D David Gutse ell

Ec conomics for Man agers 551 Trimester 1, 20 12 1

Interna I ational Case Study Repor rt

Word C Count: 2145 Words 5

DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

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C Content ts

Executive Summary: New Zeala ands Loss of Competi o itiveness

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on: Introductio Aims and O Objective of Report o

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Overview: Relevant E Economic conditions i New Zea in aland Policy Dile emma and why the ad w ddress

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Recommen nded Policy Direction y n: or mendation Reasons fo Recomm Theory and Data analy d ysis Relevant T

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Summary: : Conclusion for this re n eport

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DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

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Executive Summa ary: As at March 2012 M 2

With som signs the global economy is stabil me e lising and with a few risk remaining the explan ks g, nation for the r of the Ne Zealand economy at t end of 20 is further varied. The Rugby World Cup rest ew e the 011 r e (RWC) h in New Zealand last year in the third and fou quarters helped boas the retail se held t urth st ector to a high, w whilst the ear rlier Februar 22nd earthq ry quake that str ruck Christchurch at 12.5 50pm killing 288 g people a injuring m and many more has put a neg h gative spin on the overall financial sy n ystem howeve the er outlook for the year ahead is larg consiste with the nation adviso bank lates forecasts. gely ent n ory st nt onditions in the dairy ind dustry hint th net exports made a lar contribut hat rge tion to Excellen growing co GDP gro owth in the D December qu uarter , althou with the release of ac ugh ctivity data f from the sam period me onomy at the end of last year. The ret sector en has pain a mixed picture of th state of eco nted he e etail nded 2011 on a peak with core sales volumes liftin by a recor 2.9% with definitely th bulk comi from n ng rd h he ing the back of the RWC although th were ind k C here dicators of ta angible under rlying deman as well. nd Signals from a good deal of the rest of the ec r conomy were irregular. The terms of t e trade ground lower d at the en of last yea (even thou remainin at a very high level) an amongst s nd ar ugh ng h nd signs of prod ducers margins coming und pressure, corporate pr der rofits were mostly passive in the seco half of 20 m ond 011. Decemb quarter G ber GDP growth at 0.7% is inl a line with firm but unglam m morous forec casts. Looking at the year i front GDP growth is p g in P projected to take a bow be t efore picking up towards the end g s of this y year. Consum and busin confiden made good starts to the year howe mer ness nce wever consum mer spending will slow in the March quarter as th level of ac g n he ctivity adjust after the RW Delays in the ts RWC. Christch hurch rebuild due to furth sporadic q d her quakes and 40000 people from there leaving New 4 e w Zealand for Australia suggest un nderlying wea akness in the building ma e arket will con ontinue till su time uch as the re ebuild creates momentum in 2013. Th look ahead remains mo s m he d ostly inline w the lates set of with st forecasts released su s upporting the Governmen budget po e nts olicy stateme earlier thi year. ent is The glob economy has stabilise over the p couple months with an agreemen on the bailout for bal y ed past m a nt tions with ba Greece, further roun of econom cut backs, much longe term refina nd my er ancing operat anks and more str rengthened economic dat from Unite States hav helped to support senti ta ed ve s iment in glob bal financial markets. Ch has incr hina reased its mi production 4 fold in th last ten ye surpassin easily ilk he ears ng the 30% increase in N Zealand productio Neverthe % New ds on. eless there ar many unre re esolved structural problem with the fin ms nancial syste and volat em tility will rem for the projected fut main p ture. With tha considered New Zealan needs to a at d nd address the loss of compe etitiveness se in the economy een over the past decade. The exchan rate is pa of the pro e nge art oblem, improving compet titiveness and producti ivity will req quire an econ nomy wide pe erspective an lateral ref nd forms, the lat round of test f payment to dairy fa ts armers from milk process m sing giant Fo onterra decrea asing and the ageing pop e pulation will con ntinue to crea economic dilemma for New Zeala This cou ate r and. untry needs to take signif o ficant action no with refo ow orms or face the transition of a downw n ward spiral to a second w o world econom status my and bein taken over by overseas superpower such as Ch ng r s r hina.

DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

Page 3

Introdu uction
This rep will emp port phasize the fa that even though New Zealand (N has weath act w NZ) hered the sto of orm the global financial c crisis better than other co t ountries and has a reasonably robust f h financial transpar rency system in place, however NZ is still highly vulnerable to Global eco m s o onomic outco omes through destabilisati in foreign currency in other count ion n n tries inclusiv Greece and the United States ve d and the a arising of Ch as major economic p hina r producer bec coming furthe self sustai er inable necess sitating that New Zealands b w biggest overseas export c commodity (Milk Produc is under significant th ( cts) hreat. The com mpetitive edg that the co ge ountry had ha been lost over the past ten years an I will ende as o nd eavour to explain t rational w this has happened an the way it can be reme the why nd t edied. A cen ntral objective of the New Zea aland Gover rnment is for infrastructur to be a me re eans to permanently lift th sustainable the growth r of the ec rate conomy throu increase productivi and impro ugh ed ity oved manage ement of Cro own assets

Overview:
The nati advisory bank of late released a se of econom forecasts in support o the Govern ion et mic of nments Budget P Policy Statem (BPS). The forecast present a weaker outlo driven by global risks The ment ts w ook y s. weaker o outlook for t year ahea underpinn the ad ning the BPS reflects a nu umber of fact tors. On the domestic front, delay to the Can c ys nterbury rebu uild, which is now not ex s xpected to get underway until late et u 2012 ear 2013, par explain the outward s rly rtly t shift in the growth profile The lower level of GD in g e. r DP treasurys updated fo orecasts is al a function of official revisions to GDP back-da (Figure 1). lso n r G data 1 Howeve ongoing ri er, isks in the gl lobal econom rising fro Europe, are the main f my, om a factor behind the d weaker f forecasts. W While there are hesitant sig of some degree of sta e gns d ability emerg ging in the gl lobal economy (see later o the unde y on), erlying issues appear only to have bee booted do s y en own the road d.

Figure 1 Real GD DP

DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

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The mos eye-catching figures re st eleased to dat undoubted come from the retail s ate dly sector. Core retail sales vol lumes (which exclude ve ehicle-related spending) rose by 2.9% in the Dece d r % ember quarter from the prev vious period the largest increase sinc the series began in 199 ce 95(Figure 2) and followi a ) ing sizeable 2.6% increa in the Sep ase ptember quar too. Including the vehicle related components total rter d s, sales vol lumes rose b 2.2% on th quarter an by 6.8% on a year ago The strong retail perfor by he nd o o. g rmance undoubt tedly owes pa artly to the Rugby World Cup (RWC despite it only taking place in one month R d C) t g e of last qu uarter. Total sales volum in Wellin l mes ngton and Au uckland (which both host play-off games) ted g rose stro ongly, with a annual growth of 9.5% an 10.0% res h nd spectively.

Sales and Goods Cons umption G Figure 2- Retail S

What we do have pa e aints a mixed picture. On a positive no good gro d ote, owing condit tions in the dairy d industry helped expo volumes reach a recor high in the December quarter (Figu 3). Total exports y ort r rd e ure rose by 2 2.9% on the quarter. Foll lowing a 2.1% fall in imp volumes driven by l % port s, lower consum mption and inter rmediate goo imports, we expect n exports to make a size ods net o eable contribu ution to GDP growth P in the December qua arter.

Figure 3- Terms o Trade of

DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

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Activity in the const y truction secto also remai low by hi or ins istorical stan ndards. While new dwelli e ing consents rose strongly in January (up 27% on a year ago) and are like to increa further as the s y n ), ely ase Canterbu rebuild g ury gathers pace later this yea the curren level of ap ar, nt pproved cons sents is almost a third low than its f year average. wer five Turning our attention to this year the outlook remains br n r, k roadly in line with the BP forecasts. e PS The seas sonally-adjus ANZ Co sted onsumer Con nfidence mea asure rose str rongly in Feb bruary its thi ird consecut rise alth tive hough it rema below it long-run av ains ts verage and consistent wit just mode th est spending growth. Th mild improvement see in the hous g he en sing market over recent m months may also lend som support to consumer confidence in the near ter (Figures 4). me o c n rm 4

Figure 4 Consum Confid mer dence and H House Pric ces

Figure 5 Nation Bank Bu nal usiness Con nfidence

But sign of underly ns ying labour weakness how w wever, puttin things in perspective, b ng p business confidence remains some way sh of the highs reached in the midd of last yea and there a signs of hort d dle ar are underlyi weakness in the labou market too (Figure 5). This has thr elements.. First, while ing s ur o ree e Househo Labour F old Force Survey employmen did edge up by 0.1% in the Decemb quarter, the y nt p n ber t increase seen in em es mployment are only just k keeping pace with the incr reasing size of the worki age ing populati ion. The emp ployment rate (the propor e rtion of the working age population in employment) was w p n steady fo the third c for consecutive quarter at 63 .9% at the en of last yea q nd ar.

DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

Page 6

Second, the fall in th unemployment rate in the Decemb quarter was driven by a modest de he ber y ecline in labour m market participation rathe than a sign er nificant incre ease in emplo oyment. But there is evid dence of a discouraged work effect as people have dropped ou of the labo market. T shows up in the ker s e ut our This p total num mber of joble people. Of the 110,00 rise in tota jobless peo seen ov the past fo years ess O 00 al ople ver our since the labour mar was at its tightest, aro e rket s ound a third of the increa reflects a increase in the ase an n number of people wh are availa for work but are not actively see ho able k, t eking it (Figu 6). These people ure e etimes referr to as disc red couraged wor rkers. Finally there is little sign of acc y celeration in real n are some wage gro owth, despite the weak outlook for co o onsumer pric inflation. ce

Figure 6 Total J Jobless People Breakd down (000s s)

The heal sector is i for pressu as elderly will make up most of th expected s lth in ure y u he surge in popu ulation. The incr reasingly eld derly population creates c challenges that must be high on health agenda. Ne h ew Zealands ageing pop pulation will generate eth l hical and fin nancial complex challenge for the health es system a the Gove and ernment. NZs population will increas by 12 perc by 2036,, but 75 perc of n se cent cent the incre ease will be a among those aged 65 yea and over. In comparis Australia with a total e ars son a l populati increase o 30 percen will have a 47 percent increase in over 65 year o ion of nt i olds. Further r residenti housing w be requir (Figure 7 ial will red 7) Figure 7 Resident Investm tial ment

DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

Page 7

Howeve there are s er, signs of commodity price easing bac ANZs Fe es ck. ebruary comm mmodity price e index is expected to show further falls in wor prices for New Zealan exports (which are already r rld r nds a down 9% from a pea in May 20 % ak 011). The pri of Fonter ice rras dairy products fell 3 % to a two-m month low in th latest auct he tion in mid-F February (Fig gure 8). ports & Exp ports Figure 8 Real Imp

Non-com mmodity exp porters, which are outwei ighed by thei commodity cousins but still accoun for ir y ut nt around 4 40% of total exports are also at the w a whim of devel lopments in the global ec t conomy. All in all, the outlo for the g ook global econom has stabil my lised somewhat over the past few mo onths. Howeve many of th underlyin problems r er, he ng remain unsol lved and we expect globa economic al and fina ancial conditi ions to remai volatile fo the foresee in or eable future at the minute but plenty of risks a e, remain. The New Zealand do w ollar has risen rapidly sin Decembe last year. At the time o writing it was nce er A of w valued a just over U at US81c which is up around 7.5 per cen from the middle of Dec d nt m cember. The New Zealand-US exchang rate is close to its high level sin it was floated in Marc 1985. Aga ge hest nce ch ainst the Australian dollar it h hasn't been qu as strong - up around 1.4 per cen since mid-D uite g d nt -December. Among A the worl most trad currencie the New Z ld's ded es, Zealand doll has been the fastest ris over the past lar t ser p three mo onths ahead o the Austra of alian dollar a the Norw and wegian krona (Figure 9) a. Figure 9 Real Imp ports & Exp ports

DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

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Recommended Po olicy Direct tion:

The New Zealand ec w conomy has the potential to expand ra t apidly in cert sectors. New Zealan Trade tain nd and Ente erprise (NZT has ident TE) tified the hig gh-value man nufacturing and services ( a (HVM&S) sector as and area which could attract sign a d nificant forei gn investmen The chall nt. lenge for New Zealand business w is to secu this inve ure estment. New Zea alands locat tion in the So outh Pacific means that mass-product firms ou m tion utside the pri imary sector w always st will truggle to com mpete in Eur ropean and North Americ markets,, simply due to the N can distance to market. H e However, for high-value manufacture products, New Zealand based prod r ed N duction d can be c competitive a make a compelling va and alue proposition. Governm policies which incre ment s ease energy e efficiency an accelerate the demand for cost-effe nd e d fective alternati energy w provide th springboa for countr to leap ahead in com ive will he ard ries a mpetitiveness. Governm investm into rese ment ment earch institut and techn tes nological dev velopments f fosters knowledge creation and dissemi ination, and has a strong influence on the growth and ongoing competitive h n g eness of the secto As high-v or. value manufa acturing has b become an in ncreased foc for develo cus oped econom mies, effort ha been chann as nelled into creating effici iencies in bo manufacturing and bu oth usiness proce esses. Such eff ficiencies are created by eliminating t expenditu of resour for any o e the ure rces other goal th the han creation of value for the consumer or end-use Within th high-value manufactur r er. he e ring sector, le ean practices have led to greater distr s o ribution of p production, al llowing desig and proto gn otyping at home in our coun ntry, with pro oduction occ curring closer to geograph markets. New Zealan r hic nd-based com mpanies are incre easingly adop pting lean manufacturing principles to improve th productiv m g t heir ivity, profitab bility, and inter rnational com mpetitiveness. New Zea aland has a h high volume of imports a exports and conseque and a ently has a w develope ports well ed system s suitable for tr ransport of goods from a major cent g all tres. Higher than average costs are in e ncurred when sh hipping to Ch hina, but pote entially these are more th offset by the bi-latera Free Trade e han al e Agreement which ex xists between New Zealan and China. New Zeala is the on one of the n nd and nly e research countries to have neg hed s gotiated such an agreemen with China. nt Distance is a main driver of the cost of shipp e c ping. New Ze ealand has the least expen nsive shipme costs ent to Austr ralia than from other worl m ldwide destin nations due to the close proximity be t p etween these two countrie New Zeal es. land will dec crease its tax rate to 28% from 30% from 2012, an Australia will x f nd decrease its tax rate to 28% - 29% from 30% from 2014. New Zealands tax syste is one of the most e % % em t neutral a efficient in the OECD and D. The tren for the Ne Zealand currency has been up sinc the early 2000s. New Z nd ew ce 2 Zealand, with h Australia, Canada an Brazil, is being viewed as part of a cool countr club the m nd b d ries main benefa actors of growth as dem mand for thei commodity exports inc ir ty crease. These countries' c e currencies ha risen ave global g accordin ngly as inves stors seek to take advanta of their export succes in growi markets, t age e sses ing especially China. Ne Zealand in particular i seen as pro ew is oducing wha the world w at wants and ne eeds good qu uality farm ba ased food and materials. The New Zealand do w ollar's rise is also partly a vote of con nfidence in th underlying stability of the he g f economy Our banki system is sound, gove y. ing s ernment debt is low by developed cou t untry standards, and we have a stable eco e onomic and political envi p ironment (despite what might be perc m ceived from insular i political debates). Re l elative to the moribund e e economies of Europe, Jap or even the US, New f pan, w Zealand's prospects s seem a lot ro osier. Should w be worrie about a high New Zea we ed aland dollar? Well, our ex xports have g generally bee doing en OK rece ently, despite a sluggish world econom This is largely becau the prices for New Ze e w my. use s ealand's exports o world ma on arkets have been high. Ind b deed, high pr rices for our exports are p partly why th he exchang rate has be high. Dem ge een mand for kiw dollars has risen as a result of high sales of New wi r her N Zealand goods and s services over rseas. This ra aises the price of the kiwi relative to o i other currenc the cies New Zea aland dollar exchange rate.

DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

Page 9

Summa ary:
ssessing a co ountrys com mpetitiveness its importan to conside whom it is that you are nt er s e When as measurin it against. Bilateral ex ng xchange rate can only sh you so much. It is th es how m herefore com mmon to think in terms of effe ective exchan rates sim nge mply weighte averages of bilateral ex ed o xchange rate in es relation to a basket of other cou untries. Thes help to loo through so se ok ometimes vo olatile bilateral exchang rate movem ge ments to give a broad vie of a curre e ew encys streng The Rese gth. erve Banks trade t weighted index is a w d well-known example of a effective exchange rat Another th an e te. thing to consider when assessing a cou untrys comp petitiveness i what part of the economy it is that you are look is o king at. Common measures f n frequently ce entre on the m manufacturin sector, as a proxy for t total econ ng the nomy, reflectin the fact that this sector is usually th most invo ng r he olved with tra The noti of ade. ion competit more complic cated than ca be conveyed on a chart and should recognise th an t he tiveness is m composi ition of a cou untrys outpu and export Certainly, the manufacturing secto represents just a ut ts. , or small pa of total ou art utput in New Zealand. Ho w owever, this analysis high hlights how improving competit tiveness and productivity in the New Zealand eco d y w onomy requir an econo res omy-wide per rspective and wide ranging ref e forms. A rise in the value of the New Ze n ealand dollar is like a wa rise for ev New Ze r age very ealander rece eiving an income i this count because th price of im in try he mports goes down, which helps our in h ncomes go further. fu In additi ion, a high dollar makes New Zealand dollar savings more valuable comp N d pared to those in the e rest of th world. Th means tha we can do more with th he his at hose savings. We can put less aside to reach t o our savin goals, re ngs etire earlier, or buy more goods and se o ervices in ou retirement years. ur t

DavidGut tsellCurtinGSB EconomicsforManagers55 51Assessment229/03/12

Lecturer:GaviinForster

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