Turbulent global context for new Government
While the important domestic issues on the new Government’s agenda are its priority, several crucial capital Cs also loom for it in the global context, writes Peter Davis.
The biggest capital “C” of consequence for New Zealand is China, where just under 30% of our goods exports go. This is a high level of reliance on a single market.
With its 100-day legislative programme the incoming Government is understandably focused on the domestic issues of interest to its three coalition partners. But there is an international context to New Zealand politics. In due course these will loom large in policy-making.
With this in mind The Helen Clark Foundation mounted an interview with David Skilling, the founding director of Landfall Strategy Group, an advisory firm that provides advice and insights on global economic policy and political dynamics to assess the key international issues on the horizon.
First up in global news is the IsraelHamas conflict in Gaza, although the Ukraine-Russia war also remains in the headlines.
From a New Zealand point of view should we be concerned that either of these present a threat to world peace and order that could have ripple effects in our part of the world?
Most commentators see little likelihood of the Gaza conflict escalating, in the main because the key actors in the Middle East simply do not want this.
But one effect it is having is in leaching support away from Ukraine, and adding an extra level of risk on oil prices. It is also distracting the United States (US), thus opening up a potential power vacuum in East Asia.
Aside from the major “C” of conflict in Ukraine and the Middle East we have also in recent times the “C” of Covid, in the future the global challenge of Climate Change – and, in many ways the biggest of them all, China as an economic partner and regional power.
How do these impinge on New Zealand?
Covid now features little in domestic and international affairs, except doubts about the role of the Reserve Bank.
Did it do too much to spur inflation, has it done too little to tamp it down?
Like New Zealand, most countries saw a spike in inflation following aggressive fiscal and monetary responses to the pandemic, a spike that was compounded by supply-side constraints and higher energy and food prices.
In general terms New Zealand has experienced the same broad contours of inflation that have been globally experienced and determined: as inflation has risen, so it will decline with global trends and concerted Reserve Bank action.
Climate change is another contentious issue where partisan lines are strongly drawn, yet key sectors of New Zealand’s economy are at risk with policy and other developments in climate change – in particular, dairying, meat, and long-haul tourism.
Given the high emissions intensity of these areas we can expect to be adversely affected by shifts in consumer preferences and the impact of carbon pricing, including EU border adjustments.
Given New Zealand’s strong scientific and hands-on experience and the economic incentives to get ahead of the curve it is surprising we have not made more progress in heading off these challenges to key aspects of the export economy.
The biggest capital “C” of consequence for New Zealand is China, where just under 30% of our goods exports go. This is a high level of reliance on a single market.
For example, European economies lie in the 5-10% range.
The issue is not just the level of reliance, but also the fact that China is experiencing a slowdown in economic growth, an ageing population, lack of institutional infrastructure for an autonomous and thriving market economy, and the potential prospect of being caught in a middle-income trap like Malaysia, Indonesia, and the Philippines, rather than a transition to high-income status like Japan, Singapore, and South Korea.
So what should and can New Zealand do in this difficult economic context? There is definitely the need and potential to “de-risk” certain troubling features of the country’s external economic condition, such as an excessive dependence on the China market, vulnerability to complex and lengthy supply chains, and high emissions intensity for major parts of our export sector.
Are there any bright spots?
The US economy is thriving; it is growing strongly, most recently recording a gain of nearly 5%.
Yes, the US is becoming more protectionist, and is building up massive public debt, but the growth fundamentals are strong. The country is on a roll, with domestic politics being the biggest constraint.
How about India? A democratic country with Commonwealth and other connections and now the largest country by population in the world.
Yet it has a strong protectionist bias, particularly in agriculture.
Therefore, there are unlikely to be any short-term gains, but this bears persisting with.
Looking at the world, therefore, New Zealand faces a constellation of issues: domestically, high levels of private sector debt and big current accounts deficits, and internationally, high public and private debt, high interest rates, rising oil prices and commodity price shocks - and that’s even before we get to climate change, Artificial Intelligence, and a raft of other issues.
Once the new Government gets to the finish line of its 100-day legislative sprint, it will then have the marathon of dealing with a world in which a small country like New Zealand is bobbing like a cork in an increasingly turbulent ocean.