Growth opportunity on our doorstep

BNZ chief economist Tony Alexander
BNZ chief economist Tony Alexander

I started writing this column (for the Southland Times) in 1998 and since then I have learnt a few good lessons about economics and the New Zealand economy.

These include:

Shocks keep coming and it is impossible to pick what, when, how long, how bad and when recovery will occur.

Consider the 1987 sharemarket and property market crashes, the Asian crisis and drought of 1997-98, the 2001 terrorist attacks, Sars and the Iraq war of 2003, the 2008 global financial crisis, earthquakes and the weakness of the post-GFC recovery.

More shocks will come and businesses need to build resilience to cost and revenue shocks.

Exchange rates cannot be reasonably predicted. Our dollar has floated for 27 years and, in spite of a persistent current account deficit and implications of the interest-rate parity theory - that currencies eventually fall in high-rate countries - the kiwi has remained strong.

In fact, even our long-term assumptions of a decline are now challenged, as Asian middle-income growth means we see New Zealand's terms of trade rising long-term and are happy about our primary sector export base, whereas from the 1970s, we expected falling prices and hoped for manufacturing export dominance.

Our lifestyle is attractive to many in the world, but to enjoy it, you need to live here and that means trying to own a house and investing in other houses.

We do not support policies which undermine our wealth by cutting house prices, which will therefore stay high. Farm prices will also rise under most scenarios, except an outbreak of foot-and-mouth disease.

Our lifestyle choice embraces not only the outdoors and standalone houses, but also consumerism, which we can only afford to pursue by raising debt.

Therefore our household savings rate will soon turn negative again, our dependence upon foreign financing will remain, and interest rates will on average sit above those in most other countries.

We embrace radical change only when we feel collapse is imminent. Given that we congratulate ourselves on having undertaken reforms in the 1980s which other countries are struggling now to emulate, and feel we have weathered the GFC well, there is no appetite for big policy changes.

The broad policy status quo will continue until our next truly large crisis which, to generate policy change, will need a financing element, with overseas savers no longer willing to fund our overspending.

No investment is truly safe and history does repeat itself in the form of people chasing returns too good to be true, and investing in things with elements of risk they do not fully understand - commercial and residential property schemes, forestry.

Restraint on our ability to raise productivity and income per capita comes no longer from the regulatory environment, although red tape is still excessive and the Resource Management Act stifles growth, or institutional framework, but from our poor managerial skills, Kiwi business culture and lack of connectivity with the rest of the world.

Getting up the income ladder requires focusing on these areas, rather than the likes of the taxation framework, monetary policy or fiscal policy.

Middle-income growth in Asia and the world's economic centre shifting to our doorstep presents the growth opportunity we have been waiting for since the end of the 1950s Korean War wool boom.

History, however, says we won't grasp the opportunities as long as our children move to Australia.

Tony Alexander is the BNZ chief economist.

The Southland Times