John Curran, Senior Economist for Infometrics
I was speaking to a mate of mine
just the other day
A guy called Bruce Bayliss actually
who lives up our way
He's been living in Europe
for the year, more or less
I said "How was Europe, Bruce?"
He says "Fred, it's a mess"
We don't know how lucky we are, mate.
We don't know how lucky we are! – Fred Dagg
John Clarke, aka Fred Dagg, sang this in 1975 just after New Zealand lost its preferential access to the UK market and the OPEC oil crisis had just ended. The circumstances we find ourselves in today are different – earthquakes and a global economic and financial maelstrom – but the sentiments have renewed resonance. We have weathered the storms better than most countries and our prospects are brighter than most. Here are four reasons why.
Reason 1: Our banks are strong
We have a more robust banking system than many developed countries. Our banks mostly stayed clear of the exotic and risky investments of other rich countries, sticking instead to more plain vanilla services. They were certainly not induced by government policies to lend to borrowers with highly dubious repayment prospects, as banks in the US were for example. The ownership of our big banks by large well-capitalised Australian banks was also to our advantage, providing credibility and support at a time that such attributes were gold in the financial industry. Kudos must also go to New Zealand’s banking supervision arrangements, which have encouraged banks to be transparent and prudent.
Reason 2: We have low government debt
Government debt is currently around 30% of GDP compared to 70% of GDP in the US and an average of over 85% of GDP among European countries that have the Euro as their currency. Since the early 1990s New Zealand governments of both main political persuasions have sensibly reduced public indebtedness to provide a buffer against adverse circumstances. As a consequence the government has been able to respond to the Canterbury earthquake and invest substantially in road infrastructure at the same time as the economy weakened. Hard choices still need to be made to ensure debt does not spiral upward in the future, especially as our population ages. But the public spending and tax choices are not quite as urgent or stark as they are in, say, Europe.
Reason 3: We have a flexible economy
Our relatively flexible economy and, in particular, flexible labour market have helped us cope with the economic downturn without the large rises in unemployment experienced in many other western economies. New Zealand’s unemployment rate rose from a low of around 3.5% in December 2007 to reach 7% in December 2009. It has now fallen back to 6.5%. Compare this rate to the 9.1% unemployment rate still persisting in the US and 9.4% average in the European Union. In the darkest hours of the recession many New Zealand employers chose to moderate the wages and working hours of their employees rather than lay them off. Labour regulations make it much more difficult for French or German or Greek or Spanish employers to follow the same approach, their primary option generally being to fire staff.
Reason 4: Australia and China are our mates
We are well and truly hitched to the Chinese and Australian economies. China is the global economy’s salvation. China purchases around 13% of New Zealand’s exports by value, which makes it our second largest export market after Australia. This share has remarkably risen from only 3% in 2000. The fact is people in China are developing quite a liking for our dairy, meat and horticultural products.
Australia is more connected to China than New Zealand and is a star amongst developed economies. It is by far our largest trading partner, and we are highly integrated with its market through CER and increasingly harmonised trans-Tasman regulations. Much is made by some of the threat Australia poses to New Zealand’s economy as firms and workers dive across the Tasman to be where the money and action is. But the opportunities presented to us by Australia’s good performance outweigh the threats.
It is not all sweetness and light. Our export markets in the US and Europe will be tortured for years by the need to reduce public debt and sort out crippled banks. There are challenges to face in our own economy such as how to deal with our aging population and improve our productivity. Some reckon that private debt is too high and we don’t save enough. We hear plenty from various commentators and analysts about our problems. But our circumstances are not too bad, all things considered. So let’s take a cue from Fred:
So if things are looking really bad
you're thinking of givin' it away
Remember New Zealand's a cracker…
We don't know how lucky we are, mate.
We don't know how lucky we are!
Published in the Dominion Post 2 September 2011
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