Recessions sharp edge cutting both ways

After a mild recession, the domestic economy has apparently nudged back into a growth phase, with business and consumer confidence rising. On the face of it, this seems like good news.

“But ask exporters and they are quick to suggest a contrary view,” says Don Nicolson, President of Federated Farmers

“Although global dairy returns appear to be heading in a positive direction, no matter what the export, the strength of the Kiwi dollar means the ‘sharp edges’ of the recession have now become ‘razor like’ threats to exporters as the year progresses.

”Much has been said by politicians from the Prime Minister down that their economic stimulus – one of the largest per capita in the OECD – will shave the sharp edges off the recession.

“Federated Farmers believe the stimulus measures, especially those driving increasing Government spending, are actually delaying the economy’s rebalancing act. An act that must involve the export sector or the worst is yet to come.

“While the stimulus package has helped ease the domestic economy’s pain, it has also led to a massive increase in the size of Government. Yet for years the Reserve Bank of New Zealand governor chastised ‘expansionary fiscal policy’ for making his job more difficult. Is that not now the case?

“Just look at total Crown expenses, which have risen from $40 billion in 1999 to $76 billion in 2008 but are forecast to hit $97.5 billion in 2013. Add local authority expenditure to the list and this figure will hit the 50 percent of GDP mark in the near future.

“That’s potentially a 150 percent increase over just 14 years, making the eyes water of those trying to generate export wealth.

“The Federation acknowledges the Government’s announcement of catch up infrastructure investment programs, but they’re only part of the balance sheet equation. Many of these new programs have not yet even entered the construction phase, so the stimulus package has initially been spent where? Largely on shoring up domestic consumption, that’s where.

“But New Zealand needs a profitable export sector to pay the bills and those at the genesis of export production systems only see red ink.

“As well as spending, Government debt is shooting up at a rate of knots. Finance Minister, the Hon Bill English, admitted just weeks ago that the Government will borrow $40 billion over four years and is currently borrowing hundreds of millions per week.

“How any economy can achieve sustainable growth with such a big and rapidly growing Government sector is beyond me.

“There is little security for farmers and other exporters as their incomes come under attack from a grossly over-valued exchange rate. With the Kiwi dollar sitting above US74 cents and the TWI on the border of 67, our currency is more than 30 percent higher than what Treasury forecast back in May.

“The question now is, how has this impacted on Treasury’s economic and fiscal forecasts? The warning signs are ominous.

“Some call for direct currency intervention but history shows that doesn’t work. Then again, that’s exactly what the Government is doing by looking to soften the recession’s sharp edges. It’s nothing more than intervening, locally. Yet remember how New Zealand accused the G20 countries of setting a bad example with their many domestic interventions and protections?

“Just imagine if Crown employees’ wage packets were required to move up and down with daily currency fluctuations? Would that encourage a reality check?

“What exporters need is a commitment from Government that it supports them and has plans to ensure all policies are aligned to promote competitiveness and productivity,” Mr Nicolson concluded.