Take care in boom times, firms warned

Hawke's Bay's economy is on the up but some businesses will suffer, says Westpac chief economist Dominick Stephens. Photo/Paul Taylor

A booming primary sector means Hawke's Bay companies need to be careful they are on the right side of change, says Westpac chief economist Dominick Stephens.

"We have been predicting for quite a while that New Zealand's protein producing sectors would do well but over the last few years the sector had been much more powerful than expected," he said.

While international food prices had fallen, New Zealand was still trading well, he told a Napier City Council/Hawke's Bay Chamber of Commerce business breakfast at McLean Park last week.

"That is a bit of a puzzle because the world economy is not that flash."

In China, India and Indonesia changing diets had driven demand in the past but their economies had slowed "pretty dramatically over the past couple of years".

"It was predicted that New Zealand's prices would fall a year ago from the very high levels that they were at, but they went up. So what's going on?"

His "belated view" is that the free trade agreement signed with China in 2009 has had a "huge effect" on the price of exported products.

Trade with China as a percentage of a GDP had gone from 1 per cent to 4.5 per cent.

"It is reasonable to presume it is having a price effect, if no other reason that in China it is a really good idea to do business with the guys that have the seal of approval from the government.

"As food producers with a free-trade agreement we are probably more likely to get through the point of control than the people who don't have free-trade agreements."

New Zealand had had "a hard few decades" and was back to the terms of trade last experience in the 1950s and 1960s, which would boost regional economies.

"This year in dairy there is an extra $6 billion coming to the country to be shared amongst 12,500 farmers."

If the terms of trade stayed high, so would the exchange rate, he said. If local production firms did not adapt they would go under and an importing firm would "spring up" in their place.

"But either way, the economy would still be focused on primary exports and we would import everything else. So if you are one of those industries it is pretty bad."

The high exchange rate meant capital equipment was cheaper.

"Businesses are investing in physical capital handover first. For example, dairy farmers are putting in a lot of flash machinery." It was good for productivity but not for those the machines replaced.

"A super-high terms of trade is obviously good for New Zealand as a whole. It will obviously move us up the OECD ranks of income per person, but your business and your region may or may not be on the right side of that change."

He said typically monetary response was too late and inflation "was the big monster that popped up" and stopped the upturn. "So too do the high interest rates set by the Reserve Bank. So good reason to suspect that New Zealand is heading for a bit of a boom/bust cycle, so the latter part of the decade could look quite nasty. I implore you now to be careful."