Q+A: Steven Joyce – Recession in next two quarters unlikely

Press Release – TVNZ

CORIN You will have heard some of those stories. Some pretty grim stuff talk of suicide, drastic impact. What can you offer to those people in those situations on those farms who are doing it really tough?Q+A: Steven Joyce – Recession in the next two quarters unlikely

Q + A

Episode 825


Interviewed by CORIN DANN

CORIN Good morning to you, Mr Joyce.

STEVEN Good morning, Corin. How are you?

CORIN You will have heard some of those stories. Some pretty grim stuff – talk of suicide, drastic impact. What can you offer to those people in those situations on those farms who are doing it really tough?

STEVEN Firstly, it’s a sudden and big drop in impact for most dairy farmers – well, in fact, all dairy farmers, and it is having an impact. There is no doubt about that. A lot of them have strong balance sheets, and they’ll have had some good years, and that will help them through, because they have got very good equity, but there will be others who have low levels of equity, and also it’s a bit harder for share milkers as well, because they’re not getting the same level of support from the co-op as the other farmers.

CORIN So what can you do for them?

STEVEN Well, we’ve got quite a lot of support going on through the Rural Support Trust, the things that Nathan Guy and Jonathan Coleman have set up for farmers, with the ability to do more if that’s required. There’s assistance that Dairy New Zealand’s supplying, and there’s lots of community support to get them through, and I would just counsel that if anybody’s in that sort of difficulty, they should just put their hand up and talk to people. Nathan Guy was telling me he went round the banks on Thursday. They are on the whole supportive, and he doesn’t feel that there’s going to be a sudden rush by the banks.

CORIN They have to be, don’t they, because it’s $34 billion worth of dairy debt. Is dairy too big to fail in this country?

STEVEN Well, I think dairy’s very significant. It’s 20% of our exports. It’s about 4% or %5 of our economy. As has been pointed out there, it’s very important in a number of provincial centres – Taranaki, Waikato, Southland and so on – so it is very important.

CORIN Too big to fail?

STEVEN Well, I don’t think—The simple reality is it won’t fail over time. What we’re dealing with is a sudden price drop which has caught a lot of people by surprise, but actually the long-term prognosis for our food—

CORIN Why should we believe that, though? Because a year or two ago, people were talking about this $8.40 payout. No one saw this coming; Fonterra didn’t see it coming; you didn’t see it coming. There’s great uncertainty. Why would you, if you were 25, thinking about going into the dairy industry — why would you?

STEVEN Well, there’s a lot of things in life that people don’t see coming. I mean, the kiwi fruit industry before PSA, for example. Nobody knew that was coming. All industries suffer shocks from time to time. That’s the nature of being in business. Actually, all businesses have periods of time where they don’t make money. I was in business 20 years before I went into politics. I can remember years where we didn’t make money, because there were shocks in our part of the economy.

CORIN Sure, but the claim is from your opponents that you have ramped things up towards dairy in the good times and then over-egged it.

STEVEN Yeah, but that’s the—With the greatest respect, that’s political caricature. That’s all it is. The government didn’t ramp up dairy.

CORIN But it has left us very exposed.

STEVEN No, the government didn’t ramp up dairy. The government has set the settings that allow a lot of industries to flourish. Dairy is one of them.

CORIN Well, you’ve put money into irrigation, you’ve encouraged production.

STEVEN In what way? The reality is what encourages production is global prices, and global prices have been strong; they are suddenly weak. They will strengthen again.

CORIN The Prime Minister has been to China two or three times in the last few years. He’s gone there whenever there is any problem with milk, any suggestion that there might be a downturn to our milk supply.

STEVEN And we do the same in other industries as well.

CORIN All that emphasis has been on the huge money we are making from China.

STEVEN No, no, no, no. Well, actually, China has been hugely helpful to New Zealand through that whole GFC period, and the New Zealand economy is way stronger than it was five years ago. So let’s go through it. We’ve got much lower international debt and we had five years ago. Our balance of payments to the rest of the world is in a stronger position. Households have been saving a lot more. The government’s fiscal position is in much better shape. So we are actually as an economy much more resilient than we were five years ago. And also we are in a situation where the world economy is still growing. Now, I went back and had a look at the previous four recessions in New Zealand and said, ‘What’s the difference between those and the situation that we are in today?’ And the reality is the world economy is still growing 3% or 4%.

CORIN Hang on a second. So you’re saying—

STEVEN It’s not a recession. I’m saying we’ll have a slow-down in growth, but I went and had a look just to check, because there’s all this, sort of, rhetoric about how it’s the end of the world.

CORIN This is interesting, because all your rhetoric – the government’s rhetoric – over the last week or so has been, ‘Oh, don’t panic. There’s nothing wrong here.

STEVEN This is my point.

CORIN And you’re saying you are going away to look and see how we are going to cope.

STEVEN Well, no. Your paraphrasing now, and incorrectly. What I said was we check all the information that we come on on an ongoing basis, and what I’m telling you is the situation we’ve got here is a sudden correction in our largest commodity price. The economy is responding. We’ve got a lower exchange rate pretty much straight away. It’s now 25% against the US dollar over a year. We’ve got lower interest rates with the Reserve Bank, and that’s coming through, and in the meantime, our other export sectors – and we have to be careful, because there is a danger that you over concentrate on one – are doing very very well.

CORIN And they are. I’ll give you that. But the point is – is there going to be enough to stop New Zealand having a technical recession in the next two quarters?

STEVEN I believe so, yes, unless we got another external shock that isn’t there at the moment. And there’s lots of fragility in the world, but right now, as we sit here today, New Zealand will have a slowdown in economic growth to around the 2.5% mark and no recession unless somebody across the world falls completely out of bed, and that’s always a risk.

CORIN What about unemployment? Unemployment has risen in the last quarter. Do you expect it to keep rising?

STEVEN Well, actually, job growth has continued to rise.

CORIN No, no. I want to know about the 148,000 people out of work in this country.

STEVEN Well, actually, and one of the best results in the OECD—

CORIN Fine, but that’s not much comfort for the 148,000 people out of work.

STEVEN There’s also plenty of jobs in the economy, not necessarily in the right places for the people looking for work. I understand that. But, actually, I think we’ll see a reasonably flat period, which is what we have been seeing for the last couple of quarters. It’ll stay around the high fives. If you look at all the— Aside from the BNZ, if you look at all the estimates of New Zealand unemployment about 2 to 3 years out, it’s around the low fives, and that’s the consensus at the moment.

CORIN So you think unemployment is going to get back down to the low fives? Because you know Westpac this week came out and said it was going to go to 6.5%. We’re talking—That’s thousands more people unemployed.

STEVEN But with the greatest respect, as the GFC started, they were all talking about 11. We got nowhere near that. There’s some commentators out there who have to write the big stories to get some coverage in the newspaper, and that’s the way it works. But the reality is New Zealand is in a far better shape than it was five years ago. We’ve actually been one of the strongest performing economies in the OECD, and it doesn’t suddenly stop, even with a significant decline in dairy prices. Now, that’s a concern, absolutely, but you are seeing the automatic stabilisers come into play in terms of the exchange rate, and so there’s a whole bunch of companies – ICT, high-tech, kiwi fruit, wine – all suddenly getting significant price increases, and they’re not changing their input costs or anything like that, so it will bring different—

CORIN Is there a point when growth drops to a level when you do have to step in with some regional infrastructure plans, bring forward some roads, bridges, that type of thing?

STEVEN Well, we’re doing exactly that. That’s the irony of that. That’s exactly what we are doing. So one of the biggest infrastructure builds that will occur in small-town, provincial New Zealand is going to occur over the next three years with the extension of ultrafast broadband to towns like Stratford and Waharoa, Eltham, Inglewood, Waitara in Taranaki, in the West Coast – Westport and Hokitika. All those smaller towns will have, as I say, the biggest infrastructure build that they have had—

CORIN Sure, but that’s been planned for years. I’m talking about extra stimulus. Because here’s the point—

STEVEN No, but you’re asking when do these things hit.

CORIN But the point is why should we allow an increase in unemployment when we have the capacity to increase spending to stop that? Why would you let the unemployment rate go up?

STEVEN If you had to increase spending, we have the ability to do that, because you know and I know that we are due to make a surplus this year or the next. In 2017, there is a significant extra spend available to the government’s required, which we can bring forward. These things are all able to be dealt with.

CORIN So, you can ditch the surplus target, couldn’t you? It’s not so important now, is it, given the circumstances?

STEVEN You’ve got to be very careful, because one of the reasons our interest rates with the world are staying low is because we have a strong fiscal position, so there’s no costless decisions here, Corin, As the Australians found out, actually. When they went into the GFC, decided to spend like there was no tomorrow – Kevin Rudd –and now look at the situation that they’re in. So it’s not costless. You have to make a judgement each time, but all I’m telling you is a) that we’re spending a lot in those regions with roading.

CORIN And you’d spend more if you needed to.

STEVEN If you needed to, you’d spend more, but, as I say, we sit here today; the economy is looking at around 2%, 2.5% growth, which is coming back, and in particular areas it will be felt hard.

CORIN And the West Coast, of course, is the big one for you. Solid Energy – that region is in a world of trouble, isn’t it? Because dairy is its other big earner. It’s not doing so well.

STEVEN No, that’s not quite true. I was talking to Tony Kokshoorn and Gary Howard the other day. So Tony Kokshoorn, mayor of Grey District. Tony’s feeling pretty positive overall. He said when he got to be the mayor– I think it was about 12 or 15 years ago. He said if you’d told him that they weren’t going to be dependent on the coal industry one day, he said, ‘I wouldn’t have believed you.’ He said, ‘Actually, right now, the Grey District’s got about 60 miners in the district.’ So Grey’s going all right. Hokitika’s been going okay. In the case of Westland dairy, they’re just finishing a $120 million investment in high-value nutritionals, which is going to turn about a third of their business into nutritional—

CORIN But are you going to do anything extra for them in the light of Solid Energy mess?

STEVEN Well, I’m just telling you. The district that’s affected is the Buller District, which is Gary Howard’s one, and, yes, that’s been tough, and it’s not just Solid Energy, actually; it’s Holcim and also the gold mines. So we’re on the phone with Gary; I’ve had meetings with him; I’ve got a list of things that he and I are working on – attracting new investment opportunities to the Buller region. He wants to be in on that broadband and has put forward a very good case for Westport to be there.

CORIN Can you allow—?

STEVEN He’s also got the tourism initiatives. We’re helping them finish the Old Ghost Road.

CORIN Is it going to be money? Is it going to be tax incentives? What’s the bottom line here? How are you actually going to get people to invest in that region?

STEVEN Well, it’s two things, actually. One is that it’s making sure that the infrastructure and everything is done, and secondly is actually a matching of the opportunities with the investors. We’ve got a lot of people that are very interested in investing in New Zealand, and we’ve got to match them with the opportunity. It’s not about just, sort of, shifting people and saying, ‘Oh, we’ll make opportunities.’ There are good opportunities in each region of New Zealand, and it’s about endorsing those opportunities, costing them out and presenting them to overseas investors, for example, who are very keen to invest but are not necessarily aware of the opportunities.

CORIN Just on that point, finally, are you comfortable, then, with—? Because Labour seems to be making a distinction between investments in land and investments in businesses. Do you have a distinction? Do we need to watch out for increased investment in our dairy land, given that it’s going to be under pressure?

STEVEN With the greatest respect, I think Labour are all over the park on investment, as they are on other things. They claim to be interested in the regions. Yesterday there was a Trans-Pacific Partnership protest. There were seven or more senior Labour MPs out around the country protesting against the TPP, which if it comes to pass will be one of the biggest positives for regional New Zealand and the primary sectors, and that’s the hypocrisy that you’ve got with the Labour Party at the moment. On the one hand they’re saying, Oh, you’ve got to support the regions, but we don’t want any investment there; we certainly don’t want free trade.’

CORIN They do want investment. They’re just saying they don’t want it in dairy.

STEVEN They just want investment they can hide from people.

CORIN I just want a quick answer. If we face a big dairy slump, which it looks like we’re going to, will you step in to stop prime New Zealand dairy land from being sold to foreigners?

STEVEN Again, with the greatest respect, that’s a canard, because the simple reality is if the dairy price is down, you’ll have difficulty attracting overseas investors into dairy land even if you wanted to. I was talking to some Chinese investors earlier this year, and they’re now into the tourism industry because they see it as the big opportunity for the next few years. So this whole Labour and Winston Peters-constructed fear of massive amounts of foreign investment in the dairy industry, the reality is that with the price down, everybody looks twice before they invest in dairy, and that includes international investors.

CORIN Thank you, Steven Joyce. We have to leave it there. Thank you very much for your time.


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