Steve Maharey Speech: Economic predictions for 2004

Comments to the Manawatu Financial Planners and Investors Group. Roma Restaurant, Palmerston North.

Introduction

Thank you for the invitation to speak with you about the outlook for the national and local economy.

January and February of any year have become the season of speeches aimed at assessing the state of the nation and predicting what will happen over the coming months. I know, for example, that the Minister of Finance Michael Cullen is giving a number of speeches on the state of the economy so I am going to refer you to the government website (www.beehive.govt.nz) so you can get this information from the horses mouth.

My comments to you today will touch on the general economic picture and how we are doing in the Manawatu. I also want to look at some of things we need to be doing locally to maintain the positive environment we are enjoying.

Over the summer you may have taken the time to read the business pages. They have been full of debate about the state of the economy and what needs to be done. I have found the debate a little odd.

New Zealand is currently enjoying the most sustained period of growth in three decades. After one and a half decades of painful change that caused many social problems and did not lead to promised growth we seem to have struck the right formulae. Yet the critics spend their time demanding that we return to the policies of the 80s and 90s.

I found the recent article by Brian Easton in the New Zealand Listener (24/1/04) on this issue very interesting. Easton points out that groups like the Business Roundtable argue that a revolution took place in the 80s and 90s that led to economic growth. Unfortunately, says Easton, the facts do not support this assertion. Economic growth in the 90s averaged 2.6% - well below the OECD growth rate. The improvement came in 1999.

The critics argue that this growth must be the result of restructuring in the 80s and 90s. But this ignores the fact that in 1999 a shift in economic policy took place. The incoming Labour-led government maintained its commitment to an open economy while adopting a more interventionist stance. It began introducing policies designed to support an open trading economy as opposed to standing back and letting the market go its own way.

The stated aim is to return New Zealand to the top half of the OECD – a position we last occupied in 1985. The policies of the 80s and 90s saw us lose ground. Finally we seem to be making progress.

If the summer news is to be believed we are in for a year of major debate about economic policy and what is good for business. I can only hope this debate takes place on the basis of what works, as opposed to what is supposed to work.

For now let’s have a look at some predictions:

The New Zealand Economy

The New Zealand economy is outperforming almost all of our trading partners. Our annual growth rate of 3.4 percent on average in the past three years compared well with the OECD average of 1% percent. This growth rate is expected to slow down from around 4-4.5% in 2003 to a more sustainable 2.5-3% in 2004 and 2005 due to higher exchange rates and smaller numbers of migrants.

Prediction - growth in the domestic economy will be strong in 2004, but slightly lower than the last two years. Growth will be supported by a still high rate of immigration, relatively low interest rates, house price rises, a strong labour market and growth in business investment. Constraints will come from rising interest rates and lower consumption due to recent falls in export incomes.

A strong Kiwi dollar will continue to cause problems for exporters although the stronger world economy and commodity prices should offset the impact.

The New Zealand Labour Market

As the Minister of Employment I have been particularly pleased that this healthy economic picture has translated into a strong labour market.

Annual job growth reached 3.3% in the year September 2003 with a lot of new jobs coming from construction and service sectors. The unemployment rate has fallen to 4.4%, the lowest in New Zealand since December 1987 and the fifth lowest in the OECD.

I am hopeful that job growth will remain strong this year – although I am told it could soften towards the end of the year because of the slow down in economic growth and a higher level of labour productivity (something we are already noticing in the manufacturing sector).

The strong demand for labour has brought to the fore a number problems New Zealanders are not used to. Businesses report they cannot find workers and that they cannot find the right people with the right skills. These problems are becoming a major constraint on the ability of businesses to expand.

Let me make three predictions: unemployment will stay at around 4.4% this year; skill shortages, and wage growth will remain high.

The Manawatu Economy

Let me now turn to our regional economy.

Over recent years the region has been enjoying something of a revival. This can be attributed in part to a rediscovery of the importance of regional economies. When I was a City Councilor the prevailing belief was that a market economy would see everything move to Auckland and eventually off-shore. Regional economies focused on fighting with each other to attract business.

These days the view is that the New Zealand economy will only be strong if the regions grow and make a contribution. Instead of competing for a shrinking pie the aim is to build a strong local economy led by businesses that enjoy a comparative and/or a competitive advantage. In the Manawatu, for example, biotechnology has been acknowledged as an area that could become a major feature of our economy.

The results for the Manawatu region have been obvious. We have begun to grow again although the recent difficulties experienced by exporters will lead to a slow down.

Economic growth has fallen from the brisk pace of 5-3% in the year March 2002 to 3.0% in the year to September 2003. Growth is still high due to the strength of domestic demand.

We can hope that some of the other reasons for an economic slow down – the energy crisis and the SARS outbreak are not going to recur this year.

Prediction - the outlook for our region this year is likely to be solid as domestic activity offsets the difficulties that will be experienced by the export sector.

The Manawatu Labour Market

Once again positive economic news has led to a strong labour market. Our unemployment rate has declined steadily.

Labour force participation has risen from 58.9% in 2000 to 63.7% in 2003. There has been a 23% rise in employment between 1999 and 2003. The unemployment rate is 4.7%. We will need to deal with the problem of skill shortages. We know that the region has a shortage of plumbers, gasfitters, carpenters, joiners, drivers, health workers and skilled labourers. Work is underway on all these areas.

Prediction – 2004 will see a solid rise in employment in Manawatu. A basis for this prediction can be found in the high employment intentions among local firms and high job ad numbers in the Manawatu Evening Standard.

As you will be aware, recent export sector weakness has slowed the local economy but growth has been held up by domestic demand. The driver of growth has changed from the primary sector to construction and services in recent years.

The Government’s Economic Strategy

The comments I have made so far add up to a reasonably optimistic picture for 2004.

But an optimistic picture is not enough. The lesson nations have learned in recent decades is that for an open trading nation to succeed a great deal of work needs to be done. So let me quickly outline some of the key policies being followed by the government before I make some final remarks about the local scene.

At the centre of our programme are: macroeconomic policies that enable sustained growth and create jobs. It is important for the government to manage its finances well. In addition it needs to invest wisely. The government’s Growth and Innovation Strategy is one example. It includes investment in research science and technology, strengthening biotechnology, creative industries and communication technologies, promoting overseas trade, funding the commercialisation of new ideas, attracting skilled migrants and promoting New Zealand tourism; an employment rich, highly productive economy. Supporting business to get started, grow and export is vital. So too is the regional development strategy which has seen such grants as that to Massey University’s biotechnology centre; a flexible, responsive, highly skilled workforce. The Tertiary Education Strategy, Modern Apprenticeships, investment in Careers Services and new partnerships with industries experiencing skills shortages are just some of the policies here; the economic development of communities. Investment in the uptake and use of computers, support for microbusiness, connecting Polytechnics with local business are key policies; a fair employment environment to encourage good relationships in the workplace. Although controversial this is the aim of labour market re-regulation like the Employment Relations Act. So too are strategies to provide information for small businesses on employment issues; participation of Maori and Pacific Island people in the workforce. These are the young populations of New Zealand. We need to make sure they have what is needed to be the workforce of the future.

Local Economic Development Strategies

The active involvement of government in the overall economy needs to be matched by local leadership.

Given the regional nature of our economy, the Government cannot and should not try to do everything. There needs to be a strong partnership between what happens at the centre and what happens locally. I recall as a City Councillor in the 1980s struggling to get agreement to an economic strategy for the city. It simply was not the fashion.

Thankfully the fashion has changed and no self-respecting region is without its plan. To close let me mention three areas that I think we need to continue to build on here:

Quality of Life

In the years ahead, the quality of life a region has to offer is going to be crucial to its success. As a born and bred Palmerstonian, I can attest to the fact that we have long been our own worst enemy when it comes to selling the virtues of living in the Manawatu.

A sea-change has taken place in recent years. We are discovering just how great our local environment is. The Young Heart Easy Living slogan captures the fact that we live in a young, innovative, relaxed, go ahead place. Massey University and the Army have been integrated into the city to great effect. Celebrations like those taking place on New Years Eve, at Caccia Birch and at the Esplanade make the city more interesting. The list is growing. And it needs to continue to grow to encourage people to make their lives in the region.

One feature that I believe is still absent from the Manawatu is a defining event. I have long believed that the characteristic that most defines Palmerston North is its knowledge base. One in six people in this city are involved with education, research or technology. I would love to see us run a triennial Festival of Ideas. If you wonder what it would look like Toronto already runs one. It involves three days of the most interesting people from all areas of activity – business, culture, science, medicine, technology, education (you name it they are there) talking about cutting edge ideas. Around all the ideas is wrapped some of the best entertainment available for the times people want to relax. Imagine such a festival in a city like ours.

Education

Palmerston North has the most remarkable concentration of education and science facilities to be found anywhere in the country. Education and science are the key drivers of the modern economy. Yet we have made so little of this massive resource on our doorstep.

The government is driving education and science to connect with the community it serves. We as a community need to take this opportunity. I am delighted, therefore, to see the city council taking responsibility for coordination of our education services. A strategy is being put together. Initiatives like Tools for Schools, the Apprenticeship Trust, the scholarship programme for Highbury are great steps forward.

But we need to realize that the future of our city and our nation rests on lifting the capability of the people. We should know more about the skill base we need and we need to do more about encouraging everyone to gain or lift their qualifications.

Why don’t we set ourselves a goal as a city to have the most highly skilled and educated citizenry by the year 2020.

Business

If we are going to succeed, the region has to be a great place to do business. Last year government Ministers assembled in the city to hear what I thought was the most coherent economic strategy we had seen from any region. Funding for the biotechnology centre at Massey University was one tangible outcome of that planning process.

We need to make sure we stick to the plan. Promote small business, make use of our educational resources, build a special identity around biotechnology. We need to share a clear understanding of what will make the region succeed and work together to put in place the supporting infrastructure that is needed. To identify one challenge: we need to ensure that the commercialisation of ideas coming out of our research and education establishments is a practical goal for young entrepreneurs.

Last Comments

In closing, let me wish you all the best for the year. The take home message I want to give you is this: the New Zealand economy is in better shape than it has been for a long time. Of course there are all kinds of issues not within our control as a nation to contend with. There is a great deal, however, that we can and should do. Active government, strong partnerships with business and local leadership are fundamental to success.

Have a great year.

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