By Dr Ganesh Nana, chief economist, Business and Economic Research.
Looking back on 201 from one perspective, I point to remarkable employment numbers, house construction at 14-year highs, tourism visitor numbers and spending reaching historical highs, recovering dairy exports, along with forestry and meat revenues growing positively, government books in surplus with debt tracking down, and consumer price inflation under control and a 12-month outlook for stable interest rates.
In contradiction, there was plummeting business confidence, angst about cessation of oil and gas exploration and proposed employment legislation, snowballing public sector wage pressures, and a deteriorating external deficit and external debt position.
And, looking ahead, there are huge backlogs in transport and infrastructure investments. On their own, these activities could easily drive above-average economic growth over the forecast horizon.
However, in contradiction, current growth continues to be driven by population growth and associated consumer spending. Optimistic goals around emissions and the proposed transition to a non-extractive, low-emissions economy add to a feeling of unease in some sectors. In addition, continued construction sector capacity issues question the ability to meet infrastructure plans of both the public and private sectors.
At the same time we need to tread lightly, as a high-risk game of chicken is being played out on the global trade front. The prospect of a fully-fledged trade war between China and the US cannot be discounted, with repeated tit-for-tat tariff increases only making matters worse.
Clearly, the impact on trade-dependent nations like ours can only be on the downside. Further uncertainty surrounds currently unknown (this note was drafted mid-November 2018) arrangements following the UK’s departure from the EU next March.
With all this mist occupying the air, and noise occupying the airwaves, it is important to register what is agreed, so we can focus on points of contention. The numbers provide the evidence for agreement over the following.
- Our economy has continued to grow, but at a slower rate than previously. This slowdown was widely expected, and is a reflection of the above-trend growth rate of the earlier period.
- While the rate of growth has slowed, little has changed in terms of the fundamental drivers – being tourism, population-driven consumption spending, and the start of an infrastructure/investment cycle.
- Inflation remains low, as does the outlook for interest rates.
- The government’s accounts are sound with significant surpluses projected; and, should the need arise, there is headroom available for potential borrowing.
In contrast, the following can be identified as some of the areas of contention.
- What is the significance of the fall in business confidence? Whether warranted or not, a potential impact on private sector employment and investment plans cannot be discounted.
- Will short-term options to paper over skilled workforce shortages further delay instigating longer-term sustainable solutions? Construction, education, and aged care sector are examples where, again, the migration lever is being used to provide a quick fix.
- What happens when the immigration-driven population boom dries up? Coupled with an easing in tourism growth (albeit off a very high peak), there is potential for a couple of the primary economic drivers to go missing in action at the same time.
- Is there sufficient urgency in the goal of weaning the nation’s economy off a business-as-usual perspective? dressing longer-term structural challenges such as transitioning to a low-emission economy, and away from a commodity-based export sector risk repeatedly being kicked down the road.
From my perspective, the short-term challenges are no greater than they have been in our recent past.
An adept combination of monetary and fiscal policies will be required to buttress the potential impact of trade wars, as well as a slowing down in domestic economic drivers. Our expertise in the successful management of short-term economic cycles should not be discounted.
Currently, there is clearly significant headroom for fiscal policy – although the political will to use this headroom may be tested. As for monetary policy, interest rate reductions are available although their impact may not be that significant. In addition, there is the exchange rate mechanism to buffer us against ill-winds from offshore.
But, I argue, that while our short-term economic management is reassuring our responses to longer-term strategic challenges (some call this the function of governance) remains sorely lacking. The burning platform that is climate change, has been with us for at least a generation. Yet, any sense of urgency appears absent in many in the business sector and community. The need to embark on new rules and models of behaviour seem to be too easily overshadowed by short-term headline considerations.
Similarly, sector warnings about shortages of skilled workforce shortages have been widely communicated for several years. They now appear especially acute in construction, education, and health.
The short-term response via the immigration valve is a continuation of what is to be expected of a management focus on economic challenges. Unfortunately, such a response hinders the appetite to address the challenge from a strategic perspective. Investment in a range of workforce training and related activities is better justified with a long-term horizon, but can be easily crippled by a management lens constrained by narrow RoI or KPI measures.
Of course, the much-heralded shift away from a commodity-based export sector is similarly legendary; as we have moved from wool, to butter, to cheese, to logs, to milk powder, to tourism, and back to logs.
So, what’s in store for 2019?
We’ve already had a taster of it last year, but the word for 2019 will be ‘wellbeing’. Treasury will be preparing its first Wellbeing Budget, while local government will be grappling with the re-introduction of the four (economic, environmental, social, and cultural) wellbeings into its purpose.
To me, these are promising signs of re-balancing the ships of state away from day-to-day management and towards longer-term strategic matters. Reinforcing this sense of promise, is Treasury’s adoption of the phrase “intergenerational wellbeing” and the presence of “… wellbeing of communities in the present and for the future” in the Local Government Amendment Bill.
Unfortunately, there will be no shortage of ill-winds from offshore to blow us off course. The temptation to remain within our business-as-usual comfort zone will be as large as ever.
Assessing whether short-term factors outweigh strategic and longer-term considerations will again test the mettle of our governance bodies.