In October 2020 Stephen spoke to accountants’ conferences in Christchurch and Wellington: here are his remarks:
GLOBAL ECONOMIC UPDATE: TRENDS, SHIFTS AND IMPACTS ON NEW ZEALAND’S BUSINESS LANDSCAPE
It’s good to be with you again at this 47h One Stop Update event. My thanks to Conferenz for having me back.
When I spoke to this group last year, I took on the role of a weather-forecaster.
As I looked over global landscape, with the shadow of the US/China trade war and a rising risk of protectionism, I issued a warning – cyclone approaching – but I definitely missed something.
This year I’d be better off being an epidemiologist.
What just happened ?
A small item in the Economist of 11 January read as follows:
“Almost 60 cases of pneumonia in the Chinese city of Wuhan were thought to be linked to a new strain of the virus that caused the SARS epidemic in 2002-03. Unlike then, no-one else has yet died from the disease. The WHO is investigating…”
This global pandemic caught us unprepared and has left havoc in its wake.
All analyses, forecasts and outlooks are having to be revised – for most we may as well start over again from scratch because, let’s face it, 2020 has been brought to us by the letters W, T and F and we ain’t seen nothing like this before.
2020 has become a wasteland of hopes and dreams.
We haven’t previously seen – at least not since 1918 – such a devastating health impact and crippling effect on local economies.
We have not ever seen such a shock to the global economy or global supply chains, nor the fall out on formerly strong sectoral performers like tourism and international education.
Curiously though there has been some, albeit faint, light on the horizon.
We’ve seen, despite some initial hesitations and some variation between sectors, markets for our key goods exports remain open and performing.
We’ve seen traditional industries and some key markets largely save the day when it comes to our economy.
We’ve seen too some strong policy actions on the part of our Government aimed at shoring up supply chains and continuing the task of keeping trade flowing.
The question for us now is what we can do to weather the continuing storm in this incredibly uncertain environment.
Working out “What’s next” has never been easy and while I’m not here to predict the future, I’d like to unpack some of this further with you and I look forward to the conversation that will follow.
In the wasteland
At the outset we should note the tragic loss of life and human potential which have been caused by the pandemic, which has yet to run its course around the world.
Words fail to express the sorrow at the loss of 25 fellow New Zealand citizens, let alone the over 1 million global citizens whose lives have been prematurely ended.
That such a tragedy could befall us at a time when the world is more advanced scientifically, more connected globally and more prosperous economically than at any other time in history will be something for historians, philosophers and economists to ponder in the decades to come.
The scarring of this sort of catastrophe cannot be measured just in accounting terms (if you’ll foregive the expression) – the human cost is simply incalculable.
The global economy is reeling.
Never before have all parts of the global economy suffered a shock at the same time. Never before have both supply and demand been affected at once.
Most countries have been suddenly plunged into recession: the World Bank says that growth will contract by between 5.2 percent and 8 percent in 2020 and that the COVID-19 recession has seen the fastest, steepest downgrades in consensus growth projections among all economies since 1990[1].
While developed economies have certainly not been spared, developing economies have been hardest hit : for over 25 years world poverty has been steadily declining but now, the World Bank says, the deadly combination of Covid and climate change could in 2020 drastically increase the number of people living in extreme poverty by 88 million to 115 million[2].
Here in New Zealand our economy declined by 12.2 percent in the last quarter.
Even with a strong rebound expected after the ending of the lockdown in Auckland, the economy is still expected to shrink significantly this year, perhaps by as much as 5.6 percent before rebounding in 2021.
Here as elsewhere some sectors have been hit harder than others –international tourism and education, hospitality and entertainment, the creative industries property, construction, manufacturing to name just a few.
Around the world the loss of air and sea-freight connections has seen supply chains tested to breaking point with many businesses looking now to re-shore some critical manufacturing operations.
The pandemic has caused major disruption to food production and distribution resulting in bottle-necks along the entire food supply chain.
Throughout the pandemic a high level of policy uncertainty has existed.
The protectionist reflex, already present in the pre-Covid world, became initially even more manifest as economies looked to protect local supplies of essential health equipment, from sanitiser to PPE to soap and even food.
As the crisis began several economies placed restrictions on food exports, including eggs, rice and grains.
Fortunately, by August most of these restrictions had been removed.
This was due to a lot of pressure from international organisations like the World Bank, the IMF, the WTO, G20 and APEC which did the job we needed them to do and called for markets to be kept open and trade flowing.
As bad as it has been, there have been one or two glimpses of light in the darkness.
In April this year the best estimate of the World Trade Organisation was that trade would drop by 12.9 percent in 2020: a new forecast suggests the drop will be more like 9.2 percent, with trade rebounding by 7 percent in 2021 but still remaining below the pre-crisis trend[3].
Interestingly for New Zealand, the trade decline in Asia is expected to be less – at 4.5 percent.
All these forecasts of course are predicated on the absence of a resurgence in the pandemic; as we see in the United States, Europe, South America and India, the worst may be far from over.
New Zealand’s trade has held up remarkably well also.
Our key exports of dairy, meat and fruit are all higher this year than last year, but exports of forestry and seafood are down.
In the year to August 2020 New Zealand’s total annual exports were up 2.8 percent from the same period the previous year and total annual imports were down 8.2 percent[4].
Our traditional exports of agricultural and food products have been saving our bacon during this crisis and a big shout out needs to go to our farmers and exporters.
Key markets especially China have performed well and exports to Japan have been growing strongly as the market has opened under the Trans Pacific Partnership.
Generally speaking, our markets have remained open to us in a regulatory sense – again proving the worth of the free trade agreements which today cover over 64 percent of exports and eight out of our top ten markets.
Exporters have faced problems in terms of disruptions to supply chains including logistical delays at ports, time delays with courier services and bottlenecks in inspection and storage.
Some jurisdictions are putting in place new certification requirements and exporters need to keep in close touch with their customs agents and NZ officials about these in case they become unjustified non-tariff barriers to trade.
Several sectors are also facing critical shortages of skilled and unskilled labour including RSE workers to pick fruit, people required in meat processing plants or to service equipment in factories and seafarers to work on the fishing fleet – these shortages are going to become more acute as the border closure continues and could threaten the export-led recovery.
It has to be said that NZ Government agencies over this time have been noticeably attentive to exporters’ needs.
The Government has adopted a Trade Recovery Strategy focusing on retooling exporter support, rebuilding the network of trade agreements and refreshing key relationships.
Regular updates have been held with business represenatives to maintain a check on the pulse of trade and any problems both onshore and offshore that have arisen.
At an early stage temporary steps were taken to ensure air routes remained open both for exports and imports[5] and a number of supply chain connectivity arrangements were negotiated with key overseas partners.
Sone problems remain to be addressed: several sectors are facing critical shortages of skilled and unskilled labour including RSE workers to pick fruit, people required in meat processing plants or to service equipment in factories and seafarers to work on the fishing fleet – these shortages are going to become more acute as the border closure continues and could threaten the export-led recovery.
With Covid there came a risk that some of our partners’ worst protectionist instincts might have been awakened – by and large this has been avoided, but that protectionist reflex has not gone away.
Geo-political tensions that were smouldering pre-Covid have broken out into more aggressive firefights – the US/China relationship for example is at a worse point today than at any other time in history.
The shadow of the US/China trade war is getting longer and darker.
It is very easy at tense moments like this for trade to get caught in the cross-fire, as Australian farmers have found out recently.
This requires care in handling sensitive international relationships – we are not out of the woods yet.
It is too early to tell yet how long the current uncertainty might last.
That is very cold comfort indeed for those in the international tourism and education sectors whose revenues will simply not recover fully until borders re-open we can travel freely again.
That will depend on the ability of governments around the world to improve their response to the pandemic and the availability and distribution of vaccines and therapies.
Progress is doubtless being made but not at the speed which is needed.
In the light of that uncertainty what can be done to weather the storm?
It is pretty clear that effective domestic policy action is a pre-requisite for addressing the pandemic, but equally clear that no country working on its own has all the solutions.
This is a time when we need governments and international institutions to come together as never before – our lives literally depend on it.
Unfortunately, it is a time when distrust between the major powers is at an all-time high.
Since pre-Covid we were worried that the larger economies could not demonstrate global economic leadership, it is hardly surprising that today they lack the wherewithal to show global political leadership.
Yet, out of adversity can come opportunity and there is today a new role for smaller players like New Zealand working with others to bring together coalitions to focus on what is needed to set the stage for an eventual re-opening of borders as health circumstances permit and get the global economy moving again.
This requires New Zealand to continue to pay close attention to international affairs – even during an election campaign and formation of a new government – and to navigate carefully between super-power rivalry.
It requires us to continue the hard and sometimes frustrating work of opening new markets as we are doing today through negotiations with the European Union, the United Kingdom, as well as partners in Asia and Latin America.
Those negotiations are not easy.
An FTA with the European Union would bring significant benefits, and enable us to address some new issues, but it is still not clear whether our European friends are prepared to open their market to us for agricultural products.
Similarly, the prospect of a potentially valuable FTA with post-Brexit Britain depends entirely on the outcome of Britain’s negotiations with the EU and the direction of Britain’s future trade policy.
A very large negotiation with Asian economies – the Regional Comprehensive Economic Partnership (RCEP) – alas excluding India – will deliver some important liberalisation amongst the fifteen partners but not so much for New Zealand which already has good arrangements in Asia.
A negotiation with the Pacific Alliance of Latin American economies is making only slow progress.
If the big wins from new agreements feel somewhat elusive right now, there is other work to be done.
We should continue to focus on updating existing arrangements that have served us well such as with China and ASEAN and expanding the CPTPP.
We should even now to start to look for new partners further afield in Africa and Eurasia.
We should think ahead to new types of arrangements which can address new business models particularly in the digital space.
Trade policy and free trade agreements are important – critically so as without market access and effective trade rules trade cannot take place – but they need to be accompanied by domestic policies that develop capacity, increase productivity and competitiveness and spur new investment, including from overseas.
We are now in time where we simply cannot afford bad policy and poor investment decisions.
We may have beaten the virus, not once but twice, but securing the economic recovery will be a test of our collective endeavour and political will to make the right decisions.
In that context I want to highlight a particular opportunity that is before us in 2021 when New Zealand will chair APEC and for the first time, we will chair it virtually.
APEC or Asia Pacific Economic Co-operation provides an opportunity for New Zealand to show political and economic leadership at a critical time for the economic recovery, to work co-operatively with some of the world’s largest economies and our major trading partners and to draw on a wealth of experience and ideas to find the best solutions to address the Asia Pacific region’s critical needs.
APEC has 21 member economies who are vital economic partners for New Zealand, normally taking around 73 percent of our exports and accounting for 70 percent of our imports.
Fourteen of our top 20 export markets are APEC members, including the three largest economies in the world (the United States, China and Japan).
APEC is not just the domain of governments – APEC’s business voice is provided by the APEC Business Advisory Council (ABAC).
Three ABAC Members from each economy provide recommendations direct to APEC’s Economic Leaders: New Zealand’s ABAC Members are Rachel Taulelei, Malcolm Johns and Toni Moyes and I have the honour to advise them and lead the ABAC executive team next year.
ABAC has a role to play in focusing APEC on what is needed to rejuvenate economic activity throughout the Asia Pacific region including, critically at this time, a strong vision for the future of a highly inter-connected region, enhanced co-operation between economies and new openness to trade and investment.
Under the theme of Tāngata, Taio me te Taurikura, (People, Place and Prosperity) we’ll be developing new ideas about trade and investment, about renewable energy and responses to climate change, about Māori and indigenous business, about the digital economy and about open and inclusive financial systems.
To do this effectively, we will want to get the sort of input and perspectives from the New Zealand business community that will make the agenda practical and business-led.
You can find out more about our programme on the Trade Works website – www.tradeworks.org.nz.
The move to a virtual hosting format is certainly a challenge but it will hopefully also demonstrate New Zealand’s ability to innovate in the digital space.
Above all we will want to host APEC and ABAC in 2021 in a way that is distinctively Aotearoa, which creates a legacy going forward and which enhances the success of NZ business in the region, no matter their size or scale.
APEC is a big opportunity but to really deliver in 2021 we have to focus on what is most important – building the economic recovery.
The fact of the matter is we don’t know what is ahead of us – other than that at some unknown time the immediate crisis will come to an end.
Covid has removed a lot of the old certainties and assumptions.
Stamping out the virus and rebuilding will likely take time.
We will need to keep doing what works – both at home and abroad.
We also need to prepare better for future challenges like this one – listening to both the epidemiologists and the weather forecasters and, critically, remaining open and continuing to look outwards.
[1] https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world
[2] https://www.worldbank.org/en/news/feature/2020/10/07/global-action-urgently-needed-to-halt-historic-threats-to-poverty-reduction
[3] https://www.wto.org/english/news_e/pres20_e/pr862_e.htm
[4] https://www.stats.govt.nz/reports/new-zealand-now-overseas-trade-at-september-2020
[5] https://www.beehive.govt.nz/release/government-working-keep-air-freight-moving
