood of turning blue.
A final word, before I ask for questions, on the Qantas proposal to buy a share in Air New Zealand. As you may have heard, our legal advice makes it clear that the three ministers with responsibilities related to Air New Zealand – Trevor Mallard, Paul Swain and myself – need to remain scrupulously silent throughout the process for assessing the offer. It is of utmost importance that there is no suggestion of pre-determining the decisions that each of us has to make.
The process we are committed to will see the announcement of a conditional decision from an ownership and Kiwi shareholder perspective on 18 December. If conditional approval is granted, the matter will rest with the competition authorities on both sides of the Tasman who have indicated that they will need several months to complete their analysis.
This process and its constraints may be excruciating for some; but it is important that it is adhered to diligently.