New Zealand New Zealand at a Glance: 2002-03

COUNTRY REPORT

New Zealand New Zealand at a glance: 2002-03

OVERVIEW The Labour-Alliance government still looks set to see out its full term of office, with an election due at end-2002. But it could have a tough year, with the economy weakening and various other issues to contend with. The opposition National Party is beginning to score some hits against the government. Relations with Australia may prove difficult over the next two years. Despite a good start to the year, real GDP growth will slow to 1.7% in 2001, before picking up in 2002-03. Consumer price inflation is likely to remain high until the middle of 2002 in view of the current strength of producer price inflation; thereafter it should return to the 1-2% range. After a sharp contraction in 2001, the result in part of increased agricultural merchandise exports, the current-account deficit will stabilise in 2002 and 2003. The New Zealand dollar is likely to remain volatile in 2002 and 2003, but will tend to strengthen against the US dollar over time. Key changes from last month Political outlook • The collapse of the airline, Ansett Australia, has already complicated trans- Tasman relations, but has yet to seriously dent the public standing of the prime minister, Helen Clark, or her Labour party. Renationalisation could pose some long-term problems. Economic policy outlook • The fiscal outturn for 2000/01 was better than forecast, but slower growth will pull down the budget surplus in 2001/02. The Reserve Bank (the central bank) cut the overnight cash rate by 0.5 percentage points on September 19th, suggesting that worries about inflation levels will take a back seat in monetary policy, for a few months at least. Economic forecast • The September terrorist attacks on the US have increased international economic uncertainty. Accordingly, we have revised down our forecast for 2001 GDP growth in New Zealand to 1.7%, despite a promising first half. We have also increased our forecast for consumer price inflation to 3.2%, in the light of high second-quarter producer price inflation.

October 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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Copyright © 2001 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author’s and the publisher’s ability. However, the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-7114

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Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. New Zealand 1

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2002-03 7 Political outlook 8 Economic policy outlook 9 Economic forecast

13 The political scene

17 Economic policy

20 The domestic economy 20 Output and demand 22 Employment, wages and prices 24 Financial indicators 25 Sectoral trends

29 Foreign trade and payments

List of tables

9 International assumptions summary 10 Forecast summary 11 Gross domestic product by expenditure 21 Expenditure on gross domestic product 22 Gross domestic product by sector 24 Interest and exchange rates 30 Current account

List of figures

13 Gross domestic product 13 New Zealand dollar real exchange rates 20 Quarterly gross domestic product 29 External balances

EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001

New Zealand 3

Summary

October 2001

Outlook for 2002-03 The September terrorist attacks on the US have increased uncertainty about the global economy. The government may need to accept lower than forecast budget surpluses, and the Reserve Bank (the central bank) will take a more expansionary approach to monetary policy. GDP growth is now forecast to pick up to 2.2% in 2002 and 3.4% in 2003, after dipping to an estimated 1.7% in 2001. Consumer price inflation is likely to average 3.2% in 2001, before falling back in 2002 and 2003. Having fallen back sharply in 2001, the current-account deficit will stabilise as a percentage of GDP in 2002-03.

The political scene The failure of the airline, Ansett Australia, has led to Australian criticism of Air New Zealand, of which Ansett is a subsidiary, and, by implication, of New Zealand generally. Previously, Australia had welcomed New Zealand’s help in resolving a refugee crisis. The government has ordered a major examination of defence management. National’s rank and file members have voted for a new party president.

Economic policy The government has already announced a partial bail-out of Air New Zealand, with a stand-by loan conditional on Singapore Airlines and Brierley Investments injecting more funds into the company. The former prime minister, Jim Bolger, will be the chairman of the new “Kiwibank”. Immigration policy will be eased further.

The domestic economy There was robust GDP growth in the second quarter, with a rebound in business investment after a depressed first quarter. Private and government consumption also rose, but housing investment remained depressed. Export growth remained rapid. The labour market continued to tighten. Consumer price inflation remained outside the target range, as producer prices began to rise rapidly. The Reserve Bank made a surprise 0.5 percentage point cut to the Overnight Cash Rate (OCR) on September 19th, and wholesale interest rates have fallen sharply. The New Zealand dollar has weakened further. An electricity shortage hit production in July-August, and electricity generators have been accused of cashing in. Record production levels in several agricultural subsectors in 2000/01 are unlikely to be matched in 2001/02, for a number of reasons. The government’s stance on genetic modification has caused concern.

Foreign trade and The current account continued to improve in the second quarter, with a deficit of payments just NZ$297m (US$126m). The primary factor was a strong improvement in the merchandise trade surplus. There was also a slight decline, year on year, in the services and income deficits. Recently published statistics on investment stocks and flows are incomplete.

Editors: Graham Richardson (editor); Danny Richards (consulting editor) Editorial closing date: October 1st 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001 4 New Zealand

Political structure

Official name New Zealand

Form of state Parliamentary monarchy

National legislature Unicameral House of Representatives of 120 members elected using the mixed-member proportional electoral system for a three-year term

Electoral system Universal direct suffrage over age 18

National elections November 27th 1999; next general election due by December 2002

Head of state Queen Elizabeth II, represented in New Zealand by the governor-general, Dame Silvia Cartwright

National government Cabinet presided over by the prime minister, appointed by the governor-general on the basis of party strength in the House of Representatives

Main political parties Labour Party (49 seats); National Party (39 seats); Alliance (ten seats); ACT New Zealand (nine seats); Green Party (seven seats); New Zealand First (five seats); United NZ (one seat)

Government Prime minister, minister for arts & culture & minister in charge of the Security Intelligence Services Helen Clark (Labour) Deputy prime minister, minister of economic development & minister for industry & regional development Jim Anderton (Alliance)

Key ministers Agriculture, trade negotiations, rural affairs Jim Sutton (Labour) Attorney-general, Treaty of Waitangi negotiations, labour Margaret Wilson (Labour) Commerce, communications, information technology Paul Swain (Labour) Conservation, local government Sandra Lee (Alliance) Corrections, courts, land information Matt Robson (Alliance) Defence, state-owned enterprises, tourism Mark Burton (Labour) Education, state services, sports & leisure Trevor Mallard (Labour) Energy, fisheries & forestry, research Pete Hodgson (Labour) Environment, broadcasting Marian Hobbs (Labour) Finance, treasury, leader of the house Michael Cullen (Labour) Health Annette King (Labour) Immigration, senior citizens Lianne Dalziel (Labour) Justice, foreign affairs & trade Phil Goff (Labour) Maori affairs Parekura Horomia (Labour) Police, civil defence, ethnic & internal affairs George Hawkins (Labour) Social services & employment Steve Maharey (Labour) Transport, housing, Pacific Island affairs Mark Gosche (Labour) Women’s affairs, youth affairs & statistics Laila Harré (Alliance)

Reserve Bank governor Don Brash

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Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP at market prices (NZ$ bn) 96.5 99.4 100.0 103.2 109.1 GDP (US$ bn) 66.3 65.7 53.5 54.6 49.5 Real GDP growth (%) 3.3 2.8 –0.8 3.5 3.1 Consumer price inflation (av; %) 2.3 1.7 1.6 1.1 2.7 Population (m) 3.7 3.8 3.8 3.8 3.8 Exports of goods fob (US$ m)a 14,337 14,245 12,257 12,594 13,466 Imports of goods fob (US$ m)a 13,814 13,381 11,334 13,029 12,852 Current-account balance (US$ m)a –3,964 –4,334 –2,150 –3,596 –2,755 Foreign-exchange reserves excl gold (US$ m) 5,953 4,451 4,204 4,455 3,329 Total external debt (US$ bn)b 24.2 c 24.9 c 25.4 c 28.5 c 31.0 c Debt-service ratio, paid (%)b 27.0 c 38.0 c 28.7 c 27.4 c 29.6 c Exchange rate (av) NZ$:US$ 1.45 1.51 1.87 1.89 2.20

September 27th 2001 NZ$2.50:US$1

Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total Financial & business services 24.5 Private consumption 60.0 Manufacturing 16.2 Gross fixed capital formation 20.1 Personal & community services 11.7 Government consumption 18.4 Transport & communications 9.9 Increase in stocks 0.7 Agriculture, fishing, forestry & mining 8.4 Exports of goods & services 35.9 Retail accommodation & restaurants 7.7 Imports of goods & services –35.0 GDP incl others 100.0 GDP at market prices 100.0

Principal exports 2000 US$ bn Principal imports 2000 US$ bn Dairy produce 2.1 Vehicles & aircraft 1.9 Meat 1.7 Machinery & mechanical appliances 1.8 Forestry products 1.5 Electrical machinery 1.5 Fruit & vegetables 0.7 Mineral fuels, etc 1.4 Fish 0.4 Total incl others 12.9 Wool 0.4 Total incl others 13.5

Main destinations of exports 2000 % of total Main origins of imports 2000 % of total Australia 20.4 Australia 22.5 US 14.5 US 17.5 Japan 13.5 Japan 11.0 UK 5.4 UK 3.8 a IMF balance-of-payments basis. b Excludes New Zealand dollar-denominated debt. c Estimates.

EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001 6 New Zealand

Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (NZ$ m) Revenue 8,806 9,630 9,674 8,416 9,567 10,215 10,639 n/a Expenditure 8,762 8,958 8,852 9,599 9,119 9,365 9,212 n/a Balance 44 672 822 –1,183 448 850 1,427 n/a Output GDP at constant 1995/96 pricesa (NZ$ m) 25,276 25,512 25,907 25,761 25,889 25,955 26,014 n/a % change, year on year 4.4 4.1 4.7 3.7 2.4 1.7 0.4 n/a Employment, wages and prices Employmenta (‘000) 1,748 1,767 1,764 1,763 1,786 1,803 1,804 1,820 % change, year on year 1.5 2.5 1.4 1.0 2.2 2.0 2.3 3.2 Unemployment ratea (% of the labour force) 6.8 6.3 6.4 6.1 5.8 5.6 5.4 5.2 Average hourly earnings (NZ$) 17.6 17.5 17.6 17.7 17.9 17.9 18.1 18.3 % change, year on year 3.0 1.7 1.8 2.1 1.7 2.5 3.1 3.3 Consumer prices (1995=100) 104.9 105.1 105.9 106.6 108.0 109.3 109.1 110.0 % change, year on year –0.5 0.5 1.5 2.0 3.0 4.0 3.0 3.2 Producer output prices (1997=1,000) 1,014 1,026 1,035 1,046 1,075 1,097 1,096 1,110 % change, year on year 0.9 2.4 3.6 4.2 6.0 6.9 5.9 6.1 Financial indicators Exchange rate NZ$:US$ (av) 1.90 1.96 2.01 2.09 2.27 2.44 2.31 2.41 NZ$:US$ (end-period) 1.94 1.92 2.00 2.14 2.46 2.27 2.46 2.47 Interest rates (av; %) Deposit 4.5 5.2 5.8 6.5 6.6 6.5 6.0 5.4 Lending 8.4 8.7 9.4 10.3 10.6 10.6 10.4 10.0 3 month Treasury bill 4.7 5.1 5.9 6.6 6.6 6.6 6.2 5.7 M1 (end-period; NZ$ m) 14,256 14,649 14,957 14,350 14,343 15,568 17,169 16,388 % change, year on year 22.5 18.3 10.6 5.2 0.6 6.3 14.8 14.2 M2 (end-period; NZ$ m) 43,572 40,964 39,930 40,835 39,912 41,319 43,861 46,432 % change, year on year 18.4 8.2 –2.5 3.1 –8.4 0.9 9.8 13.7 NZSE 40 stockmarket index (end-period; Jan 31st 1957=100) 2,023 2,207 2,054 2,062 2,010 1,902 2,030 2,086 % change, year on year 17.1 6.8 –4.1 –3.5 –0.7 –13.8 –1.2 1.2 Sectoral trends Lamb & mutton exports (NZ$ m, fob) 367 350 528 452 424 458 647 594 % change, year on year 8.6 2.9 18.4 18.9 15.5 30.9 22.5 31.4 Dairy produce exports (NZ$ m, fob) 804 1,155 1,016 961 993 1,626 1,515 1,623 % change, year on year –6.2 –3.9 –0.7 26.9 23.5 40.8 49.1 68.9 Foreign trade (NZ$ m) Exports fob 5,909 6,206 6,563 7,350 7,109 8,179 7,809 8,796 Imports cif –7,034 –8,460 –6,483 –7,216 –8,213 –8,824 –7,210 –7,684 Trade balance –1,125 –2,256 80 134 –1,106 –645 599 1,112 Balance of payments (US$ m) Merchandise trade balance fob-fob –143 –580 169 373 –5 77 n/a n/a Services balance –356 26 342 –218 –312 –33 n/a n/a Income balance –921 –949 –948 –876 –705 –863 n/a n/a Net transfer payments 79 31 81 52 55 54 n/a n/a Current-account balance –1,341 –1,472 –356 –669 –967 –765 n/a n/a Reserves excl gold (end-period) 4,135 4,455 3,862 3,436 3,305 3,329 2,970 2,805 a Seasonally adjusted. Sources: Reserve Bank of New Zealand; Statistics New Zealand; IMF, International Financial Statistics.

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Outlook for 2002-03

Political outlook

Domestic politics Labour appears to be in good shape, but must now face up to the implications of the September terrorist attacks on the US. An immediate problem could be posed by the perilous state of the national airline, Air New Zealand. Meanwhile, the right-of-centre National Party has scored a few hits on the government recently, but still has some way to go in proposing coherent alternative policies.

The greatest test for the government over the rest of this year will be handling the economic implications of international developments. The September terrorist attacks on the US have introduced a strong degree of uncertainty regarding the global economy, with a global recession possible, if not probable. Aggravating the uncertainty in the short-term outlook are the travails of Air New Zealand (see The political scene). The government has already been criticised by the opposition and local media for dithering on ownership rules. So far, these attacks have not resulted in falling support for the government among the electorate as a whole. But a less than satisfactory resolution to Air New Zealand’s woes is likely to reflect badly on the government, given the government’s central role in crisis negotiations, Air New Zealand’s dominance of domestic air travel and holding of international bilateral air agreements, and its importance in both air cargo freight and tourist transport. However, in the government’s favour, the combination of these extraordinary events is likely to reduce the significance of any future intra-coalition disputes. We predict that the senior coalition partner, Labour, will remain firmly in control of government business.

The opposition National and ACT parties will seek to gain popular support from any future signs of indecision by the coalition government on economic and foreign policy issues. In addition, they will continue to harry the government on defence-related issues.

Election watch The government is almost certain to see out its full three-year term, due to end in late 2002. But while Labour is likely to emerge from the next general election as the strongest single party, it is unclear which parties will form the next governing coalition. The key factor will be which of the smaller parties polls more than 5% of the total vote (those passing this threshold are eligible for a share of the indirectly elected parliamentary seats). If the Alliance fails this hurdle, the Greens could emerge as the second largest left-of-centre force. Business would be apprehensive about any future Labour-Green coalition, as the Greens remain opposed to bilateral free-trade agreements and the proposed superannuation fund, as well as a number of other policy issues. If an agreement with the Greens cannot be reached, Labour might try to rule as a minority government.

International relations Relations with Australia have entered an uncertain period. In early September the Australian government welcomed efforts by the New Zealand government

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to resolve a refugee crisis. But the collapse of the airline, Ansett Australia, has now generated widespread discontent in Australia towards Air New Zealand and (rather unfairly) New Zealand in general. The Australian government, faced with a general election later this year, has been careful to balance its desire to appease understandable domestic disquiet over the potential loss of over 16,000 jobs after the Ansett collapse with the need to limit damaging repercussions for trans-Tasman relations.

A further area of tension between the trans-Tasman governments may arise from the Australian parliament’s decision in late September to invoke provisions of the ANZUS treaty declaring an attack on the US to be an attack on Australia. By contrast, the New Zealand government, while committed to providing a military contribution to a US- or UN-led campaign against terrorism, considers the ANZUS treaty dormant since its suspension by the US in 1987 following New Zealand’s decision to declare itself nuclear-free. Any escalation of international military activities following the terrorist attacks on the US will direct public attention towards defence issues. The opposition National and ACT parties are likely to argue in favour of closer defence ties with Australia and the US—especially in the critical area of defence intelligence (given the nature of the terrorist attacks). Realistically, public support for this option—and, hence, the opposition parties—may waver either way and will depend on the way in which international events unfold.

Economic policy outlook

Policy trends There was an unexpectedly large budget surplus in 2000/01 but the fiscal situation will get tougher from now on. The effects of slower growth on tax revenue may be compounded by extra spending associated with bailing out Air New Zealand. Even assuming that everything goes reasonably well, much smaller budget surpluses are expected in 2001/02 and 2002/03. The Reserve Bank of New Zealand (the central bank) unexpectedly reduced the official cash rate (OCR) by 50 basis points on September 19th in direct reaction to the uncertainty generated by the terrorist attacks on the US, but rate rises remain probable next year.

Fiscal policy The government recorded an operating surplus of NZ$1.41bn (US$600m) in 2000/01 (ending June), nearly NZ$800m (US$340m) above budget. The good result was the consequence of higher than expected tax revenue, and higher than forecast interest rates, which reduced the unfunded liabilities of the Government Superannuation Fund and the Accident Compensation Corporation (this latter factor accounted for around NZ$800m of the surplus.) Back in May, when the finance minister, Michael Cullen, unveiled his 2001/02 budget, he forecast surpluses of NZ$1.4bn in 2001/02 and NZ$2.4bn in 2002/03. These now look increasingly unlikely. Mr Cullen’s probable inability to push up spending on health and education may also make it politically difficult for him to cut corporate taxation over the next few years, whatever the final outcome of the government’s comprehensive inquiry into taxation.

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Proposals for a partly pre-funded superannuation scheme, which will provide state pensions to future generations of New Zealanders, passed a parliamentary select committee in June 2001. Despite some uncertainty about the details of the fund, the budget assumes that the government will make contributions to the fund totalling NZ$6.1bn over the next five years. This will increase the government’s projected borrowing over this period from NZ$1.5bn to NZ$7.6bn. In extremis, were the fiscal situation to worsen dramatically, these payments might conceivably be deferred or reduced.

Monetary policy The Reserve Bank moved quickly in reaction to the terrorist attacks on the US. As a precautionary measure against the increased downside risks to the economy posed by weaker domestic confidence and international demand, it cut the OCR by 50 basis points to 5.25% on September 19th. This unscheduled monetary easing followed a decision in mid-August to leave the OCR unchanged. The Reserve Bank’s actions may indicate a wish to “catch up” with rate cuts implemented by other central banks, in the light of a yet weaker global economy. A further cut in interest rates is unlikely to result from the next scheduled review, on October 3rd. But a further easing, probably of 25 basis points, is possible at the November 14th review, especially if the global economy weakens further. On the assumption that the global—and New Zealand—economy begins to recover in 2002, interest rates are likely to be nudged up through 2002 and 2003.

Economic forecast

International assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.4 3.5 4.1 OECD 3.7 1.2 2.2 2.9 EU 3.4 1.8 2.4 2.5 Exchange rates (av) ¥:US$ 107.8 121.5 123.5 120.0 US$:¤ 0.924 0.901 0.968 1.015 SDR:US$ 0.758 0.784 0.766 0.751 Financial indicators ¥ 2-month private bill rate 0.24 0.18 0.10 0.63 US$ 3-month commercial paper rate 6.32 3.79 3.75 6.00 Commodity prices Oil (Brent; US$/b) 28.5 27.0 26.2 24.6 Gold (US$/troy oz) 279.3 269.1 255.0 250.0 Food, feedstuffs & beverages (% change in US$ terms) –6.1 0.8 14.1 10.9 Industrial raw materials (% change in US$ terms) 13.4 –6.9 3.3 12.2

Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates.

International assumptions US growth will slow sharply in 2001. The direct impact of this will be on exports by the rest of the world to the US, but knock-on effects will pull down growth more generally in much of the global economy. The Australian

EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001 10 New Zealand

economy will not be immune from such effects, although its slowdown in 2001-02 may be less severe than previously forecast, and by 2003 Australian growth should be robust. However, prospects for the already beleaguered Japanese economy remain poor, with no significant growth until 2003. These three economies account for around one-half of all New Zealand’s exports, and are also an important share of direct and portfolio investment and debt finance—as well as tourist arrivals.

The Economist Intelligence Unit has revised up slightly its estimate for oil prices in 2001, to an average US$27/barrel in 2001 (Dated Brent), before a slight decline to US$26.2/b in 2002 and US$24.6/b in 2003. Prospects for global non-oil commodity prices are now bleak in the short term. US dollar prices for industrial raw materials are forecast to contract by 6.9% in 2001 and food, feedstuffs and beverages prices will expand by just 0.8% this year, before much sharper rises in 2002 and 2003.

Forecast summary (% unless otherwise indicated) 2000a 2001b 2002c 2003c Real GDP growth 3.1 1.7 2.2 3.4 Unemployment rate (av) 6.0 5.3 5.4 5.8 Consumer price inflation Average 2.7 3.2 2.2 1.5 Year-end 3.9 2.8 1.6 1.7 Short-term interbank rate 10.2 9.8 9.6 10.0 Government balance (% of GDP) 0.3 1.2 0.6 0.5 Exports of goods fob (US$ bn) 13.5 15.1 16.3 18.0 Imports of goods fob (US$ bn) 12.9 13.0 14.2 15.9 Current-account balance (US$ bn) –2.8 –0.9 –0.9 –1.1 % of GDP –5.6 –1.8 –1.7 –1.8 External debt (year-end; US$ bn) 31.0b 31.1 31.5 32.0 Exchange rates NZ$:US$ (av) 2.20 2.36 2.28 2.12 NZ$:¥100 (av) 2.04 1.95 1.84 1.77 NZ$:¤ (year-end) 2.13 2.21 2.22 2.05 NZ$:SDR (year-end) 2.96 3.04 2.92 2.69

a Actual. b EIU estimates. c EIU forecasts.

Economic growth Growth in the second quarter of 2001 was unexpectedly strong, with GDP rising by 2.8% year on year, and 1.8% quarter on quarter. GDP growth was pulled up by strong expansion in government spending, non-residential fixed investment and exports of goods and services. But while GDP growth may have been reasonable in the third quarter, our forecast assumes that it will fall sharply in the final quarter of this year, as the slowdown in the world economy is exacerbated by the after-effects of the September 11th terrorist attacks on the US. A poor finish to the year will largely undermine a good first half; as a result we have revised down our forecast for 2001 GDP growth to 1.7%. In 2002 and 2003 a sluggish recovery in private consumption and a rather sharper increase in investment will lift overall GDP growth to 2.2% and 3.4%, respectively.

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Private consumption will be depressed in the near term before picking up later in the forecast period. Private consumption spending growth is now forecast to average 0.3% in 2001 and 1.1% in 2002, before picking up to 2.2% in 2003. Household debt levels remain high (inflated by recent mortgage and credit card borrowing) and the continuing weakness of the New Zealand dollar is restraining spending on imported goods. So far these negative factors have been offset, in the short term at least, by high levels of employment, falling interest rates and rising rural incomes, benefiting from strong agricultural exports. But deteriorating consumer confidence about the international economic and political outlook will lead to caution in the remainder of 2001, and well into 2002.

Gross domestic product by expenditure (NZ$ m; chain volume series expressed in 1995/96 prices; % change year on year in brackets unless otherwise indicated) 2000a 2001b 2002c 2003c Private consumption 61,334.0 61,522.2 62,169.6 63,548.5 (1.5) (0.3) (1.1) (2.2) Public consumption 18,023.0 18,653.8 19,082.8 19,445.4 (–2.8) (3.5) (2.3) (1.9) Gross fixed investment 22,251.0 21,631.1 22,682.2 23,791.2 (7.0) (–2.8) (4.9) (4.9) Final domestic demand 101,608.0 101,807.1 103,934.7 106,785.1 (1.8) (0.2) (2.1) (2.7) Stockbuilding 804.0 910.0 750.0 1,000.0 (–0.6)d (0.1)d (–0.2)d (0.2)d Total domestic demand 102,412.0 102,717.1 104,684.7 107,785.1 (1.3) (0.3) (1.9) (3.0) Exports of goods & services 33,998.0 35,398.9 36,480.4 38,075.2 (7.6) (4.1) (3.1) (4.4) Imports of goods & services –32,824.0 –32,813.8 –33,498.1 –34,534.4 (1.0) (0.0) (2.1) (3.1) Foreign balance 1,174.0 2,585.0 2,982.3 3,540.8 (2.0)d (1.4)d (0.4)d (0.5)d GDPe 103,512.0 105,302.2 107,667.0 111,325.9 (3.1) (1.7) (2.2) (3.4)

a Actual. b EIU estimates. c EIU forecasts. d Contribution to real GDP growth. e Includes statistical discrepancy.

Government consumption remains constrained by the self-imposed spending cap, a likely slowdown in the growth of revenue and the need to maintain fiscal surpluses to build up the proposed superannuation fund, but will still grow at reasonable rates in 2001-03, following a contraction in 2000 caused by the purchase of a frigate in the preceding year.

Fixed investment was 5.2% lower in the first half of 2001 than in the year- earlier period, pulled down by a 22.5% fall in investment in residential construction activity. Despite lower interest rates, residential housing is likely to remain a drag on overall investment growth, at least in 2001. Other investment activity will be concentrated in agricultural and downstream activities, and should benefit from sustained export growth. Overall

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investment is now forecast to contract by 2.8% in 2001, before expanding by close to 5% a year in 2002 and 2003.

Uncertainty about the magnitude and length of the slowdown in the US, combined with the impact of low levels of rainfall in some New Zealand regions on farm production complicates export forecasts for 2001 and 2002. On the assumption that a major slump in global demand is avoided, export volumes (goods and services on a national accounts basis) are expected to grow by 4.1% in 2001 (after a good first half) and by 3.1% in 2002 and 4.4% in 2003. Imports will be flat in 2001, but will grow by 2.1% in 2002 and 3.1% in 2003.

Inflation Consumer prices rose by 0.9% quarter on quarter in the second quarter of 2001 and by 3.2% year on year—broadly in line with our expectations, and again outside the Reserve Bank’s 0-3% target band. Consumer price inflation was driven upwards in the second quarter by high food prices (especially for fruit and vegetables) and increases in transport costs (largely reflecting higher petrol prices). So far there is strong evidence that higher import prices, owing to the fall in the value of the New Zealand dollar, have been largely absorbed by shrinking margins for retailers and those dependent on imported inputs. (Producer input prices were 8.1% higher in the second quarter than in the year- earlier period.) But with these increases now certain to be passed on to the consumer, year-on-year rates of consumer price inflation may not fall back dramatically in the second half of 2001. We forecast annual average consumer price inflation of 3.2% in 2001, falling back to average rates of 2.2% in 2002 and 1.5% in 2003.

Exchange rates The New Zealand dollar has continued on a roller coaster ride, with the emphasis on the downs rather than the ups. The New Zealand dollar followed the Australian dollar sharply downhill in mid-September, to stand at NZ$2.50:US$1 on September 27th. Both currencies now appear to be significantly undervalued by almost all conventional measures. The gradual recovery forecast for the exchange rate will remain dependent on both domestic factors (notably, improving business confidence) and external developments. An average exchange rate of NZ$2.36:US$1 (NZ$1.95:¥100) is now estimated for 2001, followed by NZ$2.28:US$1 (NZ$1.84:¥100) in 2002 and NZ$2.12:US$1 (NZ$1.77:¥100) in 2003.

External sector According to Statistics New Zealand data, New Zealand recorded a current- account deficit in the second quarter of 2001 of just NZ$297m—much lower than in the year-earlier period, and following an unusual, if small, surplus in the first quarter of this year. The improvement in the current-account situation reflects both merchandise export growth, and increased exports of services (notably tourism). Both factors should be helped by the continued weakness of the New Zealand dollar, but the effects of this are likely to be offset by a weaker international economic environment and a probable fall in inward tourist numbers. However, with import demand subdued, a substantial merchandise trade surplus will be achieved in 2001, and a resumption of export growth should prop this up in 2002 and 2003. The real problem will remain the income deficit, pushed up by the cost of servicing rising levels of debt and the

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repatriation of profits by foreign-owned companies. The income deficit swelled to nearly 7% of GDP in 2000, and significant reduction is unlikely in the short term while the domestic savings rate remains low. As a result, a brake will be put on the contraction of the current-account deficit overall. We forecast a current-account deficit of US$900m in 2001 (equivalent to 1.8% of GDP) followed by a similar-sized deficit in 2002 and a slightly larger one in 2003.

Late note: Air New Zealand On October 3rd 2001 Air New Zealand’s problems were—at least temporarily— is re-nationalised dealt with by an NZ$885m government aid package. The government will lend the airline NZ$300m, and give an equity injection of NZ$585m. Depending on the assumed share price, this will leave the government with around 83% of the airline’s equity—in effect a “renationalisation” of the company. The two largest existing investors, the Singapore-based Brierley Investments and Singapore Airlines, will be left with stakes of around 5% and 4%, respectively.

Air New Zealand’s financial problems had been brought to the fore by the collapse of its Ansett Australia subsidiary. Ansett was put into liquidation in September amid a welter of allegations of mismanagement. Air New Zealand will now use NZ$185m of the new money to settle potential claims against Ansett Australia, in a deal agreed with the latter airline’s administrator. An additional A$160m (US$84m) of Ansett Australia’s debts will not be pursued. However, a number of issues remain unresolved.

The political scene

Ansett’s collapse has serious The unprecedented and catastrophic terrorist attacks on the US on September implications 11th (or September 12th, New Zealand time) have justifiably overshadowed a number of rather more parochial “crises” that have dominated the recent political scene in New Zealand. These include a critical electricity shortage (see The domestic economy: Sectoral trends), and two issues that have brought relations between New Zealand and Australia to the fore: financial turmoil in the Australasian airline sector and a refugee crisis off the shores of Australia.

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The Australasian airline industry has been seriously damaged by the financial collapse of Ansett Australia and the precarious current financial position of its owner, Air New Zealand. Ansett Australia, Australia’s second largest airline, was placed into voluntary administration (receivership) by Air New Zealand on September 12th. The following day Air New Zealand announced the largest financial loss in New Zealand corporate history. The airline lost NZ$1.43bn (US$600m) over the financial year to June 2001, including a complete write-off of its NZ$1.32bn investment in Ansett Australia. Shareholder funds fell from NZ$1.84bn to NZ$518m (US$220m) over financial year 2000/01. PricewaterhouseCoopers, the appointed administrators of Ansett Australia, suspended all operations of Ansett Australia on September 14th, by which time the airline was losing NZ$1.6m (US$700,000) a day.

Ansett Australia’s collapse has already complicated relations between Australia and New Zealand. The New Zealand prime minister, Helen Clark, experienced this first hand following the grounding of Ansett Australia when an Air New Zealand flight to New Zealand that she was scheduled to board in Melbourne, Australia, was blockaded with airport vehicles by angry Ansett Australia employees. Attempts by Miss Clark to then leave on a Qantas flight were also thwarted by the protestors and she was eventually removed from the airport by a police helicopter and taken to an air force base. From there Miss Clark was returned to New Zealand by a New Zealand air force aircraft.

Ansett Australia directly employed 16,000 people in Australia, operated six airlines and held a 39% share of the Australian airline market. Most of the anger in Australia over Ansett’s collapse has been directed at Air New Zealand. But some factions, including influential sections of the Australian media, initially called for a boycott of all New Zealand products. Both governments discussed with Air New Zealand a range of possible options for reviving Ansett Australia (see Economic policy), but its eventual collapse and the potential loss of thousands of jobs is particularly unwelcome for the Australian government, as it faces an election before December.

However, the New Zealand government has also been accused by opposition parties and key media commentators of unnecessarily delaying its decision on Air New Zealand’s future. The leader of the ACT party, Richard Prebble, alleged just before the suspension of Ansett Australia’s operations that Miss Clark had learned Ansett was losing A$1m (US$530,000) a day in July but had delayed a decision on a formal application by Singapore Airlines to raise its ownership stake in Air New Zealand because the government “wanted to let Ansett go”. This argument appears to have been backed up by the acting Air New Zealand chairman, Jim Farmer, who claimed that the airline informed the New Zealand government in June and the Australian government in May that Ansett was losing up to NZ$2m day. But in defence of the New Zealand government’s delayed decision, Miss Clark asserted in mid-September that the government had not become fully aware of the true extent of Ansett’s difficulties until the government-appointed negotiators investigated the original deal put forward by Air New Zealand and reported back to the government in late August.

Given the political implications for the Australian government of the loss of 16,000 Ansett jobs (and many thousands of additional jobs threatened

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indirectly) in an election year, criticism of the actions of its New Zealand counterpart could have been expected. However, in mid-September the Australian government directed its blame for the Ansett collapse squarely at the Air New Zealand management and board, albeit with undertones of wider New Zealand complicity. Following the suspension of Ansett’s operations, for example, the Australian deputy prime minister and transport minister, John Anderson, stated that the airline had been “completely and comprehensively driven into the ground by its New Zealand owners”.

Help is given to Australia The scope for the Australian government to criticise its New Zealand on refugees counterpart for the collapse of Ansett Australia may well have been dampened by previous New Zealand assistance in resolving a refugee crisis. The Australian government in late August steadfastly refused entry into Australian territory to 460 mainly Afghan refugees rescued by a Norwegian cargo ship from their ailing vessel off the coast of Australian-administered Christmas Island. (Christmas Island is located around 350km south of Indonesia, the alleged docking place of the refugees.) Special Australian military personnel boarded the cargo ship when its captain attempted to enter Australian waters, but the Australian government otherwise did not appear to have a strategy for resolving the crisis.

Miss Clark helped to broker a resolution after a plea for help by the Australian foreign minister, Alexander Downer. New Zealand has taken around 150 of the refugees, while the remainder will have their asylum applications processed in the tiny Pacific Island state of Nauru before being taken in by various other countries. Miss Clark’s move was politically astute, prompting the Australian prime minister, John Howard, to enthuse that New Zealand was Australia’s “best and oldest friend”. Miss Clark has also used the issue to appeal for “greater determination by the international community” to deal with the global refugee problem and has called for the issue to be addressed by the next session of the UN general assembly. This is unlikely now given the international priority of action against terrorism, although the number of Afghan refugees may receive attention.

Reaction by opposition political parties to the refugee issue has been more circumspect. The leader of the National Party, Jenny Shipley, is concerned that New Zealand should not be seen to be a “soft touch” for illegal immigrants. New Zealand First’s leader, Winston Peters, has been more scathing of the decision to allow some of the refugees into New Zealand, stating that New Zealanders were “sick to death” of immigrants “re-establishing their culture” in New Zealand. Mr Peter’s views signal that his party may be seeking to rebuild its popularity on nationalist issues. (New Zealand First gained strong popular support in the mid-1990s on the back of a policy platform to restrict immigration and foreign investment. Since then the party’s fortunes have faltered and its popular support is barely above the margin of error of most opinion polls.) Public support for the government’s decision on the refugees has been mixed but generally subdued. In another move, the government announced in mid-September new plans to ease immigration rules further for skilled and business migrants (see Economic policy).

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Defence management will The government has ordered a major examination of the management of the be examined defence forces. The defence minister, Mark Burton, and the chief of defence staff, Air Marshall Carey Adamson, announced on September 10th that three separate reviews would be conducted. Controversy and often heated political debate has dominated the defence sector recently following the release of the findings of an auditor-general’s inquiry in mid-August. This concluded that there were “dysfunctional relationships” between the armed services and “mistrust of each other’s motives”. The report had been requested by the secretary of defence, Graham Fortune, late last year to investigate controversies surrounding a contract to purchase 105 Canadian light armoured vehicles (LAV3s) for the army. The cost of the LAV3s had soared from the original NZ$212m approved by the previous government to around NZ$650m by mid-September.

There have also been allegations that the vehicles will be unsuitable for use in the terrains of some countries where New Zealand is involved in regional peacekeeping operations (including East Timor) and that the tendering process was flawed. In his report, the auditor-general, David Macdonald, found that there were serious flaws in the acquisition process, a lack of documentation and no overall project plan. These factors, along with the confused and dysfunctional relations between the defence ministry (which handles policy and major capital acquisitions), the defence force (which handles operations) and the army had delayed the project at a cost to taxpayers of millions of dollars. New Zealand First’s defence spokesman, Ron Mark, who raised the issues about the LAV3 contract in 2000, has called for the cancellation of the contract.

The largest of the inquiries to be conducted is a review of overall defence structures. This will be undertaken by the state services commissioner, Michael Wintringham, who will report back to the government in December. A possible outcome of this review might be the re-merging of the ministry of defence and the New Zealand defence force, which were originally separated in 1989. This option has been hinted at by Miss Clark, who has admitted to being concerned about fragmentation in defence structures. A second review is to be undertaken by New Zealand’s highest military judge, the judge advocate general, to look into serious allegations that some army personnel in the late 1990s may have inappropriately attempted to persuade politicians to support the army’s agenda. The final review, also to be conducted by the state services commission, will investigate leaking of information by defence personnel. Both of these smaller reviews are due to be completed in late October.

The problems between the various arms of the defence forces may well have been exacerbated by underfunding of defence throughout the 1990s. This forced the different armed forces to compete with each other for limited funding.

National’s rank and file A desire by rank and file members of the National Party to re-energise the party members vote for change was signalled in July. Party members voted overwhelmingly in support of the replacement of the party president, John Slater, by Michelle Boag. Ms Boag is a public relations executive who in the past has been influential behind the scenes in the National Party. A former press secretary to the previous leader of

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National, Jim Bolger, Ms Boag was involved in a previous controversy. During the 1996/97 “wine box” inquiry into complicated tax schemes used by several prominent corporations, the inquiry commissioner, Sir Ronald Davison, fined the investment bankers, Faye Richwhite, for being in contempt of the commission. Sir Ronald said that Faye Richwhite had deliberately misled the inquiry by secretly obtaining film of evidence given by the New Zealand First leader, Mr Peters. The filming had been arranged by Ms Boag, who was then head of Faye Richwhite’s corporate affairs.

In accepting his defeat, John Slater suggested that it was the result of dissatisfaction among the party rank and file over the performance of their MPs in parliament. This explanation appears to have been at least partly endorsed by Ms Boag, who indicated in August that some long-serving MPs needed to step aside to allow “new blood” into the parliamentary wing of the National Party. This has generated widespread speculation about the future of a number of National MPs, including several former cabinet ministers. Ultimately, however, control over the parliamentary members of the party rests with the leader, Jenny Shipley, although Ms Boag’s high profile since gaining the party presidency has given the impression at times of her overshadowing Mrs Shipley. This point was not lost on the prime minister, who has noted that Ms Boag behaves “more like a leader than a president”.

Economic policy

Air New Zealand’s fate The financial collapse of Air New Zealand’s wholly owned subsidiary, Ansett hangs in the balance Australia, in mid-September (see The political scene) was the culmination of several months of largely unsuccessful negotiations between Air New Zealand, the Australasian governments and other interested parties over the restructuring of the airline. The negotiations were initiated by a formal application to the New Zealand government by Singapore Airlines (SIA) in early July to raise its ownership share of Air New Zealand from 25% to 49%. SIA’s bid for a greater stake in the airline was a direct response to a renewed bid by Qantas to gain a 49% share in Air New Zealand. Air New Zealand also required re-capitalisation in order to fund a NZ$5bn (US$2.1bn) upgrading of Ansett’s ageing fleet over four years. Under the existing and complicated ownership rules of Air New Zealand, SIA needed government approval before a 25% cap on ownership in Air New Zealand by a single foreign carrier could be lifted. (These ownership restrictions and the earlier Qantas move are discussed in more detail in our last report, July 2001, page 24.)

Air New Zealand’s original proposal for SIA to lead a re-capitalisation of the airline with an enlarged 49% ownership stake was contingent on Air New Zealand buying the budget Australian airline, Virgin Blue, from Sir Richard Branson. Sir Richard rejected a A$250m (US$130m) offer in early September and stated that Ansett Australia was losing A$1m a day. SIA subsequently backed away from its initial proposal to pour over A$1bn (US$425m) into the Air New Zealand group to revitalise Ansett. This forced Air New Zealand to approach the Australian government with a plan to restructure Ansett Australia

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as a budget airline underwritten by the government. The government rejected the plan, but ironically endorsed another Air New Zealand proposal for Qantas Airways to take over Ansett Australia for A$1 (53 US cents), even though this would give Qantas a near-monopoly position in the Australian domestic airline market. However, Qantas was unprepared to take on Ansett’s excessive liabilities—and would no doubt have been aware that it stood a chance of gaining from the demise of Ansett Australia, without having to take on any of its debts.

Air New Zealand is partly The New Zealand government announced a partial bail-out of Air New Zealand bailed out on September 13th. Under the rescue package, which saw Ansett Australia stripped from its parent company and placed into receivership, the government is providing a stand-by loan of up to NZ$550m (US$230m) for re- capitalisation. The cap on share ownership in Air New Zealand by SIA has been lifted from 25% to 35%. Brierley Investments Limited (BIL), a former New Zealand company now based in Singapore, has increased its ownership stake from 30% to 37%. The government’s provision of the NZ$550m loan is conditional on SIA and BIL each injecting NZ$150m into Air New Zealand. The refinancing package subject to due diligence checks, which are expected to be completed by early October. Air New Zealand’s complicated “A” and “B” share system, which limited ownership of “A” shares to New Zealanders is likely to be changed. Another condition of the government’s assistance is a reduction in the number of Air New Zealand board directors from 14 to nine. The government must approve the appointment of the Air New Zealand chairman and the majority of board members must be New Zealanders (although SIA and BIL will each appoint three directors). If SIA and BIL do not inject new funds, renationalisation of the airline is likely.

The conditions on the structure of the Air New Zealand board, along with the likelihood that most existing directors will not be reappointed, suggests government displeasure at the performance of the Air New Zealand board over the past couple of years. A number of other factors have contributed to the sharp decline in the performance of both Air New Zealand and Ansett Australia over the past year. These include higher fuel costs, low Australasian exchange rates, tight margins on the highly competitive trans-Tasman routes, and the entry of budget competitors (including Virgin Blue) into the Australian domestic market.

Ansett had too high a cost Negative factors directly afflicting Ansett Australia underpinned Air New base Zealand’s need to lobby the Australian and New Zealand governments for help. Ansett’s cost structure was too high by comparison with its rivals, and inadequate information systems meant that the Air New Zealand board allegedly did not know which routes flown by Ansett were profitable. Finally, the potentially crippling drag on the parent company that forced Air New Zealand to shed Ansett was the cost of rebuilding the ageing Ansett fleet of aircraft. Safety and maintenance problems with part of the fleet had led to their grounding over the last Christmas and Easter holiday periods and directly contributed to a slump in Ansett’s Australian domestic market share from 49% to 39%.

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These major problems specific to Ansett have raised questions over why the Air New Zealand board approved the A$580m purchase of the remaining 50% share of Ansett Australia not held by Air New Zealand from the Australian firm, News Corporation, in February 2000. The acting Air New Zealand chairman, Jim Farmer, confirmed in August that the company had undertaken only “extremely limited” due diligence checks before agreeing to buy the rest of Ansett. Air New Zealand management have also claimed that News Corporation control of the management of Ansett prevented Air New Zealand from getting adequate financial information on the company. Yet three Air New Zealand directors had sat on the Ansett board since Air New Zealand bought into the airline in September 1996. It appears that the Air New Zealand board rushed into taking full ownership of Ansett to counter a Singapore Airline bid of A$500m for News Corporation’s stake. In the process, Air New Zealand paid A$80m more than SIA’s offer for the remaining shares in Ansett.

The refinancing package and shedding of Ansett Australia is hardly the ideal outcome for Air New Zealand. It has reduced the airline from being the world’s 20th largest carrier with a large regional presence in Australasia, to its previous role as a small country-based airline operating some international routes. While allowing the airline possibly to regain profitability, the package limits its opportunities for future growth. The collapse of Ansett Australia has also removed a valuable source of up to 4m passengers per year feeding into the Air New Zealand network.

Jim Bolger backs the An astute political manoeuvre by the Labour-Alliance coalition government “Kiwibank” has threatened to undermine criticism by the National Party of the proposed “Kiwibank”. It announced in early September that the former leader of the National Party and current ambassador to the US, Jim Bolger, would be the chairman of the soon to be established banking arm of the state-owned NZ Post. The new state-owned banking operation is a key policy of the left-leaning Alliance and has been championed by its leader, Jim Anderton. Mr Bolger will also take over as chairman of NZ Post from next year.

Mr Bolger is a surprise choice for the chairman of the new state-owned bank and his appointment is a political coup for the government since the bank has been heavily opposed by his own political party. Under his leadership, National sold New Zealand’s only nationwide state-owned bank, the Bank of New Zealand, to National Australia Bank in 1992. His agreement to lead the new venture has caused some political commentators to wonder if it is a form of revenge on his party for his being ousted as leader by Jenny Shipley in November 1997. The board of the new bank may also offer some interesting dynamics—among the appointments is Ken Douglas, a former Council of Trade Unions president who, in 1990, Mr Bolger labelled the “most active communist” in New Zealand.

Immigration policy will be The immigration minister, Lianne Dalziel, announced in mid-September that eased further the government is to ease immigration policy further to attract more skilled migrants. This is a direct move to tackle the growth of emigration since the late 1990s, which has raised widespread anxiety of a “brain drain” of skilled workers to other countries. Effective from October 2001, the annual target for

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immigrants will be raised from 38,000 to 45,000. This move follows a temporary raising of the target to the 45,000 level last year.

The key change is that—for the first time—priority has been given to business and skilled migrants ahead of those entering as relatives of residents. Skilled and business migrants will make up 60% of the overall target, with the family reunification category limited to 32%. The remaining 8% is allocated to people seeking to enter New Zealand on humanitarian grounds. A new “talent” visa is also to be developed with the aim of facilitating applications for residency by temporary skilled workers. The government’s move to attract skilled migrants is supported by the major opposition party, National. Not surprisingly, however, the leader of New Zealand First, Winston Peters, opposes the plan.

The domestic economy

Output and demand

GDP growth is robust in Expenditure-based GDP increased by a robust 1.8% in the second quarter of the second quarter 2001, to produce year-on-year growth of 2.8%. A surge in business investment, up by 18.6% in the second quarter, drove quarter-on-quarter growth. Investment in plant, machinery and equipment was especially strong, growing by 28.4% in the second quarter of 2001. However, the strong growth in business investment needs to be viewed as the result in part of a rebound following a 14% contraction in the first quarter of 2001. On a year-on-year basis, business investment rose by 10% in the second quarter.

Final consumption expenditure by both households and the government also contributed modestly to the second-quarter economic growth. Strong spending on durables, especially used passenger cars, contributed to a 0.7% increase in private consumption in the second quarter of 2001 and a year-on-year increase of 2.2%. General government spending rose by 1.2% in the second quarter of 2001 and was 2.8% higher than in the year-earlier period.

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Expenditure on gross domestic product (% real change, quarter on quarter; seasonally adjusted; chain volume measure at 1995/96 prices) 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Private consumption 0.0 1.0 –0.3 0.9 0.7 Public consumption –1.0 0.4 –0.4 1.5 1.2 Residential investment –24.0 4.7 –12.8 –3.1 1.2 Other investment –0.5 2.9 4.8 –14.0 18.6 Exports of goods & services 2.7 –2.3 2.7 1.1 2.8 Imports of goods & services 1.4 0.0 0.0 –0.4 0.1 GDP –0.9 0.6 0.1 0.2 1.8 Source: Statistics New Zealand, Gross Domestic Product.

Housing investment still In the expenditure-based national accounts, housing investment is treated as a looks depressed form of gross capital formation. In recent quarters this component of private spending has moved erratically, with 1.2% growth in the second quarter of 2001 following a 3.1% reduction in the previous quarter. On a year-on-year basis, housing investment slipped by 10.5% in the second quarter.

Export growth remains The positive impact of export-led growth on the economy in recent quarters rapid was still evident in the latest national accounts. Seasonally adjusted exports of goods and services grew by 2.8% in real terms in the second quarter of 2001, outpacing the 0.1% growth in imports. Volume growth of dairy exports was a key contributor to export growth in the second quarter, reflecting a record production season in 2000/01 (see Sectoral trends). In year-on-year terms, expenditure on exports expanded by 4.2% in the second quarter, while imports of goods and services fell by 0.3%.

Production-based growth is According to the production-based national accounts, GDP rose by 2% even stronger quarter on quarter in the second quarter of 2001 and was 3.4% above the levels recorded in the year-earlier period. Variations in the production-based and expenditure-based estimates of GDP are explained by different estimation techniques and datasets used by Statistics New Zealand. The national statistics agency prefers its production-based measure owing to the greater quarterly volatility and some timing and valuation problems with expenditure-based GDP.

Economic growth in the second quarter of 2001 was broad-based, with most sectors experiencing higher output. The flow-on influence in output-based national accounts of the rebound in business investment was reflected in strong output growth from the manufacturing and construction sectors. Manufacturing output grew by 4.8% quarter on quarter in the second quarter of 2001 and was up by 5.7% year on year. Dairy manufacturing production subsector recorded the largest growth, accompanied by higher output from other food manufacturing industries. The only manufacturing industry to contract in the second quarter was wood and wood products, down by 7.4% in the quarter and 6% below output levels in the year-earlier period.

Gross domestic product by sector (% real change, quarter on quarter; seasonally adjusted; chain volume measure at 1995/96 prices) 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Agriculture –2.1 2.9 2.3 –0.7 –1.5 Fishing, forestry & mining 0.3 0.0 1.8 –3.0 2.4 Manufacturing –1.5 1.3 1.0 –1.4 4.8 Electricity, gas & water 3.9 3.0 –0.2 –2.2 –5.3 Construction –18.0 1.5 –5.1 –4.7 7.3 Wholesale 0.5 0.4 –0.1 0.8 3.3 Retail, accommodation & hotels 0.1 0.4 0.1 0.9 1.5 Transport & communications 3.0 –0.5 1.7 0.7 2.4 Finance 0.3 0.5 0.5 1.4 0.2 Personal & community services 0.5 –2.1 2.2 2.5 0.8 General government 0.3 1.1 1.3 2.2 1.0 GDP –0.4 0.8 0.4 0.3 2.0 Source: Statistics New Zealand, Gross Domestic Product.

Construction has been the most poorly performing sector in recent quarters, falling by 4.7% in the first quarter of 2001 and by 5.1% in the final quarter of 2000. But renewed demand for non-residential building boosted construction output by 7.3% in the second quarter of 2001, although output remained 1.5% lower than in the year-earlier period. One sector to contract in the second quarter of 2001 was agriculture, owing to a fall in both livestock and dairy production. However, this reflected a fall-back in farming output from record production levels in the 2000/01 season—agricultural output was still 3% higher in the second quarter of 2000 than in the second quarter of 2001.

Employment, wages and prices

Unemployment is reduced The labour market continues to tighten according to latest statistics. further Unemployment in the second quarter of 2001 reached its lowest level since the fourth quarter of 1988. Seasonally adjusted unemployment in the second quarter of 2001 stood at 5.2%, down from 5.4% in the first quarter and 6.1% in the year-earlier period. The reduction in unemployment was the result of both a smaller rise in the size of the labour force and modest employment growth. The labour force participation rate (seasonally adjusted) rose from 65.6% in the first quarter of 2001 to 65.9% in the second quarter. The participation rate for the second quarter of 2000 was 64.9%.

Seasonally adjusted employment grew by 0.9% between the first and second quarters of 2001, and was up by 3.2% year on year. On a quarterly basis, 3.5% growth in part-time employment outstripped full-time employment growth (up by 0.2%) in the second quarter of 2001, but, on an annual basis, full-time employment was the main driver of employment growth. On a year-on-year basis, seasonally adjusted full-time employment increased by 3.4% in the second quarter of 2001, while part-time employment grew by 2.7% over the same period.

Labour costs increase The labour cost index recorded a 0.5% increase in salary and wage rates modestly (including overtime) in the second quarter of 2001, after increasing by the same percentage in the first quarter. On a year-on-year basis, labour costs in the second quarter were 1.8% higher. Private-sector salaries and wages rose by 0.5% in the second quarter of 2001, outstripping an overall 0.3% increase in the public sector. Private-sector labour costs were 1.9% higher in the second quarter of 2001 than in the year-earlier period, while public-sector labour costs rose by 1.6% over the same period. This was the lowest annual increase for the public sector since the third quarter of 1999, reflecting the removal of the upward influence of 1999 and 2000 teachers’ salary increases from the annual figures. However, a new round of teaching contracts recently finalised will push up the public-sector labour costs index for the third quarter of 2001.

According to industry groups, the highest year-on-year growth in the second quarter of 2001 was the 3.1% rise in salaries and wages in the agricultural sector. This was followed by a 2.5% increase in the machinery and metal products group. Among the larger employers by sector, community and personal services’ labour costs rose by 2.4% in the year to the second quarter of 2001, while central government costs increased by 2.1%. Second-quarter data show that the slowest year-on-year growth in wages and salaries took place in the wood and wood products industry group.

Consumer price inflation is Consumer prices rose by 0.9% in the second quarter of 2001, compared with a outside the target range 0.2% fall in the previous quarter. On a year-on-year basis the consumer price index increased by 3.2%. (The Reserve Bank of New Zealand, or central bank, is supposed to keep inflation within a 0-3% range.) The main contributors to the quarterly increase in consumer inflation were higher petrol and international airfare prices, accounting for around one-half of the overall increase. This was reflected in the transportation group, which recorded the highest increase in prices, up by 2.9% in the second quarter of 2001, after dropping by 2.2% in the first quarter. On a year-on-year basis, petrol prices increased by 9.6% in the second quarter. Seasonal demand factors drove a 7.9% increase in international airfare prices in the second quarter. Among the other groups measured by the consumer price index, only the credit services group recorded a drop in prices over the second quarter of 2001, falling by 5%. This reflected lower loan application fees.

Producer prices start to rise A modest decline in producer prices in the first quarter of 2001 that ended again nearly two years of continual growth may have been a temporary blip. Both input and output prices for producers resumed growth in the second quarter. Producer input prices (excluding wages and depreciation) rose by 1.4% in the second quarter of 2001 and were 8.1% higher than in the year-earlier period. The largest sectoral contributor to the overall quarterly increase in the producer price index was a 4.3% rise in wholesale trade input prices. This was driven mainly by a 9% increase in crude oil prices over the second quarter of 2001, following a 24% fall in the first quarter. Higher input prices for the meat and meat processing industries also contributed to the overall quarterly increase, rising by 8.1% in the second quarter of 2001 in line with higher livestock prices paid by meat processing companies. Although the lag in the release of

the producer price index statistics gives them only historical value, the recent electricity crisis nevertheless features, with a 10.7% rise in the price of electricity generation and supply inputs over the second quarter of 2001.

Producer output prices for New Zealand industries increased by 1.3% in the second quarter of 2001, to produce year-on-year growth of 6.1%. Almost 30% of the overall quarterly increase in producer output prices stemmed from the agricultural sector. Livestock and cropping farm output prices rose by 7.8% in the second quarter of 2001, a reflection of the higher livestock prices paid by meat companies as noted above. Meat and meat product manufacturing output prices increased by 6.9% in the second quarter owing to buoyant prices for sheep and cattle products. Output prices for the highly topical electricity generation and supply sectors recorded an 8.1% surge in the second quarter of 2001. This reflected both higher prices received by generators as well as higher prices paid by commercial electricity customers to electricity retailers.

Financial indicators

Interest and exchange rates (% unless otherwise indicated; period averages) 2000 2001 Jul- 3 Qtr 4 Qtr 1 Qtr 2 Qtr Aug 90-day bank bill rate 6.7 6.7 6.4 5.9 5.8 5-year government stock 6.7 6.5 5.9 6.3 6.5 10-year government stock 6.7 6.5 6.0 6.5 6.7 Base lending rate 10.6 10.6 10.4 10.0 9.9 First mortgage rate 8.7 8.5 8.4 7.8 7.7 Exchange rate (av; NZ$:US$) 2.26 2.44 2.31 2.41 2.41 Currency index (June 1979=100) 50.1 47.8 50.5 49.7 50.2 Overnight interbank cash rate 6.5 6.5 6.5 5.9 5.8 Source: Reserve Bank of New Zealand.

Monetary policy is The Reserve Bank surprised financial markets on September 19th with an unexpectedly eased unscheduled easing of monetary policy. The central bank lowered its official cash rate (OCR) by 50 basis points to 5.25% ahead of its next scheduled review on October 3rd. (The OCR is the main mechanism used by the Reserve Bank to establish monetary conditions in the economy. It determines the rate at which retail banks borrow and lend between themselves overnight.)

The Reserve Bank governor, Don Brash, stated that the primary reason for the easing was the tragic events in the US. The Reserve Bank now thinks it is more likely that the world economy’s performance will worsen, with adverse effects on New Zealand’s short-term economic outlook. It is a precautionary move against increased uncertainty, and the likely negative impact of this on business and consumer confidence. But as it is too soon to assess the global economic impact of the terrorist attacks, the Reserve Bank may have acted too quickly. Interestingly, the Reserve Bank of Australia (the Australian central bank) decided against a similar unscheduled reaction to the events in the US.

Wholesale interest rates Short-term wholesale interest rates fell sharply in reaction both to the terrorist fall sharply attacks and the Reserve Bank of New Zealand’s subsequent loosening of monetary policy. The key 90-day bank bill rate, which is the main determinant of retail mortgage rates, had been relatively stable at around 5.8% throughout July and August. Following the terrorist attacks in mid-September, the rate fell to around 5.7% in line with similar reductions overseas. The Reserve Bank’s announcement then provoked another sharp reduction, with the 90-day rate falling to nearly 5.3% in mid- to late September. Retail interest rates have followed suit, with most major retail banks reducing their floating home mortgage rates from 7.7% (at the end of June) to 7.2% in late September.

The New Zealand dollar is The New Zealand dollar, as measured by the trade-weighted index (TWI), weakening again fluctuated within a narrow range of 49 to 50 points through July (June 1979=100) before appreciating in August to reach a peak of nearly 52 points by the end of that month. The TWI then fell sharply, reaching nearly 48 points by September 20th. These movements were driven mainly by shifts in the value of the New Zealand dollar against its US counterpart. The New Zealand dollar had appreciated from NZ$2.44:US$1 at the end of July to peak at around NZ$2.26:US$1 towards the end of August, as a slowing US economy encouraged investors to shift out of the US dollar. But despite the US dollar’s depreciation against the euro and yen in early September, the New Zealand dollar managed to weaken against all three units. This weakness may have been exacerbated by a shift by investors into the major currencies, in reaction to the increased uncertainty generated by the September 11th terrorist attacks.

Sectoral trends

Electricity shortage hits New Zealand experienced a major electricity supply crisis in July-August, production confirming warning signs of an impending shortage over preceding months (July 2001, page 25). The combination of the record low levels of hydroelectricity lakes—upon which New Zealand depends for up to two-thirds of its total electricity generation—plus higher demand owing to an unusually dry and cold winter resulted in soaring wholesale electricity prices. By late July hydroelectricity lake levels had fallen to 60% of their average capacity, down from 80% in June. Wholesale electricity prices consequently peaked at a daily average of 40 New Zealand cents (17 US cents) per kwh in late July, over six times their level a year earlier. The threat of critical electricity shortages forced the energy minister, Pete Hodgson, to launch a major electricity conservation campaign at the end of July. Mr Hodgson called on consumers to aim to cut their electricity consumption by 10% over ten weeks.

The conservation campaign appears to have been effective. Savings over a six- week period from the end of July nevertheless averaged around 8%. By early September a combination of renewed rainfall in the critical South Island hydroelectricity lake regions and the conservation efforts had eased the crisis and wholesale prices had fallen back to around five New Zealand cents per kwh. But the problem of electricity shortages will have negative implications for economic growth. Faced with unacceptably high prices in the wholesale electricity spot market, several of the largest companies in New Zealand have

cut their production. Colmalco, for example, which consumes up to 15% of total New Zealand electricity generation (making it the largest single user of electricity), cut production at its aluminium smelter by 5% in July. Aluminium exports from Colmalco’s plant account for around 4% of New Zealand’s annual exports by value. The electricity crisis is estimated to have shaved 0.1% off GDP this year, although some forecasters have placed the negative impact as high as 0.4% of GDP.

Electricity generators are The big winners from the recent electricity crisis are likely to be electricity accused of cashing in generators. This has prompted the opposition National Party to accuse the government of profiteering out of the crisis, since it has an interest in three of the four main electricity generators, who, between them, control around 60% of total generating capacity. However, a report released in mid-July by the wholesale electricity market surveillance panel, a sector watchdog, found no evidence of market manipulation.

The panel’s investigation was sparked by allegations brought by the largest electricity retailer at the time, On energy, of unfair practices by generators. On energy has been one of the biggest casualties of the crisis. The company supplied 30% of electricity consumers but generated only 6% of total electricity supply. Insufficient hedging arrangements forced it to buy electricity on the spot market for around 27 New Zealand cents per kwh even though it was tied into selling it to retail customers for between five and 14 New Zealand cents per kwh. Suffering daily loses of around NZ$1m (US$425,000) a day, On energy exited the electricity retailing business in late July after the sale of its 290,000 North Island customers to the state-owned supplier, Genesis Energy. On energy had previously sold its 116,000 South Island customers to another state-owned enterprise, Meridian Energy, around a month earlier.

The wholesale electricity The increased concentration of both electricity retailing and generating among market will be reviewed four main companies has raised concern among consumer and business interest groups. This issue is likely to be covered in a post-crisis review of the wholesale electricity market, announced by Mr Hodgson in early September. Other areas that may be examined include the possibility of introducing more transparency into the market’s operation, and the profit levels of the three state-owned electricity companies. The key issue for the future that needs to be addressed, however, is whether the country will tolerate occasional but recurring shortages in the future or look at ways to boost generation capacity. In the meantime the crisis will have raised awareness by companies of the need to arrange hedge contracts in order to avoid the volatility of the spot market. There is likely to be a series of price increases for all consumers over the coming months, although retail electricity prices remain among the lowest in the OECD.

Farming may fare less well The farming sector, assisted by tourism, helped to push up overall economic next year growth over the past year. The major export-oriented dairying, sheep and beef farm sectors experienced record production and profitability levels in the 2000/01 season owing to the combination of a low New Zealand dollar exchange rate, excellent growing conditions and strong international com-

modity prices. The Meat and Wool Economic Service (an industry-owned body) confirmed in July that profitability in sheep and beef farming reached its highest level since 1979/80 in real terms in 2000/01. Average farm incomes grew by 21% over the season. The recent boom conditions are also reflected in the farming sector’s role in driving recent strong growth in export prices (see Foreign trade and payments).

The outlook over the next year is less favourable, with record production levels of the past season unlikely to be surpassed. A number of factors signal this. First, international demand for primary commodities appears to be easing. This is reflected in many international commodity prices reaching the peak of their current cycle. The forecast slight appreciation of the New Zealand dollar may also not help matters. A final factor pulling down output will be poorer growing conditions. The dry cold winter weather that lay behind an electricity shortage crisis in recent months has produced drought conditions in some key agricultural regions, especially on the South Island. Poor pasture growth and feed shortages are expected to lower production in these regions. Figures from the Meat and Wool Economic Service show that sheep numbers reached their lowest levels for 44 years (43.5m sheep) in July. This will reduce spring lamb slaughters; the industry body predicts a fall from 25.3m in the current year to 23.9m next year. Consequently, farm incomes are forecast by the Meat and Wool Economic Service to fall by 4% in 2002. Reduced pasture growth and lower feed levels in drought-affected regions will also lower dairy production.

The dairy “mega-merger” Fonterra Co-operative Group is the new name for the “mega-merger” of dairy gets a name companies expected to be created from October 1st after parliament passes final approval legislation. Announced in August, the Fonterra brand name replaces the previous working title of GlobalCo. The merger of New Zealand’s two largest dairy companies, Kiwi Dairies and New Zealand Dairy Group, with the New Zealand Dairy Board will create the world’s ninth largest dairy company and its largest dairy exporter.

Fonterra starts making Fonterra has wasted no time in seeking out partnership deals, even in deals advance of its creation. At the end of August it announced that it had entered into a joint venture with the world’s largest food company, the Swiss-based Nestlé. The joint venture will market dairy products in North and South America. These dairy markets are forecast—by the companies—to expand by 4% each year for the next five years. Currently, their combined size is an estimated NZ$216m (US$91m). Included in the joint venture will be branded dairy products such as chilled milk drinks and food. Commodity dairy products, such as butter and cheese, will not be part of the deal. The final establishment of the Fonterra-Nestlé joint venture is subject to due diligence and various regulatory approvals.

In another strategic move, NZMP, the milk powder arm of the New Zealand Dairy Board (and hence Fonterra), sealed in mid-August an arrangement to become the major marketer of US skimmed milk powder exports. The deal is with Dairy America, a marketing company that represents major US dairy co-operatives with a share of around 70% of US skimmed milk powder exports. The venture will also boost Fonterra’s earnings once NZMP is merged with it.

The government’s GM Fonterra threatened in September to shift its NZ$100m research division stance causes concern overseas if a voluntary moratorium on genetic engineering (GE) testing is extended by the government for another two to five years. Fonterra’s stance is indicative of a wider belief among agricultural sector and scientific community interest groups that the Labour-Alliance government may reject the recommendations of a Royal Commission inquiry into genetic modification (GM), released by the government at the end of July.

The existing moratorium on GE testing was due to expire at the end of August, but was extended by the government—with the approval of Life Sciences Network (representing biotechnology research groups)—until the end of October in order to give the government time to consider and respond to the Royal Commission’s findings. The inquiry’s findings recommended that genetic modification of organisms “proceed with caution”. It stated that it was impractical to keep GM organisms out of New Zealand. The inquiry has recommended the “conditional release” of GE organisms, backed up by relatively heavy regulatory control. This includes the establishment of a parliamentary commissioner on biotechnology and a bioethics council to consider cultural and ethical issues. The Royal Commission also recommends voluntary labelling of GE foods and suggests that the first application for the release of GE crops be decided by the environment minister.

Although the government initially appeared to support the findings of the inquiry, there were signs in August and September of hesitation within the coalition. In particular, the prime minister, Helen Clark, surprised agricultural and scientists’ groups (and, according to some sources, some senior ministers) with a suggestion that the moratorium be extended beyond October 31st for up to five years.

The GM issue is politically sensitive for the government. The Green Party, which supports the minority coalition government on an issue-by-issue basis, has threatened to withdraw its support if GE testing is approved. There are also signs of disparate views within the coalition. Although the leader of the Alliance, Jim Anderton, has stated that his party supports laboratory-based GM research, the ruling body of the Alliance in early September adopted a policy of banning GE organisms until the associated technology is proved safe. The Alliance ruling body endorses the extension of the moratorium for the two to five-year period.

The fear of scientists’ and agricultural bodies is that a failure by the government to accept the Royal Commission’s findings will result in an exodus of scientists overseas and a loss of competitive advantage for the primary sectors. The government is due to release its formal reaction to the inquiry findings in November.

Tourism could suffer after The short-term prospects for the New Zealand tourism sector are uncertain the recent terrorist attacks following the terrorist attacks on the US on September 11th. It remains unclear at this stage to what degree the attacks will make Americans more wary of undertaking long-distance air travel to destinations like New Zealand. Whether or not this happens, a likely scenario is a reduction in consumer confidence in the US, which will indirectly reduce expenditure on tourism. The US is New

Zealand’s third largest tourist market, with just under 200,000 arrivals from the US in the year to June 2001. American tourists were also the highest spenders, spending on average NZ$4,460 (US$1,900) per visit in the same period, compared with an average for all tourists of NZ$3,041. The tourism sector would also be hurt by higher fuel costs.

Foreign trade and payments

The current account New Zealand’s unadjusted current-account deficit in the second quarter of continues to improve 2001 was NZ$297m (US$125m), a NZ$316m deterioration compared with the previous quarter, but the lowest second-quarter deficit since 1993. In the year to June 2001 the current-account deficit totalled NZ$4.5bn (US$1.9bn), equivalent to 4% of GDP. This was a substantial improvement compared with the current-account deficit/GDP ratio of 7% in the second quarter of 2000.

Adjusting for seasonal factors between quarters, the current-account deficit in the second quarter of 2001 was NZ$526m, compared with a deficit of NZ$1.1bn in the first quarter. The NZ$566m improvement in the seasonally adjusted deficit between the first and second quarters of 2001 was primarily the result of a strong improvement in the merchandise trade surplus, aided by a modest improvement in the seasonally adjusted services balance and a narrowing of the deficit on international investment income. The seasonally adjusted merchandise trade surplus improved by NZ$214m from the first quarter of 2001 to produce a NZ$1.2bn surplus in the second quarter. This was driven by a 4% increase in exports of merchandise goods (balance-of-payments basis), outpacing a 1.5% rise in merchandise imports. The main contributors to the export growth in the second quarter of 2001 were the higher volumes and value of dairy and meat products exports.

A fall in imports of services exceeded a fall in exports of services to produce a near-zero services balance (seasonally adjusted) in the second quarter of 2001. That compared with a modest NZ$33m deficit in the first quarter of 2001. The main influence improving the services balance in the second quarter was travel services, with higher numbers of overseas visitors to New Zealand boosting

exports of travel services. The deficit on investment income in the second quarter of 2001 was NZ$1.8bn, a NZ$308m improvement quarter on quarter, but higher than the NZ$1.7bn deficit recorded in the second quarter of 2000. The reasons for the quarterly improvement were higher income accruing to New Zealanders from their investments overseas, while foreigners’ incomes on New Zealand investments declined. Notably, the improvement in the underlying profitability of overall international investments by New Zealand enterprises offset the negative impact of the operating losses of the New Zealand-owned airline, Ansett Australia, in the months leading up to its collapse in September (see Economic policy).

Current account (NZ$ m; balance-of-payments basis; not seasonally adjusted) 2000 2001 Year to 3 Qtr 4 Qtr 1 Qtr 2 Qtr Jun 2001 Merchandise trade balance –2 199 1,117 1,792 3,106 Services balance –681 –75 913 –406 –249 Income balance –1,754 –2,128 –2,111 –1,802 –7,795 Transfers balance 125 133 100 119 477 Current-account balance –2,313 –1,870 19 –297 –4,461 Source: Statistics New Zealand, Balance of Payments and International Investment Position.

Investment statistics are The annual balance-of-payments statistics for the year to end-March 2001 incomplete revealed a current-account deficit of NZ$5.3bn, a substantial improvement compared with the NZ$7.4bn deficit recorded in the year to end-March 2000, and seemingly confirming the downward trend. The annual balance-of- payments series (which is more detailed than the quarterly series) has been upgraded to allow a limited analysis of the stock of foreign direct investment both in and out of New Zealand. Unfortunately, the small size of the New Zealand economy and the existence of major investors from certain countries or within certain industries mean that confidentiality issues force the suppression of some data by the government’s statistical unit, Statistics New Zealand. (Their concern is that if the data were released, it might be possible to infer from them the results for individual companies that had not consented to the publication of their data.) On a country-by-country basis, this has suppressed the release of data on direct investment by New Zealand enterprises into countries such as Canada, Germany and the United Kingdom.

Nevertheless, statistics still show that Australia is the largest single destination for New Zealand direct investment overseas, totalling NZ$9.3bn at end-March 2001 (out of a total direct investment overseas of NZ$14.7bn). Australian enterprises also dominate direct investment into New Zealand, accounting for NZ$35bn out of the NZ$49.3bn in foreign direct investment into New Zealand at end-March 2001.

On an industry basis, the problem of data suppression owing to confidentiality issues is even more prevalent. Of the 17 broad industry sectors surveyed by Statistics New Zealand, nine were suppressed for international assets, and seven for international liabilities. But at end-March 2001 the finance and insurance industry (unsurprisingly) emerged as the dominant industry, as regards both

liabilities and assets. Total international assets by industry at end-March 2001 totalled NZ$84.9bn, of which the finance and insurance sectors held NZ$55.1bn. On the liabilities side, the finance and insurance sector accounted for NZ$98.9bn of the NZ$171.5bn in liabilities held at end-March 2001.

New Zealand’s terms of New Zealand’s terms of trade index (which divides export prices by import trade slip prices) fell by 0.3% in the second quarter of 2001, ending four consecutive quarters of growth. Strong rises in the preceding quarters did, however, result in a 9.8% growth in the terms of trade index between the second quarter of 2000 and the second quarter of 2001.

The main reason for the quarterly decline in the terms of trade was that import price inflation exceeded export price inflation. Export prices rose by 1.9% in the second quarter of 2001, but were up by 17.5% year on year. The farming sector was one of the main contributors to the quarterly, and year-on-year, increases, with higher export prices for dairy and meat products boosting the pastoral and dairy products index category by 2.9% in the second quarter of 2001. Another significant factor was a 1.5% depreciation of the New Zealand dollar against the currencies of major trading partners in the second quarter. Import prices rose by 2.2% in the second quarter of 2001, to produce year-on- year growth of 7.1%. The quarterly increase in import prices was also influenced by the depreciation of the New Zealand dollar, although most commodity import prices also rose. Petroleum products import prices increased by 7.3% in the second quarter of 2001, after falling by 20% in the first quarter.

Farming exports push up Customs-based merchandise trade statistics are more up-to-date than their the merchandise surplus balance-of-payments equivalents. According to these figures, New Zealand recorded a NZ$45m merchandise trade surplus for the year to July 2001. This was the first annual trade surplus for six years. In the year-earlier period there was a deficit of NZ$3.1bn, although this was partly the result of the purchase of a NZ$631m frigate by the government. Farming sector exports drove strong growth in exports over the year to July 2001, with dairy exports accounting for 40% of the total annual increase.