Diving into the global economy

Pacific Tiger, rock star economy and other such ebullient phrases are starting to trip off the tongues of New Zealand's business and political leaders.

Indeed, business confidence is at a 20-year high and economic growth this year will be the best in seven years. Along with the US and UK we'll enjoy a 3 per cent or so lift in GDP, well above the 2.2 per cent average for developed countries forecast by the IMF this week.

Our growth will be quite well-balanced too. Modest rises in exports, jobs, wages, consumption and investment are all playing their parts across the country.

Sure, the global economy has issues. While GDP growth will be 3.2 per cent versus 2.4 per cent last year, the IMF forecasts, it warns the end of quantitative easing and the resulting rise in interest rates could cause some massive disruptions to global capital flows.

The turmoil could come sooner rather than later. The US Federal Reserve says it doesn't expect to raise US interest rates before mid-2015. But financial markets are wondering if a strengthening US economy might trigger a prompter hike, likewise in the UK. But, heck, we weathered far worse turmoil during the Global Financial Crisis.

It's important, though, for us to look ahead. Our growth rate will peak next year and drift back to about 2.5 per cent in the year ending March 2016, according to the consensus forecast compiled by NZIER.

The Treasury is forecasting growth will average 2.6 per cent a year 2014-18 and productivity growth will average 1.1 per cent a year. Both are OK but insufficient to maintain our current living standards.

Worse, Treasury pointed out in its December half-year economic update, "the economy is expected to be operating at, or above capacity over most of the forecast period, leading to some increase in price pressures."

Moreover, it forecast our current account deficit would expand to 6.5 per cent of GDP, adding to our indebtedness to our international creditors. The truth is we're still not earning anywhere near a big enough living in the global economy.

There is abundant evidence of our constraints in NZIER's latest quarterly survey of business opinion and consensus forecasts. Capacity utilisation is already at 90.2 per cent, and skills, cost and price pressures are starting to increase.

So, we have a choice. If we're satisfied with our moderate growth, we'll keep eking out incremental change in our existing business and economic models.

Or, if we're ambitious, we'll use the next couple of years as a springboard for true transformational change to a faster growing, higher value, more sophisticated, and more globally connected economy.

There's a lot to do. Here are six of the big themes.

Exports: Once farmers have fully recovered from last year's severe drought, our total exports will grow by about 3 per cent a year in real, that is price-adjusted, terms for the next few years, according to NZIER's consensus forecast.

In addition, we can hope for some price gains, too. But increasing dairy production elsewhere in the world, for example, is expected to moderate dairy commodity prices, which are currently unusually high.

Our food and beverage exports grew from $13 billion in the year ended June 2003 to $23b in the year ended June 2013. The stars were dairy, which lifted the dollar value of its exports 2.5 times to $11.5b, and wine, which accounted for almost all of the 3.5-fold growth in beverage exports to $1.5b. Meanwhile the rest of the food and beverage sector struggled. Meat, fish and fruit exports rose only modestly, while vegetables fell.

Getting consistent volume and value gains across the food sector requires a great deal of innovation and collaboration.

We're chipping away at the issues, but we have a great deal yet to learn before we catch up with the Danes, the world leaders. They quadrupled their food exports to € 16b (NZ$26b) in the decade to 2011 and are forecasting continued brisk growth.

Critical ingredients in their success include hefty innovation on farm, in environmental practices, in food science, processing, marketing, brands and corporate development, as a recent excellent article in The Economist describes. It's available at http://econ.st/1m6fLxq

The environment: The push for greater dairy exports is sharply increasing pressures on land and water around the country. Similarly, growth of mineral, energy and tourism sectors and urban areas are raising difficult choices about how to best achieve economic gains in environmentally responsible ways.

The issues will come to an intense head this year with the government's efforts on many fronts. It is seeking to finalise an ambitious new regulatory regime for water quality and allocation; to make further changes to the RMA; to sign off big projects for irrigation on land, and mineral and energy extraction at sea; and to sign off controversial urban projects such as the flyover at the Basin Reserve in Wellington, Auckland's unitary plan and some of Christchurch's redevelopments.

All of these will severely test the government's ability to execute complex environmental and resource policies and initiatives, and its efforts to build public support for them.

Regional development: Every city and rural region has a big challenge to improve its economy. Except for Auckland and Christchurch, they also have demographic challenges of ageing and slow-growing, or even declining, populations.

Investment: Outside of the dairy industry, which has been investing heavily, other industries are only just beginning to pick up their capital spending. The crucial test, though, is how they spend their money. They need to invest strongly in new products, process and markets if they are going to help transform the economy.

This is the year Callaghan Innovation has to prove it can make a dramatic different to R&D in New Zealand; and many more companies must follow the lead of global trailblazers such as Xero.

Housing: Rising interest rates will cool the booming market a bit but extract a hefty toll on the rest of the economy. A sharp market correction would be even worse. A far better way to satisfy demand would be to start making big progress on increasing supply and lowering costs through massive innovation in design, construction, land use and urban form.

New thinking: An election year is the ideal time for business and society at large to push politicians for ambitious policies that sustainably double our growth rate and engage us deeply in the world economy.

We aren't a Pacific Tiger yet. But we could be.

Sunday Star Times