Introduction
Thanks to Brightstar for the opportunity to be with you again, in person this time!
I’ve spoken several times now at this event and I’ve usually begun by bemoaning the current state of the world and the shadow this casts over our economic fortunes here in Aotearoa.
I’m not going to disappoint you today – as we meet here this morning, it’s hard to escape the fact that we are in some serious trouble at the global level.
Two conflicts – one in Ukraine and an expanding one in the Middle East – threaten the global rules-based order and risk overturning the slow progress we are making to overcome the post-pandemic economic gloom.
Both conflicts have the capacity to impact enormously on the outcome of the November US Presidential election – a water-shed moment not just for the United States but for the world as a whole.
And they are also diverting attention away from other hugely significant challenges: a technological revolution that can change fundamentally the way our society functions and a climate challenge that the world is largely failing to take seriously enough.
On so many levels it seems we are at an inflection point, a moment in history where what transpires in coming months will radically change the future.
Let me explore this further today by talking about:
- The big picture facing New Zealand in the global economy;
- The geo-political issues that loom large; and
- Some of the other trends and challenges that we currently face.
Global economy
Let’s start by looking on the bright side.
The global economy, while weak, is growing again and inflation is being brought under control.
The IMF released its latest World Economic Report[1] back in July.
The IMF expects the global economy to grow 3.2 percent this year and 3.3 percent next year.
That’s lower than the long-term average of 3.8 percent.
The world is also making some progress in reducing inflation, which is forecast to slow to 5.9 percent this year (from 6.7 percent last year).
The not so good news is that inflation is surprisingly persistent: while costs of “headline” inflation – food and energy – have declined, prices for services have continued to rise, which complicates the return to a more normal inflation outlook.
That growth projection masks different scenarios for different economies.
Generally speaking, emerging markets and developing economies especially in Asia and Africa are doing better than advanced ones.
China’s economy is facing structural problems – the forecast is for 5 percent growth this year although some commentators doubt this can be achieved.
India continues to out-perform but at a lesser rate – down from a high in 2023 of 8.2 percent to 7 percent this year.
Other economies in “emerging and developing Asia” which include some of New Zealand’s bigger trade partners which the Government is now targeting, are doing reasonably well.
Why do these figures matter?
They matter because they impact on the countless commercial decisions in international markets which drive the prices which New Zealand businesses receive for their goods and services.
Back in April the World Trade Organisation released its annual trade survey[2].
The WTO forecast is that trade should grow by a mere 2.6 percent in 2024 and 3.3 percent in 2025.
That’s a lot better than the paltry 1.2 percent score for 2023.
But these are still not great numbers.
One bright spot is that services trade – driven by a surge in digitally-delivered services – things you can buy over the net – and other services like tourism – has expanded significantly.
(Of course, these are the very same services where price rises are now contributing to global inflation!)
We see this in New Zealand – while tourism is not yet back to pre-Covid levels, there are now more Chinese airlines serving New Zealand than pre-Covid.
When it comes to goods trade, the last year has seen some stabilising of our position after a decline which set in towards the middle of last year.
Whereas total goods exports declined by 5.5 percent in the December 2023 quarter they grew in May and dropped by a mere 0.1 percent in June and August[3].
Some have pointed to the economic difficulties in China, our largest market, as a contributing factor to New Zealand’s export performance over the last year.
It’s true that the Chinese market has continued to be problematic, reflecting a slow rebound from Covid and other structural problems in the economy.
Meat exporters have been particularly hard hit, but in other sectors like dairy and horticulture there would still seem to be optimism for a rebound in the market in the medium term.
Kiwifruit is doing particularly well as a result of the strong market position Zespri has built in China.
It’s important to remember too that New Zealand is not supplying “the whole of China”: there remains a lot of growth potential in the middle class, which is our target market, variously estimated to be between 500 and 700 million people.
China still has a number of policy levers at its disposal and we are starting to see these deployed as more stimulus is pumped into the economy.
What’s more China continues to open its market to New Zealand as is shown by Chinese willingness to explore new ways of further upgrading our ground-breaking FTA.
Geo-political risks
That is of course unless geo-politics overturns the apple cart.
It’s fashionable these days to say that “history, geo-politics and (even) geo-economics are back”.
I’m not sure they were entirely absent earlier, but it is true that these days we seem to be returning to another age in terms of super-power rivalry.
Certainly, geo-politics is being talked about more frequently and at Boardroom level than ever before.
That’s doubtless because of the growing risk caused by geo-political disruption.
By “geo-political disruption” we mean the way in which conflict or tension between states or other international entities can impact on the global economy and the ease and cost of doing business.
Look at Putin’s illegal and immoral war in Ukraine or the multiple conflicts in the Middle East between Israel and its neighbours and the risks these “proxy wars” pose for wider conflict between Israel and Iran.
Impacts are already being felt on energy and oil prices, on global supply chains and the cost of shipping passing through the Red Sea, complicating the time to move goods to and from Europe.
There is also the “new cold war” that is becoming hotter between the United States and China, in which New Zealand itself risks becoming embroiled.
New Zealand is not immune from these developments.
We may be far away from the global hot-spots but as a global trader, with global interests and a proud history of being active on the international stage, our interests are certainly impacted.
We are seeing these geo-political tensions play out in our immediate neighbourhood in the stand-off between the US and China.
China’s political and economic rise has drawn it into greater competition with the United States which is no longer the only prevailing super-power.
If you want a classical interpretation, we are heavily into the territory of the Thucydides trap.
Thucydides was an ancient Greek historian who postulated that a when a rising power threatens to displace a ruling power, the result can be conflict.
Let’s hope Thucydides is proved wrong, but it is fairly clear that the United States is no longer prepared to accommodate China’s rise and is taking steps to respond to what it sees as increasing Chinese competition.
Hence the raft of economic measures taken against China started under former President Trump and continued and even expanded by President Biden.
The American explanation for this is that China itself has changed by becoming more authoritarian both within China and especially in the provinces of Xinjiang and Tibet and externally through its coercive, “wolf-warrior” diplomacy, increasing militarisation and destabilising actions in the South China Sea and the Taiwan Strait.
Last November’s meeting in San Francisco between Presidents Biden and Xi gave rise to some alleviation of the geo-political tension between the two.
It was an improvement in tone, rather than in substance, but even this risks being overtaken as the United States seeks to gather its allies and partners in a tighter coalition prepared to challenge directly what it sees as Chinese aggression.
The most visible illustration of this is the AUKUS (Australia, UK, US) partnership which focuses on deterrence through a programme of expansion of Australian nuclear-powered submarine capability in the Pacific.
New Zealand is currently considering whether there is a case to join a second pillar of AUKUS related to advanced military technology.
What is a small, freedom-loving, trade-dependent South Pacific country like New Zealand to do ?
We have developed strong relationships with both the US and China.
We’ve tried hard, with some success, to maintain some sort of balance, while remaining faithful to our values and history.
That’s really what our “independent foreign policy” is all about: making our own decisions about how we act and what we say, quite often in concert with our traditional partners, but from time to time acting on our own.
Our traditional relationships matter, but so do our economic interests particularly at times like these.
The political risk is rising of an impact on our trade from an unforeseen event or some new policy direction, which disturbs the balance we have tried hard to maintain.
Membership of AUKUS II could well fall into this category as we are drawn into the inevitability of regarding our largest trading partner as a direct military threat.
These are weighty matters and the New Zealand Government will need to be alert to the potential unintended economic consequences of big changes to our independent foreign policy.
Other tends and challenges
I suggested earlier that these geo-political issues tend to mask some other big challenges.
Let me touch briefly on a few of these.
Protectionism
First up, the world is becoming increasingly inward-looking.
That’s unfortunate at a time when our Government is wanting to double export value.
Today, protectionism on the rise everywhere as the number of trade restrictive measures increases.
Free trade is giving way to “industrial policy and friend-shoring”.
In the land of the free and the brave, tariffs are the order of the day – whether the 100 percent tariffs the Biden Administration is imposing on electric vehicles from China or the 20 percent tariff that a second Trump Presidency promises to initiate should be win the election.
A 20 percent tariff applied to New Zealand’s $14.5 billion worth of exports to the United States, which is not protected by any free trade agreement, could prove even more problematic for our economy than the impact of economic uncertainty in China.
This comes at a time when the World Trade Organisation, as the ultimate keeper and arbiter of the rules of international trade, is in a severely weakened state, just when we need it most.
New Zealand has benefited greatly from the wave of trade liberalisation that has unfurled around the world in the last thirty years.
CER entered into force in 1983 but our second FTA was not signed with Singapore until 2001.
Since then we have knocked off some big ones including China, ASEAN, CPTPP, RCEP, the UK and the EU.
At the end of September Minister McClay announced the conclusion of negotiations for our latest FTA with the United Arab Emirates.
And of course the Government is keenly interested in a new FTA with India if that can be unhooked – that will depend largely on whether we can first expand the relationship across the board and develop new areas of co-operation.
Trade agreements also need to be continually updated as business models change and new issues arise – this is the case with the mega-regional agreements like CPTPP.
We may not have reached “peak FTA”, but the age of large-scale transformational agreements is probably behind us.
Attention will now need to turn to making sure we get the most out of the agreements we have and finding ways to improve competitiveness and productivity.
Sustainability
Another key challenge for us – and one that is closely linked to our trade prospects – is to walk the talk on sustainability and fully embrace the climate challenge.
Climate consciousness has risen significantly around the world in recent years and only the most backward-looking of political parties and the occasional business organisation thinks there is nothing to worry about.
Whatever you may think about the causes of climate change the international community has signed up to the Paris agreement and the obligations that entails – obligations which impose on us an undertaking either to meet our “nationally determined contribution” or emissions target by 2030 or buy carbon credits on the international market.
This commits Aotearoa New Zealand to reducing net greenhouse gas emissions by 50% below gross 2005 levels by 2030.
Today it seems we are some way off from meeting this target which implies a significant contingent liability – in other words either we play or we pay !
Beyond this, we have a huge incentive to get on the right side of the debate and use our superior carbon performance as an asset in marketing our products overseas.
It matters not whether it is consumers (the end purchasers of our products) or customers (those who actually buy from us) demanding greater attention to sustainability, the writing is clearly on the wall.
I was very much taken by KPMG’s most recent agri-business report[4] which had this to say about the future positioning of New Zealand food products in global markets:
“The challenge for organisations is targeting consumers that understand our products and are prepared to pay for them…the industry needs to be clear in its ambition to deliver nature-positive food from well stewarded landscapes, that is demonstrable by hard data”.
“Nature positive food from well stewarded landscapes that is demonstrable by hard data” – think about that.
In today’s anxious times consumers everywhere are wanting reassurance.
Reassurance about a product’s origin, safety and sustainability.
This is not a cost, this is a huge opportunity waiting to be realised, but it starts with meeting the climate challenge and living up to our commitments.
Artificial intelligence
The last global challenge I want to mention all too briefly is the fourth technological revolution and the advent of artificial intelligence.
The APEC Business Advisory Council (ABAC) is an organisation I am involved with – it brings together business leaders from the Asia Pacific region.
ABAC points out that AI has the potential to transform the world as we know it.[5]
Whether in science, business, education, productivity or climate change, AI can help to tackle the world’s greatest challenges, including green development, alleviating poverty and increasing food security, solving significant health issues.
But AI is an emerging technology and there is need to weigh opportunity, responsibility and security in considering how to develop AI and the appropriate governance and standards to harness the benefits and mitigate any potential risks.
The point here is that there is a lot of work to do both here both in policy and AI business development in New Zealand and around the world: we must not let our understandable preoccupation with today’s problems undermine our ability to tackle tomorrow’s challenges.
Conclusion
Let me come back to where I started.
The world is at an inflection point.
That we will eventually get back to where we were before the pandemic – remember those heady days ? – is not a given.
The slow economic progress we are making can be derailed.
Our attention is too easily diverted by the difficult security situation we find ourselves in.
Geo-politics is everywhere, trust amongst nations is at an all-time low.
This risks preventing a focus on other big issues – the closing of borders, a pressing need for greater sustainability, the opportunities and risks of AI.
New Zealand is making its way in a confused and unstable world.
Today more than ever we must leverage our strengths in trade, sustainability and the adoption of new technology.
[1] https://www.imf.org/en/Publications/WEO/Issues/2024/07/16/world-economic-outlook-update-july-2024
[2] https://www.wto.org/english/res_e/publications_e/trade_outlook24_e.htm
[3] https://stats.govt.nz/information-releases/overseas-merchandise-trade-august-2024/
[4] https://assets.kpmg.com/content/dam/kpmg/nz/pdf/2024/06/2024-agribusiness-agenda-v6.pdf
[5] https://www.tradeworks.org.nz/wp-content/uploads/2023/11/DIWG_43-045A_ABAC_Statement_on_Artificial_Intelligence_4th_draft.pdf
