The Resilient Economy The NZ economy or: lost in a low-wage cul-de-sac Ganesh Nana August 2010

www.fabians.org.nz 1

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The NZ economy

or: lost in a low-wage cul-de-sac presentation to Fabian Seminar

Dr Ganesh Nana Chief Economist Business and Economic Research Ltd August 2010

R18 Contains horror scenes Not appropriate for the young and innocent

Agenda •  20 years of inflation targeting •  the low-wage cul-de-sac •  the exit strategy

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Annual average inflation

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20 years of price stability The Kiwi $

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Exchange rate volatility

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20 years of price stability Base interest rate for business lending

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20 years of price stability Residential house prices

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20 years of price stability NZX50*

spliced onto earlier NZSE40 and Barclays indices

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20 years of price stability Australian All Ordinaries

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NZ OCR

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The recession

RB Monetary Policy Statement June 2008 March years Employment

2008 -0.2

2009

2010

2011

-0.2

-0.4

0.0

“The length of the downturn is in part required to keep medium-term inflation under control”

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BERL Forecasts June 2008 Editorial “… a state agency can publish an economic forecast … of four consecutive years of negative or nil employment growth and yet no one has been called to account to explain such a comprehensive failure of economic policy.”

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BERL Forecasts June 2008

Feature: the costs of low inflation over the coming three years: •  an additional 44,000 unemployed, and •  a further 51,000 remaining outside the labour force •  that is, 95,000 jobs •  equivalent to $7.4bn of GDP *  or the size of the entire agriculture sector’s annual contribution.

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BERL Monthly Monitor October 2008

“… the (NZ) recession was engineered … as a result of the policy framework that puts the costs of heightened inflation above those of recession. …”

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20 years of inflation targeting: a report card The Benefits Low consumer price inflation

The Costs Other prices

Interest rates Exchange rate Assets: equities, houses, farms Sound financial system

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Economic transformation the Kiwi way External trade volumes as % of GDP

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The Achilles’ Heel of the NZ Economy

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The result

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20 years of inflation targeting Another report card

% of GDP

3 years to Dec 1990

3 years to Sep 2009

Exports

26.2

29.3

Imports

24.8

30.4

Trade balance

1.5

-1.3

Current account balance

-2.8

-7.5

Net foreign assets

-751

-87.7

AA-

AA+

Other Foreign currency credit rating

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Economics is … liquidity swap rates house prices interest rates inflation leverage securitisation hedge funds debt ratings

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Economics is … land people

buildings businesses

skills & knowledge

water networks

experience innovation technology machinery & equipment

liquidity swap rates house prices interest rates inflation leverage securitisation hedge funds debt ratings

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2 key prices •  price of borrowing * no, not for houses – but for long-term investment in business growth

•  price of foreign exchange * so that exporting is profitable to engender wealth creation through attraction (and retention) of resources Fabian Society – Wellington – August 2010 slide 24

How much are we investing for the future?

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Is it enough?

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What about investment in people? •  Of NZ’s 20-40 year olds more than a quarter of a million (268,000) have, AT BEST, a level 1 qualification •  and, remember, the majority of these will remain in NZ’s labour force for the next 20 years (if not longer) •  this group will play a significant role in NZ’s productivity performance for the next 20 years (at least) Fabian Society – Wellington – August 2010 slide 27

Investing in the future (cont.) Public education spending as % of GDP

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Because, look who’s catching up

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So, what next?

“Looking beyond our present circumstances, our future depends on our ability to export.” Budget Speech, July 1980

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Or, let’s try … “Growth in New Zealand will be propelled by technological change, investment and higher productivity.” Budget Speech, July 1978

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