Faced with a number of domestic and international challenges, New Zealand’s economy has faltered over the last year. But there is still much to be positive about, writes Domini Stuart.
In January 2014, Paul Bloxham, HSBC’s chief economist for Australia and New Zealand, described New Zealand as a “rock star economy”. For the rest of the year it lived up to the name – it had the fastest-growing economy of all 32 nations in the Organisation for Economic Co-operation and Development (OECD). Then things started to slow down – but, as Bloxham said recently on New Zealand TV, that’s a long way short of a disaster.
“The economy is still growing – [New Zealand] is actually in the middle of the pack across the OECD at the moment, and there are good reasons to be optimistic about its prospects,” he said.
New Zealand has certainly out-performed many advanced economies in recent years. However, as Reserve Bank of New Zealand governor Graeme Wheeler has pointed out, international forces including large declines in dairy, oil and other commodity prices, low international interest rates and record net immigration levels continue to exert a major influence on the economy.
“Globally, economic growth is below average and inflation is low, despite highly stimulatory monetary conditions,” he said in December’s Monetary Policy Statement. “Financial markets remain concerned about weaker growth in emerging economies, particularly in China. Markets are also focused on the expected tightening of policy in the United States and the prospect of an increasing divergence between monetary policies in the major economies.”
A downturn in dairy
The plateauing of construction activity in Canterbury and the earthquake rebuild in Christchurch, along with weakening business and consumer confidence, have contributed to a slowdown in economic activity, but it is the dairy industry that has been causing most concern. As the world’s top dairy exporter, New Zealand accounts for around 40 per cent of the international dairy trade, but a drop in demand from China played a major role in halving the price of milk over the past two years. According to New Zealand agri-information web service AgriHQ, local dairy farmers are getting the lowest milk price in the world.
“Part of the reason for this is that 95 per cent of the milk produced is exported, which makes New Zealand the most dependent upon the global market,” says AgriHQ dairy analyst Susan Kilsby.
New Zealand is unique in that market price can’t be set through competition – the Fonterra Co-operative of 10,500 farmers and their families collects about 87 per cent of the supply. Instead, Fonterra uses an independently approved methodology to calculate a farmgate milk price. While this has bounced back somewhat from last winter’s 13-year low, it is too early to say whether these improvements will be sustained – although New Zealand Minister of Trade Tim Grosser is confident that there’s no danger of agriculture becoming a “sunset industry” and fading away.
“Our markets have always been distributed around the world and producers have had to adapt to the needs of those [markets] or die,” he told the recent International Federation of Agricultural Journalists (IFIA) annual congress. “Only 3 per cent of our food exports now go to the UK, compared with more than 60 per cent in 1973. The growing wealth, prosperity and population of China and Asia will reconfigure New Zealand’s global export trade in the coming decades.”
An upsurge in tourism
Wheeler has identified the large pipeline of construction activity in Auckland and other regions and, importantly, lower interest rates and the depreciation of the New Zealand dollar as factors that are continuing to support economic growth. But the standout success is tourism, which is set to take over from dairy as the country’s top export earner.
“The industry has recorded 9 per cent growth in international visitor arrivals in the last 12 months, and the indications are that we will see that level of growth continue or even increase through the peak visitor season, especially with all the new air services coming into New Zealand,” says Tourism Industry Association New Zealand chief executive Chris Roberts.
Air New Zealand recently started regular services from Buenos Aires and Houston, Philippines Air is now flying from Manila to Auckland, China Southern Airlines and China Airlines are flying into Christchurch, and China Eastern Airlines and Air China have introduced new services into Auckland. United Airlines is also about to enter the market by launching a San Francisco–Auckland service in July this year.
“The US is New Zealand’s third largest tourism source market, contributing almost a billion dollars to our economy in the past financial year,” says Air New Zealand chief executive officer Christopher Luxon. “We know there are more than 30 million Americans actively considering New Zealand as a holiday destination. To have a partner carrier with a network like United Airlines promoting New Zealand and attracting visitors through its immense sales and distribution channels will provide a significant boost to inbound tourism.”
New Zealand also remains an attractive short-haul destination for Australian tourists and, increasingly, corporate events.
“Dozens of direct flights depart from seven Australian airports and many are as short as a couple of hours,” says Lisa Gardiner, international business events and premium manager at Tourism New Zealand. “In fact, Sydney is closer to Auckland than it is to Perth.”
“The events market combines the appeal of an overseas location with the familiar benefits of safety, security, strong and respected business governance, and the reassurance of well-established brands,” adds Franck Hesse, area director of sales and marketing at hospitality firm, IHG New Zealand. “Plus, over the past two years, rising demand has encouraged owners to invest in renovating rooms and meeting spaces, including installation of the latest technology. Hotels in the 4.5 and 5 star range are now offering very high-quality facilities and services.”
New Zealand’s cities are so compact that the attractions are often within walking distance of conference facilities and there is also easy access to contrasting environments across the country.
“This is very attractive to the growing number of event organisers who are looking for ways to supplement the formal conference agenda with opportunities to access a wide variety of leisure activities and a unique cultural experience,” says Gardiner.
There are major venues in Auckland, Hamilton, Rotorua, Wellington, Dunedin and Christchurch. Work has begun on the New Zealand International Convention Centre in Auckland, which will add significant capacity for large-scale events and, in Wellington, the City Council has committed to co-investing with Sir Peter Jackson and Sir Richard Taylor in a combined convention centre and movie museum.
“Wellington currently has some good, smaller scale conference and meeting venues but a purpose-built facility will attract significant international events,” says Roberts. “The Movie Museum will be an exciting new attraction in its own right. One of the most successful new tourism products in New Zealand has been the Hobbiton Movie Set in Waikato. Wellington is at the heart of New Zealand’s film industry and the Movie Museum could potentially attract visitors on a similar scale.”
Gardiner says that New Zealand is fortunate in having a number of world-class industry leaders and experts who attract international conferences. “Locals are able to leverage their local intellectual capital and industry knowledge clusters in areas such as marine, aviation, agribusiness, health science, high value foods and earth science. We view this more broadly as a societal benefit for New Zealand as it also ensures knowledge transfer in these areas.”
The fastest-growing sector
The third leg of New Zealand’s export economy is the technology sector, which incorporates information and communications technology (ICT) and high-tech manufacturing.
“This is the fastest-growing sector, the fastest-growing in terms of job creation and it has the highest average rates of pay,” says Graeme Muller, chief executive of the New Zealand Technology Industry Association (NZTech). “It also accounts for the largest proportion of investment in research and development (R&D).”
ICT’s contribution to gross domestic product (GDP) grew by $1.282 billion in the five years to 2013, driven almost entirely by computer system design. The interactive gaming industry has also grown rapidly into a multi-million dollar export industry.
This success has been driven at least in part by government policy and investment decisions. For example, Callaghan Innovation, which is an office of the Ministry of Business, Innovation and Employment, supports and encourages investment in R&D and has developed a network of incubators and accelerators. The 2014 budget allocated $28.6 million over four years for an ICT Graduate School program to deliver industry-focused education and research and build connections between tertiary education providers and high-tech firms. The Beachheads initiative from New Zealand Trade and Enterprise connects companies to a network of local and global private-sector advisors who act as mentors and share their insights into the reality of growing an internationally successful business.
“At NZTech, we’ve found that the industry has been maturing rapidly and building a more cohesive level of collaboration,” says Muller. “As a result, a growing number of new and innovative tech companies are entering global markets quickly and successfully. Some are becoming world leaders in their niche – for example, Xero SaaS accounting was acknowledged as the World’s Most Innovative Growth Company in 2014 and 2015, with over 500,000 subscribers worldwide.
“Orion Health Healthcare Solutions is used in over 30 countries by hundreds of thousands of clinicians and facilitates care for tens of millions of patients. And VEND POS System was the first point-of-sale system in the world to be built entirely in the cloud. Since its launch it has expanded into more than 140 countries and raised more than $US 30 million.”
Doing business with New Zealand
Australia is New Zealand’s largest single market and its strongest trading relationship. Many New Zealand-based companies have gained access to a wider pool of capital by listing on the Australian Stock Exchange. However, New Zealand Trade and Enterprise lists 10 good reasons why Australian companies should return the favour by doing business with New Zealand.
- New Zealand is globally recognised as a safe place to invest and do business.
- It ranks number one in the world for ease of starting a business and number two for ease of doing business.
- Business costs are low for a developed country and the tax system is relatively simple.
- The economy is efficient and market oriented.
- Geographic proximity and extensive free-trade agreements provide access to key global markets.
- There is a culture of innovation and entrepreneurship.
- Flexible immigration policies include a range of visa categories catering for investors, entrepreneurs and business managers.
- Abundant resources include water and arable land and a stable supply of gas and electricity.
- New Zealand has world-class infrastructure across transport, logistics and freight.
- Sophisticated telecommunications infrastructure includes international broadband submarine cable systems and competitive onshore mobile networks.
Benefits such as proximity, safety and high service standards also make New Zealand an attractive place for Australians to hold their business events.