New Zealand Unlikely To Catch Up With Australia

New Zealand’s economy is unlikely to match Australia’s in the near future, according to the new BNZ chair of finance at Auckland University ’s Business School .

Professor Mayes is a former chief manager of the New Zealand Reserve Bank and has advised central banks all over the world.

Speaking on TV3’s The Nation today, Professor Mayes said the policies are not yet in place for New Zealand to accelerate its growth to match Australia ’s.

“It's certainly possible. Is it likely? I would have thought it's not particularly likely. I think we would have to be much more closely involved with Australia if we really were going to have their sorts of rates of growth.”

“I think if the ideas, if the knowledge economy is being pursued, then we could actually get there, because you’ve got to ask what is it we're going to be better at than other people are, in order for us to be able to increase at that sort of rate. Well quite clearly it's not gonna be mining, we're not gonna be able to emulate Australia in that sort of way, so we've gotta be able to do better than Australia in areas where we have something where there's some possibility for an advantage, and human capital is the most obvious.

'THE NATION'

PROFESSOR DAVID MAYES
Interviewed by DUNCAN GARNER

DUNCAN Billionaire investor George Soros says the world is entering act two with the financial crisis as Europe's fiscal position nears breaking point, yet there's a sense in this country anyway that we've come through this world's economic troubles almost unscathed. It's a dangerous way to think of course according to my guest, Professor David Mayes, the new BNZ Chair of Finance at Auckland University's Business School. Good morning Professor Mayes.

I just want to ask you, the world has come through this recession but where are we at in terms of a global sense, are we at that sort of stage two that we've just started talking about?

DAVID Well I think it's always difficult to decide when you’ve got to the end. Not all the losses have been identified, not all of the ability to pay back has been worked out. What we're seeing at this stage is that some people have some real problems about handling the losses which they’ve got, and we really don’t know how their going to handle it, and so uncertainty is what causes the difficulty.

DUNCAN Would you say that we're at that brink of a stage two?

DAVID Well it's always possible, and there will be some people who like Georg Sorros who will argue that that’s going to be the case, but I think the general view is that we're slowly coming out of it.

DUNCAN Just in terms of New Zealand's exposure, I mean where are we at in terms of the future, in terms of our exposure to China for instance, I mean where are our markets at?

DAVID Well I think we've been very lucky in the sense that Australia's done very well because the demand for its products have gone, and they're our biggest market. The Asian countries on the whole have done well, although this is not true of all of them, South Korea had a really bad time to begin with and so that helps. So we're vulnerable to what happens in Asia. So if Asia is going to be the path which dips down, then that’s going to have an effect on us.

DUNCAN Because if you look at our exports to China they really have rapidly increased over the past sort of two years 18 months after that Free Trade Agreement. There is that view from Stephen Topliss at the BNZ that there are some real problems with China emerging in terms of fiscal and monetary policy, how is it going to affect us?

DAVID Well it depends what happens, but I mean the Chinese economy has grown at rates that most of us thought were completely unbelievable for years, and if you look at these arguments about is it going to overheat, is it going to have to slow down, then I would have said this has been a regular occurrence for quite some time. Well some time this is going to be right, whether it's right this time it's very difficult to say.

DUNCAN And what about Europe, when we're seeing this major meltdown in Europe, I mean you see it in Portugal, Greece, Spain, Ireland, Italy, all these major debt problems. Do we have an exposure there in terms of our exports, and how is that likely to affect us?

DAVID Well Europe's our second biggest market after Australia, and so if there was to be a continuing problem in Europe then that would have an effect on us. But the meltdown so to speak, this is purely a financial issue, that people are worried about whether these countries are gonna be able to pay back, and therefore the spread on their debt is rising. It's not that the country's themselves are seeing serious economic recession continuing, they're recovering, so there's a difference between the economy and that’s what's going to affect us and they're their problems.

DUNCAN Do you believe we have – I mean there's this view out there that we've come through relatively unscathed over the past two years, and certainly last year, that we've been insulated. Do you believe that?

DAVID Oh I think we've been extremely lucky, I mean you may feel this is a recession of the sort of order of magnitude we've had can be described as luck under any circumstance, but compared to what's been happening in some of the other countries around the world, where they’ve been going backwards by nearly 20% in a year, we've been lucky in that sense.

DUNCAN But why is that because I mean I know our unemployment has come back to 6% which is remarkable if you look at some of those European countries, and what is it that we've done right?

DAVID Oh I think it's just the structure of our economy. If we were a major investment goods producer then we've have had a really bad time, but the fact that we're producing things that people want, even in recessions, means that we don’t go down anything like as much as some others.

DUNCAN So is there something that you'd recommend in terms of regulatory sort of regimes or legislative change, that could stop our exposure to say a stage two type crisis, there's something we need to do?

DAVID I don’t think there's much which you can do which can stop your exposure. What you can do is try and do something about the effect it has on you. I think that’s something which we ought to think about, and look very carefully at what's happened elsewhere around the world. A lot of people have suffered far more than they needed to, because they believed they were largely immune and it wouldn’t happen to them, and it turned out to be wrong.

DUNCAN But are you saying the government here doesn’t need to do anything else, we've pretty much got everything in the right boxes and we don’t need to do anything else, we're bullet proof in a sense?

DAVID Oh no, no I think it's simply that we're insured, that we know what it is that we'd have to do if the rest of the world turns down. It won't be pleasant but we know what we've got to do.

DUNCAN If you just look at this week, and you did work obviously at the Reserve Bank, if you look at the official cash rate this week, which there are now predictions that this will go through 5-6% end of next year, which we'll see interest rates up around 8%. Do you think that’s likely to happen or does it again come back to what happens in Europe and in Asia?

DAVID Well I haven't seen anybody say 8%, but the expectation is that there'll be a sort of staircase increase in interest rates if the world recovers. If the world doesn’t recover, then having taken one step or two steps, then we'll wait for a while. It will depend on what the prospects are, because monetary policy's forward looking, so the government's trying to work out what's going to happen 18 months, two years ahead.

DUNCAN But if you look at that staircase I mean there is that prediction that the ACR could go to 6% which would see some of the market rates go you know 7½ - 8%. Based on the figures that you're seeing around the globe at the moment, do you think it's likely that we'll get to that point where we'll end up to the top of that staircase that you talk about.

DAVID Well I think we're bound to get to the middle of the staircase because that will be a neutral position. At present we've got quite low interest rates because things have been going so badly, but not as badly of course as they have been in other countries. So if we look at where the US is and where Japan is and where Europe is, I mean they’ve got interest rates virtually zero, and they're already at 2.75.

DUNCAN Do you see a scenario which from two or three years ago when you did see people – we did see the banks actually lending at just short of 10%. Do you see a scenario like that again, you know given our inflation outlook at the moment?

DAVID Well I think it's not so much the inflation outlook, it's the growth outlook, and I think that the future looks fairly robust. So it looks as if we probably will have economic cycles in the future. If you could have nice smooth growth right up the middle, then you'd have interest rates nicely up the middle all the time, but it's more likely that we'll have some sort of cycle again.

DUNCAN If you look at some of Alan Bollard's comments this week in the Monetary Policy Statement, he was talking about the housing market, I just want to focus a little bit on the housing market, that there will only be growth of about one perhaps maximum 2% over the next few years, and that’s heavily depressed isn't it, in terms of what most New Zealanders have experienced over the last decade?

DAVID Oh compared with what New Zealanders have experienced, but nothing like what people in other countries have experienced. I mean if we'd experienced what happened in the United States people would have been not expecting anything of that sort. So we haven't had a serious downturn in the way other people have.

DUNCAN So should New Zealanders be going out there with some confidence in the housing market, should they be going out there taking out big mortgages. I mean what would be your advice to New Zealanders around you know what is their dear love isn't it, housing?

DAVID My advice I think would be to talk to a number of people and not just to me, but normally house prices have gone up fairly steadily over time, and people have banked on that. Now we have plenty of experiences in other countries, where they’ve gone down and very substantially for a period and then recovered.

DUNCAN And you’ve spent some time I think with Alan Bollard over the past 24 hours personally. I just want to get your view. Do you think it will only be that 1-2% increase in house prices over the next few years?

DAVID I think it's very difficult to predict. If the world economy turns down, then this is likely to have an impact on asset prices downwards again, because what's surprising about asset prices around the world I think, is how well they picked up after having plummeted.

DUNCAN I just want to look at this political ambition of the government, and you may be quite nicely placed to give us a view on this, given you're not in politics as such, but the government has this ambition to effectively by 2025 be on a part with Australia in terms of wages and so forth. What's your view on whether or not we can catch Australia.

DAVID Well it's always possible, and I think if the ideas, if the knowledge economy are being pursued, then we could actually get there, because you’ve got to ask what is it we're gonna be better at than other people are, in order for us to be able to increase at that sort of rate. Well quite clearly it's not gonna be mining, we're not gonna be able to emulate Australia in that sort of way, so we've gotta be able to do better than Australia in areas where we have something where there's some possibility for an advantage, and human capital is the most obvious.

DUNCAN Do you genuinely think we can – putting mining to one side which doesn’t actually politically look like it will happen – that we can actually get there, because Alan Bollard who obviously is a friend of yours and you work with, says no.

DAVID It's certainly possible. Is it likely? I would have thought it's not particularly likely. I think we would have to be much more closely involved with Australia if we really were going to have their sorts of rates of growth.

DUNCAN I just want to finish on if is can, the Budget, which obviously was a month or so ago, but you saw that huge stimulus package come in at 14 billion dollars worth of taxcuts. What's your view on that?

DAVID Well I was a little surprised myself, I had expected that perhaps they'd be a bit more cautious, but you have to try and have some sort of balance between getting a recovery in the short run and paying for it in the long run. I think probably the way round which they’ve gone was saying let's really try and make sure that we get a decent recovery first, is the way to go, because then that helps confidence, it helps people's immediate standard of living and how they're going. So I have some sympathy with going that way round, but then we still will have to pay the debt back later on.

DUNCAN And generations will pay for decades to come. Professor thank you very much for your time this morning.

ENDS

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