Strong growth in export revenues paid big part in New Zealand significantly reducing its current account deficit last year from -6.7 percent of GDP in 1999. The deficit deteriorated to -7.5 percent in the first quarter of 2000 but had been pulled back to -6.6 percent by the September quarter and an especially rapid improvement in the December quarter lopped it to -5.5 percent by year-end.
Export receipts during the year were more than 30 percent higher than in 1999, although import growth was strong, too, mainly because of the big rise in oil prices. Even so, the merchandise trade balance improved from $1.1 billion deficit in the 1999 December quarter to $188 million surplus in the 2000 December quarter.
At the time the 2000 balance of payments figures were published, forecasters generally expected further narrowing of the current account deficit this year. This was “undeniably an encouraging development”, said ANZ chief economist Bernard Hodgetts. But he sounded caution, too, saying “it is important to recognise that the sharp improvement in the deficit is strongly cyclical and may prove relatively short-lived”.
An appreciating Kiwi dollar would limit further export gains, for starters. Growth in our major markets, moreover, was slowing too, which did not auger well for the strength of overseas demand for our goods, although economic forecasters differed in their expectations.
Business and Economic Research said the economy would continue its period of moderate prosperity based on an export-led expansion. Its forecasting tables showed export growth would ease from 10.4 percent in the 2001 March year to 6.8 percent in 2001/02 before more sharply falling to 3.8 percent in 2002/03.
The Institute of Economic Research, however, expected export growth to have been just 7.5 percent in 2000/01, falling to 4.1 percent next year, then rising marginally to 4.3 percent in 2002/03. When shaping its monetary policy stance in March, the Reserve Bank was uncertain about how severe the international slowdown might be or how long it might last. But it optimistically said there were some “special factors” which suggested New Zealand’s export prices might hold up rather better than has been the case in previous periods of slow international growth, particularly in markets for meat and dairy products.
But even if the world slowdown turned out to be deeper and more prolonged than the Reserve Bank envisaged, it was not expected to be accompanied by the same degree of financial upheaval as happened at the time of the 1997 Asia crisis.
This time, too, the Kiwi dollar already was at historical low points, whereas in 1997 it was depreciating from historically high levels. The tradable sector had been much more fragile as consequence.
While the forecasters were peering into their crystal balls, or manipulating their computer-driven forecasting models, or whatever, institute director Alex Sundakov was looking into another bothersome constraint on New Zealand’s exports: business attitudes to exporting and the lack of an export strategy among many companies.
Sundakov had observed some oddities in New Zealand export patterns.
Manufactured exports seemed to be closely linked to what’s happening in the domestic market in New Zealand.
When things are tough in New Zealand and manufacturers are desperate, they look overseas for customers, but as soon as they see the home market recovering, they abandon the export market and return to New Zealand. Thus the pace of growth of exports is inversely related to the strength of the domestic market, suggesting the majority of exporting companies do not treat export as their primary focus.
In February, as part of its questionnaire for the Quarterly Survey of Business Opinion, the institute asked business respondents about exporting. The results showed growing involvement in exporting activity, demonstrating the extent to which businesses were diversifying their markets. In 1990, goods exported accounted for 19 percent of GDP; by 2000, the proportion had increased to 25 percent.
The survey tells Sundakov that while many companies do have strategies, many don’t. This worries him because under-performance in exporting accounts for much of New Zealand’s under-performance. New Zealand’s GDP growth is substantially below the OECD average, and export growth lags too, although the domestic economy has performed just as well as anywhere else in the OECD.
If New Zealand’s export growth had matched the OECD average, and assuming domestic growth remained unchanged, its GDP growth would have been at the OECD average, too. This means the country’s relative GDP decline is almost entirely explained by its under-performance with exporting. And we can’t just blame market difficulties. Management attitudes are important, too.
Bob Edlin is Wellington-based economic commentator and journalist.
