Widely touted as a role model for responsible government, the New Zealand brand of dry economic management appears to have been oversold. After two years in which the economy was dragged spectacularly from a long period of negative growth to race ahead at more than 6%, there was an equally headline-grabbing plunge over the next two years that only now appears to have hit bottom. What the policy clearly has failed to provide is the predicted stable platform.
Over the past 10 years the economy has been on a switchback: down, up, then down again, as measured by percentage changes in annual GDP. Five consecutive years of negative growth were turned into modest growth of 1.2% in fiscal 1993, a tremendous surge to 6.2% in 1994 and another impressive rise of 5.3% in 1995. But for 1996 growth dropped back to 3.6% and in the 12 months to March 31 1997, it became clear that the economy again had run out of steam: growth was 1.4%.
At this level, the economy probably is near the bottom of the cycle, according to ASB Bank economist Rozanna Wozniak in Auckland. She expects signs of renewed growth to emerge by the end of this calendar year. The burst of growth in 1994-95 she puts down to lax monetary controls that allowed the economy to overheat.
The official assessment of the economy is relatively positive. Acknowledging that growth has slowed over the past two years “against a background of tight monetary conditions”, the treasury in its New Zealand Economic and Financial Overview states: “However, the economy has continued to grow at a relatively healthy pace, recording growth of 2.3% in the year to September 1996. While overall economic growth has slowed recently, the service sector has continued to post growth, up by 4% [in the same 12 months].” The treasury might not have been so sanguine about the sector had it known that services activity was to fall by 1% in the March quarter this year, the first decline in this sector in 20 years.
The treasury’s assessment is: “New Zealand’s economic success story of recent years suggests that the comprehensive programme of economic reforms administered since the mid-1980s are bearing fruit. These reforms were designed to foster the development of an open, competitive and resilient economy and have transformed New Zealand from being one of the most controlled OECD countries to one of the most market-oriented.”
The formula calls for tight monetary and fiscal policies, rapid progress toward balanced budgets and a reduction in government debt, and privatization of state services and utilities. These actions provided the backbone of the conservative economic policies pursued by the previous National government.
A determination of the significance of New Zealand’s recent stumble has been made harder by the heavy overselling of this strategy – adopted in other countries, including Australia – in 1994 to 1996. To sceptics, it has all seemed a litttle too glib. Geoffrey Bertram, senior lecturer in economics at Victoria University in Wellington, says he regards the present downturn and the spike in 1994-95 as falling within the parameters of a normal economic cycle for New Zealand. The contraction is no more than a rebound from the real growth rates of 4% to 6% achieved in 1994 and 1995, he says. He also questions the validity of claims for policies that abstract growth figures from just one part of the business cycle. A more technically credible course would be to measure the growth of a full period from one cycle to the next, he says.
Bertram suggests that massaging of data for politically motivated reasons has caused gross misconceptions. “After 10 years of reform, New Zealand has achieved a disappointing growth rate,” he says. “The pay-off for 10 years of pain is certainly not to be found in economic growth, although there may have been gains in such areas as quality of service, which cannot readily be measured. The only pay-off has been to the top 10% of income earners.”
The Bertram view of the primacy of the economic cycle is shared by David Plank, chief economist for Bankers Trust New Zealand, who says that the downturn is part of the economic cycle although there may be other, minor influences at work. “Just because you follow particular economic policies doesn’t guarantee a particular outcome,” Plank says. In his view, the high-growth spike was unsustainable.
A Commonwealth Bank of Australia study, written by Bruce Freeland and Wozniak of CBA subsidiary ASB, points to negative influences to explain the present slow growth:
a government deferral to July 1998 of tax cuts due this year;
a delayed response to tight monetary conditions in 1996 and earlier;
slow adjustment by corporations to pressures created by the rapid growth of the mid 1990s;
disillusion with the present coalition government.
The coalition of the National Party and the New Zealand First Party is a favourite scapegoat for New Zealanders when discussing the economic malaise. Yet the decline in growth was well under way when the government was elected in October 1996, though Wozniak notes that the political uncertainty it has created has not helped the economy.
This election was the first under a new mixed-member proportional (MMP) system. Previously, the country had single-member electorates; a single-chamber parliament with no state or regional government and no constitutional constraints.
The old system usually returned popular governments with comfortable working majorities. By contrast the MMP system makes it almost impossible for any party to gain a large majority. In the 1996 poll, the National Party gained a majority of only two seats and for the sake of parliamentary stability was pushed into a coalition with New Zealand First, led by Winston Peters, an articulate but populist figure. Peters was able to negotiate himself into the treasurer’s post, an appointment which Plank of Bankers Trust says caused initial concern.
While NZ First was seen as having scored a coup by securing the top financial portfolio, the National Party retained control of all the critical spending portfolios. Peters’ first budget in June proposed increased spending, particularly on health and education. Personal tax rates will be reduced next year and perhaps again in 1999 and the government will continue to run operating surpluses and repay public debt.
In the 1997/98 financial year, revenues are forecast to be NZ$35.7 billion (versus NZ$35.1 billion the previous year), net expenditure NZ$34.6 billion (NZ$33 billion), operating surplus NZ$1.5 billion (NZ$2.4 billion), and net public debt debt NZ$25.2 billion (NZ$25.6 billion). Revenues are expected to rise in 1998/99 to NZ$36.7 billion, expenditure to NZ$35.4 billion, the operating surplus to NZ$1.9 billion but debt to drop to NZ$24.3 billion. A continuing negative aspect of the economy is the projected poor performance of the current-account deficit, expressed as a percentage of GDP: 1997/98 – 5%, 1998/99 – 5.5%, and 1999/2000 – 4.6%.
The day after the budget the Reserve Bank of New Zealand confirmed that present growth and inflation were slow. The bank projected further monetary easing in the December quarter. Both the Reserve Bank and the treasury expect growth to accelerate during 1998 and beyond.
Brendan Moyle, a lecturer in economics at Massey University in Palmerston North, is not so certain. “Most independent economic analysts regard the treasury forecasts as being charitably bullish,” he says. “They are very much at the optimistic level. However there is an expectation that growth rates will pick up again. Most economies do experience cyclical growth. We went through rapid growth through 1993/95, so entering a slowdown period is not unexpected.”
Moyle, who says New Zealand is “pretty much at the whim of the international economy” identifies several areas for concern:
the continuing high government share of GDP;
the smallness of the economy;
the economy’s vulnerability to events overseas; and
downturns in key markets such as Australia and Japan.
Meanwhile the government is pushing ahead with its policies. Its first hurdle is a referendum scheduled for this month on universal compulsory superannuation (ie, pension savings), which is intended to boost private savings. Polls have indicated that the proposal will fail. Plank of Bankers Trust suggests it will be a close call with cabinet ministers from the National Party coming out in support of the scheme.
Those policies which attracted so much foreign interest in the former National government’s management style are also being pursued under the coalition. The government, for example, is intent on bringing greater competitive pressures to bear by lowering tariffs ahead of its treaty schedule and by opening up the economy to foreign investment. It will also pursue privatization of government entities and deregulate postal services. Critical to all these proposals is a resumption of reforms to the labour market. Some people may be listening to sceptics but the government clearly is not.
The programme has fired enthusiasm among investors. Bankers Trust writes in a recent report: “The subdued growth outlook confirms the Reserve Bank’s favourable inflation forecasts and means the bank’s easing window will remain open for some time. This monetary policy bias, together with existing high nominal and real rates (the highest among non-emerging markets) will see New Zealand bonds outperform other bond markets.”
The report continues: “We expect 4% growth in the December 1998 year, requiring a monetary policy response from the Reserve Bank. However, our analysis suggests that the bank reacts to activity with a lag. In addition, the growth pressures are unlikely to match those of 1993 and 1994. The Reserve Bank will therefore only begin tightening by March next year but will remain in tightening mode for the rest of 1998. By 1998 we see 90-day bank bill rates of 8%, New Zealand 10-year bonds at 8% (100 basis points over their US equivalents) and the trade-weighted index appreciating to 69. Monetary conditions will have tightened the equivalent 400 interest rates basis points from their low point in the second half of 1997.”
However, Bankers Trust warns that the risks in its analysis could come from an earlier-than-expected pick-up, from a sharp fall in the NZ dollar, or growth not picking up at all.
The Commonwealth Bank of Australia study warns that the NZ dollar will be sensitive to monetary tightening or easing in the US and Australia. It is by no means clear, the study says, that movement might involve lower interest rates. “Any upward bias in offshore rates is likely to see NZ short-term rates stall and the New Zealand trade-weighted index to depreciate further. Conversely should offshore rates stabilize or decline, some modest bill-rate reductions are likely, along with modest currency depreciation.”
Most economic forecasts predict an acceleration in the pace of growth to begin in the December quarter of this year and to pick up speed in calendar 1998 and strengthen further in 1999.
The most conservative forecasts come from the treasury and from the Reserve Bank of New Zealand. The treasury predicts 2.4% growth in 1997/98, 4.2% in 1998/99 and 3.5% in 1999/2000. The Reserve Bank forecasts 2%, 3.8% and 3.8%, respectively, for those years.
The challenge for New Zealand is to sustain the growth in such a way as to stop the roller-coaster ride that has been the fate of the economy in recent years.
