Michael Cullen Address to the Wellington Chamber of Commerce: Economic Outlook and what it means for Wellington.
Thank you for the invitation to speak to you this morning. I have been asked to give an economic update and outlook.
“Update and outlook” are typically seen as related. The outlook is very much conditioned by where we have come from and
where we stand at the present. Unfortunately, at this stage they appear to have been decoupled. Trends and uncertainties
mean that we could well be seeing the maturing of a particular phase in our economic development, so that the recent
past is not a good guide to our near future.
I don’t want to make too much of this. One thing I have learned during my years in the finance portfolio – in opposition
as well as in government – is that the mainstay of the economy chugs on largely unaffected by the changes taking place
at the margin with interest rates, the exchange rate, overseas prices, wars, droughts and all of those things. When we
look at the outlook for the economy, we can safely say that well over 90 per cent of what happens next year will be the
same as what happened this year.
The important thing about change is that it compounds: it is the difference that 3 or 4 per cent a year makes over ten
or fifteen years that really makes a difference to our condition of living, and in particular to how that compares with
other countries. The second important thing about change is that it matters greatly what the starting position is.
In this regard, our strong performance over the last three and a half years has left us in a strong position going into
a period of uncertainty and even turbulence. In addition, by focussing on those factors that make a small annual
difference to performance, but sustain it over a long period of time, the government’s growth framework seeks to make
the material difference.
As for the national economy, so for the Wellington region.
Let me start with a summary of the factual position and our best estimate of what is likely to happen going forward.
The economy has grown at 4.4 per cent, unemployment is hovering around 5 per cent, inflation is running at 2.5 per cent
and we have a current account deficit of 4 per cent of GDP. The government’s accounts are strong, reflected in a solid
operating surplus and falling government debt. That is all very solid.
What, then, can we say about how the Wellington region fits into all of this? The economic expansion that most
commentators pick to have peaked around March this year was driven by two factors in two stages. The first was the
so-called rural recovery, stimulated by good weather and strong commodity prices and a lower exchange rate. That later
morphed into a house construction, immigration, export education and consumer led recovery in the cities, particularly
Auckland.
Wellington’s regional economy is roughly one-eighth of the national economy, so it is unlikely to exhibit marked
differences in performance compared with the overall average.
The expansion didn’t exactly pass Wellington by, but it was not grounded in the core sectors that sustain economic
activity in the region. The result was that in relative growth rates, Wellington lagged behind the national average. The
latest National Bank regional economic activity survey suggests that the region was the slowest growing of all regions
in the year to March 2003, with growth of 2.5 per cent.
One of the good things is that if you are not dependent on the current drivers of growth you are less likely to suffer
when those drivers lose momentum. I would also repeat my observation that a lot depends on where you are starting from.
2.5 per cent growth is not all that bad if the starting position was a modestly sound economy. Wellington seems to have
escaped the volatility that a number of other regions have experienced. Despite what may appear to be a soft economic
performance, unemployment rates in the region remain low. In 2001, unemployment rates in the region were a half to one
percentage point below the national average. A relatively soft 2002 saw Wellington’s unemployment rate move back to
around the national average. But Wellington remains well above the average for per capita incomes. The Wellington
economy is also showing some short-term resilience. The National Bank survey indicates that economic activity in the
region rose for six consecutive quarters: slow and steady as the saying goes. In the March quarter, Wellington had the
second highest regional employment growth, the third largest rise in retail sales and the third highest level of
consumer confidence. It also had the largest fall in new dwelling approvals and in the number of job advertisements, so
work that out! (It’s a mixed bag).
It isn’t possible to spend large amounts of time in Wellington and not be aware of the concerns about the hollowing out
of its non-governmental corporate core. Tranz Rail has shifted its head office to Auckland, as has Westpac. Wellington
has lost ENZA, and with the creation of Fonterra the Dairy Board is no more. CS First Boston quit New Zealand, and
therefore Wellington. An oblique reference to this exodus by Mark Weldon had the Wellington media in a funk that he was
contemplating shifting the stock exchange north as well. Media speculation that the National Bank was for sale had the
new - actually “a” new owner – even speculatively – doing the real estate rounds in Queen Street. Looking at the
economic outlook means that we need to distil out short-term risk and volatility from the underlying trends. As for the
national economy, so for Wellington.
The economic outlook is dominated by the longest global bear market in fifty years, weak investor confidence,
uncertainty about the post-Iraq war reconstruction, pessimistic forecasts about returns to dairying, SARS, questions
about the cost and supply of electricity, worries about the exchange rate, the effects of dry conditions in parts of the
country and frosts in other parts, and I suppose everyone in the audience could add two or three items to that list.
This is certainly one of the most unpredictable environments that we have encountered since the stagflation and Third
World debt crises of nearly twenty five years ago.
If you look at that list, it is possible to split it into two: those items that, on best estimate, are temporary, and
those that are more fundamental.
Wellington will probably escape the worst impacts of a short-term, soft-spot slow down. It is not as dependent on either
the generation or use of electricity, or on agriculture. SARS and global uncertainty may impact on tourism and export
education, which will touch the regional economy. Uncertainty may affect finance market activity, and soft dairy prices
will limit corporate activity in those areas, but then haven’t we just established that those are the sectors that have
exited Wellington?
The key question is what is the longer-term, underlying strength of the economy and Wellington’s place in it.
The Wellington Regional Council produces an excellent publication called Regional Oulook. If you haven’t read it, take
time out to do so. I am not going to read it aloud. I will lift one quote. The February edition starts with as bold a
statement of Wellington’s risks, opportunties and challenges as I have seen in recent times.
Let me quote.
“Wellington is struggling to transform itself from a centre for large corporations into a hub for education, the arts,
tourism and innovative small to medium-sized enterprises. Growth in these new sectors has been encouraging. But there
have been many departures of the region’s head office businesses over recent years, and employment growth has slowed
almost to a standstill over 2002. However, it is important not to overreact to these structural changes.”
Exactly.
Economic change is a process of creative destruction. Like the shark, if economies stop moving they die. The fact of
economic life is that typically resources flee dying industries and creep into growing ones. The real challenge for
economic policy is to nurture the growing industries, not simply accelerate the withdrawal of resources from stagnant
ones. That, if anything, was the overwhelming lesson of the restructuring of the eighties and nineties.
In order to nurture the industries that will replace those that shrink during the process of change, the government has
adopted a growth framework. It has three core elements.
Where does Wellington fit into this? The regional economic strategy as outlined in the Regional Council document
identifies six main development engines that will replace the corporate head-office functions that are being lost. They
are business services, including information technology consultancies; film; tourism; science; education; and new
cluster development in specialist areas like optics.
That regional assessment of its potential aligns very closely with the government’s assessment of where the long-term
growth engines are located.
The only word of caution I would add is to be patient. In the past, too many good opportunites have been lost through
herding: an overexpansion of activity in areas where short-term profit opportunities are seen to exist. Examples in the
agriculture sector were kiwifruit, deer, ostriches and the like. In urban economies the stock market and commercial
property boom and bust of the late 1980s are a case in point. A viable economic transformation of the regional economy
has to be measured and balanced. It is important to avoid overconcentration on a single product in a single market. By
way of example, a solid, sustainable and expanding education sector is more than three month English language courses
for Chinese students.
The second thing I would say based on my own past experience as a resident in and MP from Dunedin is beware of talking
yourself down. The more local leaders say Wellington is declining [untrue though that is] the more likely it is to
become true.
People are not going to be attracted by a locally painted picture of gloom and doom. In Dunedin, it was when we finally
stopped talking ourselves down and began to explore and utilise our real strengths and comparative advantages that the
turning point came in lifting morale and performance.
And Wellington has plenty of those – not least the solid core of high value employment provided by central government,
its educational facilities, its potential for further film production, its cultural life and so on.
Nor should you be looking for some cavalry to come riding over the horizon. That sort of economic cavalry is now part of
our history, not our future.
So the only thing that remains to be said is how do we get from now to then? The answer is in steady order and good
condition.
It is hard to predict what sort of effect the more fundamental factors that are driving the global economy will have on
ours, and how long they will last. The timing and strength of any global recovery, what it will do to commodity prices
and our terms of trade, and how it will impact on the exchange rate are all factors that are largely beyond our control.
We can take comfort in the fact that we approach an uncertain future with significant policy headroom and a range of
policy options. Corporate, farm and household balance sheets are in a reasonably healthy state. We did not have the tech
stock or even stock market asset bubbles that other countries did in the 1990s, so there has not been quite the same
degree of wealth loss to shake consumer sentiment.
We have taken steps to expand trade opportunities, to plug some of the gaps in the venture capital market, to upgrade
our training programmes, to align immigration policy more closely with skill needs and to rebuild the infrastructure:
all factors that will make it easier for New Zealand firms to find their way in troubled times.
I am relaxed about the short-term pressures that the economy faces. I think we are well placed to work through them. I
am confident about our longer-term prospects. We have the building blocks in place to construct an exciting future. I
think Wellington has a lead role to play in that future, and it will adapt and change and prosper and thrive and be the
vibrant and exciting community it has been ever since humans inhabited these challenging coastlines.
Thank you.