Bill English talking about dairy and recession on Q&A yesterday..
“It’s about 5 to 6 per cent of the whole economy. It’s only 20 per cent of our exports. The other 80 per cent will be starting to enjoy the benefits of the lower exchange rate, and the lower exchange rate will help cushion the impact on dairy of their lower prices.”
Essentially he is just lying with numbers by not looking at the effects and spending his ‘thinking’ time inside his favourite delusions.
The NZ economy isn’t one that produces most of its own goods. So we import them and a pile of services from offshore. We pay for them mostly by selling goods offshore. The rest of the economy runs on the income from that plus some tourism and and a bit from inwards migration.
So last year dairy was about 25% of the goods that we sold by value. It was the only sector that grew by more than a few percent.
But more importantly over the last 5 years dairy exports accounted for something like half of our export profits when you count in the returns back to the farm gate and beyond.
Just how dramatic the impact of dairy has been on our economy can be seen in this graph from a speech given about dairy exports and their effect on our economy by the Reserve Bank governor Graeme Wheeler last year.
Most of the change in export returns for dairy derived directly or indirectly from a single set of products and a single market. Whole milk powder being sold into the burgeoning Chinese market in recent years. This was coupled with a shortage of production due to various weather events world wide gave this interesting price spike in 2013 and 2014.
Milk production systems worldwide were in the process of responding to the earlier demand with the USD3000-4000/MT prices from the 2011 and 2012 when this price signal hit in 2013. So as usual for markets they responded harder. Which is why the global price for this product is now down around the USD2000 level, and in my view likely to stay there.
Now the effects were ameliorated by the exchange rate, in part caused by the very success of selling dairy. That is what this chart from Wheeler shows.
So now the dairy price is going down, so is our currency. Which will both shows the horrendous effect of recent dairy prices on the rest of our economy (especially manufacturing) and will also limit some of the effect on the dairy payouts to farmers which are done in local currency.
Now none of this is news to anyone who has been watching this government pushing this particular commodity over the last 5 years.
National traditionally has this horrible habit of trying to run with economic prescriptions from the past. Chief of which is that they seem to adore leaving NZ exposed to the vagaries of prices in the international markets for barely processed commodities – mainly farm products and mining.
Bill English is one of the worst exponents of it. This was obvious pre-election back in 2008. As Rob Oram pointed out then, National on the two previous recessions in the early and late 1990s had cut spending drastically (and attempted to provide stimulus from tax cuts). It didn’t work on either of those occasions and didn’t after the 2008 election either. These following words could have been written about the fiscal strategy after the 2008.
And once again, National’s fiscal strategy was blown off course. In particular, government debt rose sharply rather than falling as promised.
These dynamics of the New Zealand economy are well known. They stem from the tiny size of the economy, its exposure to global commodity and financial markets and the government’s relatively large share of activity.
When we head into a recession, government revenues fall and spending on the likes of unemployment benefits rise. The reverse happens when we head into boom times but this positive impact is relatively smaller than the negative impact during recessions.
But he also pointed out the skimpy weakness of National’s economic thinking.
So, that is pretty much all we know so far about National economic policies. It’s a rerun of the party’s 1990 mantras about less tax, spending and regulation. That’s no surprise at one level. English, National’s chief policy developer and economic manager, learnt them from the master of budget micro-management, Bill Birch.
“I make no apologies for the simplicity of National’s plan,” English said in his conference speech last weekend. He ridiculed the current government for spending so much time and effort working with key industries on strategies, taskforces and other efforts to deal with the great complexities of the global economy and New Zealand’s search for greater engagement and greater wealth.
She’ll be right, he reckons. We’ll sell more food to Indians and Chinese at higher prices. That was the only vision of New Zealand’s economic future he offered delegates.
Indeed, it would be nice if life were so simple. But, as his own farming constituents would tell him, it’s not. At home, they face distinct physical limits to expanding volumes and financial limits from rising land, fertiliser and other costs. Abroad, they face growing competition from foreign farmers.
The primary sector has a great future, as do many other sectors. But rerunning their 1990s’ strategies won’t deliver that future. The world has already changed hugely since National was last in power and is changing even more radically before our very eyes.
Key told this columnist in an interview in March that National was working on a “stunning” set of economic policies. But judging by what it has delivered so far, National has spent the past nine years in opposition ignoring a changing world.
So in the last seven years we have had National and Bill English guiding us towards a “Brighter Future” of selling more commodity farming products. They did this while accumulating lots of government debt because they “stimulated” the economy with taxcuts that had no observable effect on economic performance, and cut government spending which had a detrimental effect. Talk about a groundhog day – this was the exactly the same economic stupidity that they performed in 1990s.
On the way through, they cut virtually all government spending on developing startup companies, removed almost all R&D tax incentives for larger companies to do it themselves, and pushed a small proportion back in as Callaghan grants to companies who could have done it themselves. They did the same for farming by decreasing the spending on R&D in that area.
Similarly over the last 7 years Trade and Industry has gone from being barely functional in helping NZ companies getting out into the world markets, to being useless for anyone outside of the dairy sector.
So when Bill English says
“I think he’s stretching it a wee bit here. I think there’s a bit more resilience than that in the economy,” he said.
“If you pick out all the bits that are going badly, you can paint a bad picture.
“Most of it’s actually going okay – migration numbers are up, households will be pleased to see interest rates dropping, our exporters are all seeing a big drop in the exchange rate.”
Sure there is “resilience”. But it is a survival resilience. Most parts of the export economy have nothing much to build with.
The survivors have long since moved to areas that are not dependent on exchange rates so a dropping exchange rate, while welcome for profit, does little for increasing their markets. They have no new ideas that are ready to push into the global market place because the government hasn’t been interested in those for the last 7 years and the available capital goes into “safe” investments like the negative sum game of buying property.
Certainly there is nothing to fill the vast hole that having whole milk powder at below USD 2000 / MT for several years is going knock inot our balance of trade. And by all indications, we look to be heading into a global recession with debt and nothing new to sell.
Bill English is clearly being the beltway idiot that he has always been. Perhaps he should try looking at what makes exports actually work…