Economy Q&A with Alan Bollard

Each week we ask our business and community leaders how they think the economy is going, and what they think are the biggest challenges.

Former Reserve Bank governor Alan Bollard, chairman of the New Zealand Infrastructure Commission, answers Stuff’s questions on the economy.

Bollard says the Government looks to have made broadly the right decisions about the Covid-19 lockdown last year and speedy job support, but now we have to find ways to open up.

How do you feel the New Zealand economy is tracking currently?

The New Zealand economy is recovering well from Covid, certainly better than I ever expected. There is a similar story underway in many other countries too.

But we need to remember we have had the deepest contraction on record, and it is leaving its scars. We are about to have the strongest recovery on record, but interpreting will be complicated.

Any economics graduate can tell you that what goes down eventually comes up again, but we are likely to get some weird data readings that are difficult to interpret. That means a high degree of uncertainty for some years.

At the moment it looks like we are the lucky country again – we are enjoying very high commodity prices due to the amount of stimulus sloshing around our trading partners.

What are you most concerned about right now?

Covid was a weird event, and there will still be some surprises for us ahead. The Covid variants are highly contagious and there is no guarantee that they will not spoil the recovery. This is acute since you can contract and pay for vaccine supplies, but small countries are last in line.

The recovery is being stimulated by the biggest concerted international stimulus ever. This is leading to asset price inflation, particularly in stock markets, and at some stage this has to rebalance with economic prospects. So far the international markets have been enthusiastic about all of this.

But let’s be clear: the trillions of dollars committed mean a huge build-up of sovereign debt and that will have to be repaid. We might acknowledge this and previous finance ministers and Treasury for their good fiscal management, which has meant that, when we needed to spend more, we had the debt head-space to do this. (I used to head Treasury some years ago, and I know they don’t get much thanks!)

What has the last year taught us about the New Zealand economy?

It now looks like the Government made broadly the right decisions about lockdown last year and about speedy job support. These were tough decisions, the time when we decided to follow the East Asian model of strong central government leadership, rather than the Western model of individual rights. The international Covid data shows this was the more successful policy.

In addition, our essential services – health, transport, freight, warehousing, all worked reasonably well – there was plenty of toilet paper.

But there are more tough decisions ahead – we seem to have taken over from Bhutan as the kindest little hermit kingdom in the world; now we have to find ways to open up.

The international tourist sector is dead, so is the international education market, and there will be more bankruptcies ahead in these sectors. The business sector has been unable to maintain its marketing and other international connections, and this is starting to hurt. Parts of the retail sector are suffering digital by-pass, and we can all see high street closures happening.

Are you optimistic or pessimistic about the economy this year? Why?

I hope I am realistic rather than optimistic! The Treasury Budget growth forecasts are around 3 per cent for the next two years, and that seems to me realistic, albeit with very high risks either way. We (and other countries) are riding a wave of fiscal stimulus, high commodity prices and strong asset values, which ultimately will need to correct. It’s going to be hard to restore our unimpressive productivity growth with all these structural disruptions underway.

In the meantime we are all very dependent on the management of fiscal policy, whereas the Reserve Bank has had a more limited role in this downturn.

What is the biggest challenge facing New Zealand?

There are plenty of underlying problems – they might have been obscured by the Covid concerns, but they have not gone away. Here are a few from my list:

  • Continuing failure to extract value from our exports. (For an account of how Singapore makes more money from our dairy powder than we do, see the NZ PECC Dairy Value Chain report!)
  • Cost and time pressures that we have imposed on infrastructure. (E.g. we have more sand, gravel and rock than most countries but red tape makes it almost impossible to establish a new quarry.)
  • An economy that leaks talent, value, private benefit and tax revenue. (Look at our recent returnees – how many have enjoyed New Zealand education, yet pay tax to foreign jurisdictions, take advantage of us as a safe haven, and will leave again as soon as possible?)

– The responses represent Alan Bollard’s personal views.

– The Monitor is Stuff’s unique set of insights to help the business community better understand the economic landscape, and maximize their success. Alongside the quarterly snapshot is an economic index showing the speed of growth across different parts of the economy.