We cannot rely on Auckland to drive the New Zealand economy according to Dr Clydesdale who today releases a discussion paper ‘A middle path for the New Zealand economy’. 

 A key feature of recent economic debate has been the idea that Auckland will be the country’s economic driver.  The argument states that there are economic advantages to having many firms located close together.  However, Auckland’s industries have low rates of innovation and exports: key drivers of economic growth.  The city lacks the capabilities to deliver desired growth rates.

 Auckland’s location does present many economic advantages, but to expect it to drive growth is going too far.  Recent policy was inspired by recent literature from economic geography, diversity and immigration.  Dr Clydesdale states it is time to end the myths and alchemy that has influenced the New Zealand economy for so long.  It is time to get back to basics. …

Definite food for thought. The full paper is embedded below.

Conference Fashionable Policy With Super Font

New Zealand’s economy contracted in the third quarter and growth in the second quarter was revised down to a wafer-thin 0.1 per cent, showing the nation came close to a double-dip recession this year.

Gross domestic product shrank 0.2 per cent in the three months ended September 30, according to Statistics New Zealand, compared to the 0.2 per cent growth predicted in a Reuters survey of economists and the 0.3 per cent forecast from the Reserve Bank. Growth in the second quarter was revised down from 0.2 per cent.

I guess we can all agree now the Reserve Bank hiking interest rates was rather premature!

Prime Minister John Key has vowed to stick with his goal of closing the income gap with Australia, despite an embarrassing dismissal by the Reserve Bank Governor who said there was no chance of it happening.

Speaking on TVNZ’s Q+A programme yesterday, Alan Bollard said Australia had been “blessed by God sprinkling minerals” and had handled its economy well. He said New Zealand would do better to make the most of the “crumbs that come off the Australian table”.

He said it was up to the Government what its own goals were, but he did not believe catching up with Australia was possible.

However, Australia’s success was good news for New Zealand and the real challenge was in working out how to capitalise on it.

The Governor is quite right that it is not practical to think we can close the gap with Australia by 2025 – quite simply the gap is just far too large.

However I think we can aspire to something more ambitious than making the most of the crumbs that come our way from Australia.

Even if the gap is not closed by 2025, we do want a very strong focus on higher levels of economic growth so the gap gets smaller, or at least doesn’t grow as quickly.

There are effectively six scenarios going forward, from worst to best:

1. NZ growth rate in next 15 years is even lower than for last 15 years, meaning gap between Australia grows even faster than previously.
2. NZ growth rate in next 15 years is the same as last 15 years, so the gap grows as fast as previously.
3. NZ growth rate in next 15 years is higher than the last 15 years, but still not as fast as Australia, so the gap continues to grow – but slower than before.
4. NZ growth rate rate in next 15 years matches that of Australia, so the gap remains relatively constant.
5. NZ growth rate in next 15 years is higher than that of Australia, but not high enough to close the gap by 2025, so the gap closes but is not gone by 2025.
6. NZ growth rate in next 15 years is so much higher than Australia’s that the gap is closed by 2025.

Now like the Governor, I don’t think No 6 is realistic. We are starting too far behind. But personally I’d be pretty delighted with either No 5 or No 4 – both would be absolutely major achievements. Even No 3 would be better than the status quo.

Closing the gap with Australia and stemming the trans-Tasman brain drain is one of the Government’s main long-term aims but Labour leader Phil Goff said the reverse was happening.

“Australian employment figures have soared for the fourth straight month and the jobless rate has fallen to 5.5 percent, a full percentage below New Zealand’s unemployment,” he said.

“For the first time in more than a decade, Australian unemployment levels over the past six months are lower than New Zealand, with Treasury forecasts that New Zealand’s unemployment will continue to grow.”

Now it is true that unemployment is now higher in New Zealand than Australia, and this is not good. Unemployment is a lose-lose. Having able bodied people not working means we don’t achieve as high economic growth as we could, and it is bad fiscally as it means less tax paid, and higher welfare payments.

But unemployment tends to rise when economic growth falls away. Not straight away but normally with a lag of six to 12 months or so. So let us look at economic growth between NZ and Australia.

So why does Australia now have lower unemployment? Because New Zealand went into recession, and Australia did not. And no this was not a post credit crisis recession. New Zealand’s economy started shrinking in the first quarter of 2008, and kept shrinking until the second quarter of 2009.

Now people may be wondering who was responsible for the economy in the first quarter of 2008. Well a Phil Goff was an Associate Minister of Finance. So when Phil wonders why Australia now has lower unemployment than NZ, he doesn’t have to go far to ask how come.

This graph from interest.co.nz (originally Treasury) shows the price we paid for the third term of Labour.

New Zealand lacks a common purpose. No one knows exactly what we want. We hanker for a return to the times when we were one of the wealthiest countries in the world. We want everyone to be better off, knowing that individual wealth does not result in freedom from crime and the social fallout of excessive disparity. However, there is no clearly articulated goal we are pursuing and no solid plan of how we can get there.

As a result, there is no definition or accountability for policies or policy-makers. Policies are often clothed with loose positive objectives and ultimately ineffective aims. There is no co-ordinated accountability for these policies (or politicians) in terms of their ability to contribute towards a common measurable outcome. Consequently, we continue our steady decline. As the attached analysis shows, current forecasts have our GDP per capita slipping below Kazakhstan and Botswana by 2025.

I’ve been discussing this with colleagues and friends, and we believe that NZ needs to embrace a common objective that will provide the means to deliver what we are seeking as a nation.

Whatever the objective chosen, it needs to be simple, clear, measureable, understandable, aspirational and, most importantly, catalytic in terms of driving positive change that makes the outcome achievable.

We’d like to stimulate a broader discussion over what that goal should be for NZ. To kick-off the debate, here’s our starter for ten: NZ should aim to be back in the top 10 countries in the world based on GDP per capita by 2025. Not just the OECD, the world. Unachievable? No way. Ireland, Korea, Singapore and Taiwan all achieved the required level of growth over the last twenty years. It will take real collective commitment and more creative thinking about our economy – but that’s exactly what an ambitious goal will generate.

I’m hoping you’ll participate in a broader discussion about an aspirational, measurable goal for New Zealand. Please read the attached document. Pass it on to your friends. Participate in the debate by emailing measurablegoal@hrlmorrison.com or contributing to the forum on www.blog.nzx.com. If you agree with what we’re proposing, show your support. If you don’t, please share your ideas for a national goal. Together, let’s take the first step in defining and delivering a better future for New Zealand.

Lloyd has out together this (a-measurable-goal-for-nz-short-2) presentation that is worth reading and also an FAQ – a-measurable-goal-for-new-zealand-_2_.

If you don’t like Lloyd’s goal, then suggest one of your own.

NZIER has just put out its quarterly survey of business opinion.

Statistics New Zealand recently reported that real Gross Domestic Product (GDP) fell by 0.3% in the March 2008 quarter. Indicators of domestic trading activity from the latest QSBO suggest economic activity declined further in the June quarter and is likely to decline again in the September quarter which will make it three quarters of negative economic growth in a row.

That takes it beyond a technical recession to a full recession. They says firms are more negative abotu their own activity and their trading activity since 1998 and 1982 respectively.

Now what about inflation:

The net balance of firms intending to increase selling prices in the next three months has increased. The balance was 45% in the March survey and 49% in the June survey. The 49% figure is the highest since March 1987. The net balance expecting an increase in costs has increased from 62% in March to 71% in June. The 71% figure is the highest since December 1986.

This is why their press release refers to stagflation.

Dr Cullen told the finance select committee today that economic data since the May budget was far more gloomy than Treasury predicted.

“It is now quite clear that the quarterly GDP figure for the first quarter (of the 2008 year) almost seems inevitably to be negative,” Dr Cullen said.

A recession is negative growth over two quarters, so if this is true then the June 2008 GDP figures may put NZ into recession. The March 08 figures are out on 27 June so the June 08 figures should be out at the end of September – likely to be the beginning of the election campaign.

To start closing the gap with Australia we really need to put in place policies which will get a 4% average growth rate. A 2% growth rate will see fall further in relative terms.

People don’t get very excited about 2% vs 4% so what does that mean in real dollars.

GDP as at September 2007 was $171 billion.  At 2% growth it would be $181 billion in three years. If 2% growth continued for say nine years (three terms) then GDP would hit $204 billion.

And what if one managed 4% growth.  Well in three years  GDP would hit $192 billion. And in nine years it would be $243 billion.

So NZ would be $10.9 billion better off in three years if it could get 4% growth instead of 2%. And over nine years it would be $39 billion wealthier if it could make 4% instead of 2%.

And what does that mean for the average family? Well while GDP growth doesn’t automatically translate into cash in the hand, the extra national wealth per household (just under 1.5 million in the last census) would be $7,300 after three years and $26,000 after nine years.

Now even if one says hey we can never make and maintain 4%, even the gap between our usual 3% and 2% is significant.  An average $3,600 per household after three years and $12,500 after nine years.

So the only person who should be saying

There was some good news – the economy is expected to keep growing by around 2 per cent a year for the next three years.

Should be the Australian Minister of Immigration as he welcomes people in.