Gilbert Ullrich: Sunny forecasts not all they might seem

Gilbert Ullrich

Plenty of reason to be optimistic, proclaimed a recent economic and business forecast in the Herald. While there are certainly many encouraging signs, things aren't always what they seem to be and, for the future to be secure, there are several less feel-good factors that should be mentioned.

Two factors that seem to have not been focused on are the huge and growing current account deficit (now well over $100 billion) and the state of exporting. We seem to have a domestically focused economy; consumer confidence surveys are being influenced by growing domestic consumer spending and more investment in local real estate. What these have done is accelerate the growth in our current account deficit, whereas we need to redirect our commitment to, and investment in, productive and added-value industries that contribute to our export capability.

Until this is done, we will continue to have a two-speed economy - or, as I would prefer to describe it, one prone to the iceberg effect (the one-ninth above the water looks fine, but what is happening with the eight-ninths out of sight, below the waterline?).

This country's problems are not dissimilar to the US, where consumer spending has been a main contributor to a worrying current account deficit of about 6 per cent of its GDP (high by developed country standards, and financial markets are now nervous about the US economy, as reflected in the continued slide in the greenback's value). If this nervousness takes hold here, the implications could be serious. Probably the only factors preventing this are the small size of the economy and that the dollar is not a key trading currency.

As global traders, this country depends heavily on export earners that are vulnerable to external forces. About 75 per cent of our exports are merchandise and a high proportion of that is commodities - logs, wool, hides, milk powder, fish, fruit and even aluminium ingots. And our three main services export earners are tourism, transportation (air transport) and international education. We have seen the fall-out from bad press over several failed English language schools and the subsequent huge drop in enrolments.

Tourism and air travel are increasingly at the mercy of terrorism and tsunamis (fortunately, New Zealand is seen as a safe haven, but a big natural disaster here could quickly change that secure position). And if it were not for an unforeseen recovery in some key commodity prices, the merchandise trade deficit could be looking quite sick. Like the fluctuating currency and global events, commodity prices are things over which this country has little or no control - we are merely price-takers. Do we want to end up like the poor coffee-producing countries?

The only way I see we can address the fundamental problems (those below the waterline, that are essential if the environment above is to flourish) is for us to significantly expand our export earnings.

Our challenges are many - they include discriminatory trading practices by most countries, the flooding of world markets with cheap Asian goods (mainly from China), the lack of robust intellectual property protection, joining the Kyoto Protocol, the provision of affordable export guarantee insurance and some way of better stabilising the dollar to realistic levels. Added to that is the need for companies to niche market and concentrate on the premium end of the market; and, to assist those companies, the Government must commit itself to greater direct financial support for exporters in developing and keeping those markets, as well as addressing the chronic skills shortages.

The matter of skills shortages is a real and pressing problem, to which the Government has contributed much rhetoric, and some funding initiatives (like the Modern Apprenticeship scheme) have been taken, but much more has to be done practically. This requires a wholehearted commitment from industry. Without it, our competitors will make gains in our markets. With likely continued tourism growth, where will the trained people come from, when there is an existing severe skills shortage in the sector?

On the matter of developing and keeping offshore markets, I am conscious that Australia supports regular export missions to New Zealand, including two in 2004. Where is a similar initiative from New Zealand? Australia has become far more active in the Pacific Islands and this country is at real risk of losing markets to Australian exporters, not to mention the Chinese. At the same time, the Australians and Asian countries are courting small Pacific nations with attractive aid packages, that see aid tied to trade, as well as buying goodwill (in some cases to acquire lucrative fishing, milling or mining rights).

Australia has been quite smart in that these missions are essentially state government initiatives and, therefore, don't contravene CER. Maybe we should consider re-establishing the two early New Zealand provinces of the North and South islands, New Ulster and New Munster, so we can compete with Australian states on an equal footing regarding trade support, vis-à-vis Australia and the Pacific Islands?

Maybe we don't need to be quite so extreme, but we must begin to think imaginatively. Our numerous trade negotiations are only scratching the surface and will not stop our new trade partners from pushing the envelope (either during the negotiations or after) to secure advantages for their farmers and manufacturers and Government-led exporters - trade negotiations are not the panacea they are being claimed to be.

On new immigration and business investment, we must not only make this export-driven, but rather than buying up existing businesses (and then often relocating them offshore), the criteria should be focused on new greenfields industries that add to to our industrial and export capability. Offshore investment should be directed away from real estate and bricks and mortar to enterprises that produce value-added goods and services here.

Lastly, let's begin to unashamedly promote New Zealand and "Buy NZ Made" to curb the growing flood of imports and create better-paid skilled jobs here.

By such means we can reduce the current account deficit and climb back up the OECD table.

* Gilbert Ullrich is managing director of Ullrich Aluminium Industries.