Over the last five years, New Zealand’s export volumes have grown by an average of just 1.4%pa. During that period,of course, exporters have grappled with a high exchange rate and aninternational recession. But the growth figure is still the worst in more thanthirty years, and continues a trend of a deteriorating export performance since2003. Exports aren’t the be-all and end-all for the economy, but theirlacklustre performance highlights the need for New Zealand to alter itseconomic model if we’re to avoid a debt crisis down the track.
The one feature that has helped keep New Zealand afloat over the last few years has been the terms of trade. Put simply, theprice of those products we export has risen, while the price of what we importhas fallen â€“ so our purchasing power on the world stage has improved. Withoutthe terms of trade lift, our export incomes in recent years would have lookednowhere near as impressive, and the current account deficit would have beenmuch worse â€“ although arguably financial markets would have driven the exchangerate lower to help offset these negatives.
Unfortunately over the last year, theterms of trade has come under pressure as our export commodity prices havefallen. Looking forward, Infometrics is optimistic that some of that declinein export prices will be reversed, and that the prices of manufactured importswill be held down by soft global demand and international overcapacity. But maintaininga strong terms of trade is only half the equation â€“ growing our export volumesas well would make our external position much stronger. And this is where it’shard to be optimistic about New Zealand’s prospects.
Our manufacturing sector has come underincreasing pressure over the last two decades, due to advance of China and a volatile exchange rate. Between 1989 and 1994, manufactured exports grew by anaverage of 11%pa. The trend growth rate has slowed consistently since then,averaging just 2.2%pa over the last five years. Prospects for themanufacturing sector don’t look any brighter, with China’s growth set tomaintain pressure on New Zealand firms.
Notwithstanding the primary inputsrequired for the manufacturing sector, achieving an increase in manufacturingproduction is relatively easy in theory compared to the primary sector. Primaryproduction is much more constrained by stock cycles, the availability of land,weather conditions, and environmental concerns. But if manufacturing is goingto continue fading in importance, what hopes do the primary industries hold?
With dairy prices having fallensubstantially since mid-2008, the conversion of land to dairy farming hasslowed significantly, and so growth in dairy volumes is unlikely to be asstrong as we have become used to over the last few years. Indeed, much of thegrowth in dairy volumes has been achieved at the expense of meat productionanyway, as sheep and beef numbers have steadily declined.
Transport costs and the lack of availabilityof ships have prevented any growth in forestry exports over the last fiveyears. These pressures have eased, but probably only temporarily. As worlddemand recovers, forestry prices are likely to improve, but exporters will alsofind themselves struggling against the obstacle of distance that hasincreasingly inhibited the sector over the last decade.
The Tui and Maari oilfields havegenerated significant export growth over the last few years, but the typicalproduction profile of an oilfield sees output peak early and then graduallydecline over time. Without further oil discoveries, export volumes are likelyto shrink, rather than grow, over coming years.
Excluding high-end manufacturing (whichhas growth potential, but is such a small part of our economy), we are leftwith services. The largest component, tourism, has struggled to maintain thestrong performance achieved throughout the 1990s, with visitors from Australia the only growth market at the moment. That presents its own problem â€“ anincreasing proportion of people arriving from Australia are expat NewZealanders visiting family. Typically they don’t spend much money, so provideless export revenue than European, Asian, or American tourists.
Much comment has been passed on how far New Zealand has slipped down the OECD league tables since the 1950s, and how far our incomes havefallen behind those in Australia. But New Zealanders’ lifestyles generally donot reflect our economy’s relative underperformance. Our spending habits arestill in 1950s mode, running up debt on the basis that our incomes will catchup at some point. Peering out from the bottom of this recessionary hole, it’shard to see our export sector filling that brief. On that basis, the stage isbeing set for a realignment of Kiwis’ expectations about their living standardsâ€“ and the required adjustment could well be a nasty shock for many people.
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