Patrick Gower interviews Economic Development Minister Steven Joyce

Steven Joyce dismisses fears of a recession in the next two years, “unless we talk ourselves into it” but admits “the job isn’t done in the economy”.

Will present a new foreign investment strategy to Cabinet on Monday that involves partnering with Australia to create “a pipeline of private sector investment opportunities to international investors” aimed at the regions.

Won’t project how long dairy prices will stay low; dismisses estimates of five-year glut but thinks prices may stay low “slightly longer than Fonterra” has thought

Says while “it’s going to be bumpy”, he’s still positive about the economy, stresses many industries are growing and argues dairy concerns have to be kept “in perspective” because it’s “not the whole story”.

“You can’t be all about China forever” and current economic concerns are “a bit of a warning that it can’t be”.

Debate over TPP “is a bit silly because it’s all about access to our farmers and access for our businesses in world market”.

Says lower dollar will push up inflation “a little bit”, but will protect our exporters:

Lisa Owen: Well, given dairy is the backbone of our economy, it is time to see the doctor? The Government is insisting that we’re well placed despite the slump, although some economists have even used the R word – recession. So is Economic Development Minister Steven Joyce changing his view, and does he have any medicine up his sleeve? Paddy is with Steven Joyce.

Patrick Gower: Good morning, Minister, and thank you for joining us.
Steven Joyce: Morning, Paddy.

Let’s look at dairy and the slump that we saw in that story before the break. The dairy price is falling and falling. The global milk glut is hurting the New Zealand economy and probably worse still, it’s hurting confidence in the economy. There’s no argument about that. Steven Joyce, just how big a worry is this for you?

Oh, look, I think we’ve got to keep it in perspective. It is obviously our biggest industry, but it’s about 20-odd percent of our exports, not the whole story, and, actually, all the other industries that we’ve got in the exports base are going very well at the moment, which is good for us. And as a country, we’ve got education, tourism. All the kiwifruit, the apples, the wine are all having record years. ICT, a new industry that’s growing fast, high-tech manufacturing, even the meat industry’s having a positive run, so it’s tough for dairy, but, actually, the rest of the economy is going well. And, of course, the other advantage is that we’ve seen automatic stabilisers come into effect, and we’ve seen a drop in our exchange rate of around 19%, which does counter a lot of that.

Sure, but if we come back to those other export earners, for instance, if we take some of those that you mentioned – wine, fish, IT and fruit – and put them all together, that’s only half of what dairy does.

The reality is they’re not big enough to pick up the slack

Well, hang on. Be careful. Tourism is our biggest of all, and it’s had about 7% growth in the last year and, actually, it works in a lot of the regions where we’re having the dairy challenges at the moment, which is why they’re doing better than expected. So places around the country are looking at 6% to 7% growth in the tourism industry. So I’m not saying that it’s not something we should be focused on. Absolutely we’ve got to keep investing and encouraging investment in our economy, because it’s something that we just should keep it a bit in perspective.

Yeah, because we’ve got Bill English saying this is a concern, then we’ve also got Stephen Toplis from the BNZ coming in and warning of a scenario where a recession may not be that far away, and he puts the dairy slump at the top of that list. I mean, seriously now, are we at risk of a recession in the next couple of years?

No, I don’t think so, unless we talk ourselves into it. I think, actually, we have got some challenges internationally. The world’s a pretty fragile place, and we’ve sort of gone along 17 quarters of growth and probably convinced ourselves that everything in the world is okay. And what we’re seeing with Greece and China and a couple of other places at the moment is that it is still pretty fragile, so I’ve been on record the last week saying I think it’s going to be a bit bumpier over the next little while, but, again, I think we should be very careful not to talk ourselves down too far and we should keep doing and probably accelerate the sort of things that we’ve been doing anyway that we know works, because we’ve had a little reminder that, actually, it is— the job isn’t done in the economy.

>Sure, because I’ll come back to that word ‘bumpy’. And here’s a bumpy number – $2 billion. $2 billion. $2.5 billion is what the dairy industry put into the economy last winter. It’s going to be around about $500 million this time around. That’s $2 billion less going around those regions that need it.

Yeah, but—

Is that bumpy?
It is bumpy, but the other side of it is a lot—
It’s more than bumpy.
No, the other— It’s a 230-odd million— billion-dollar economy. The other side of it is other parts of it are going much better, and I don’t want to go on about them, but the kiwifruit industry, for example, which has struggled through the last few years, it’s really come away. You go to the Bay of Plenty at the moment, particularly the Western Bay—

Kiwifruit is tiny compared to dairy.

No, you’ve got to be a bit careful. Dairy is about 5% of our economy, about 5% of GDP. So you mentioned ICT and said that’s not much. Well, it’s nearly 2% of our economy. You mentioned the tourism industry. That’s around 7% of our economy. So they all contribute.

Dairy is 20, and we can—

No, no, no. Dairy is about five, Paddy. It’s about 5%.

20% of exports, which is where it counts.

20% of all exports, that’s right. Well—

>We can go around these numbers—

No, but it is important to get it right, because the export stuff you’re right, but, actually, that is what that economic stabiliser of the lower exchange rate is doing to counter that, so people are effectively pricing the New Zealand dollar lower, that will push up our inflation a little bit, but it will help protect our exporters. And for exporters that have been dealing with the tough times, like manufacturers and like other industries besides dairy, have suddenly found that their prices in world terms have suddenly gone up a lot because the exchange rate’s come down. So you talk to the Fisher & Paykel Healthcares of the world, you talk to the ADInstruments of the world, they’re suddenly got a big income increase.

I guess what I’m wondering here is are you trying to minimise this? Are you being a bit Pollyanna about the whole kind of thing? Because I’ve heard you talk New Zealand up this week and in other interviews, and I want to know really whether you’re being a bit complacent.

No, no, no, not at all. Because I’ve actually, as I’ve said, it’s going to be bumpy. In fact, in one of the national dailies this this morning, it says I’ve gone negative. I haven’t, but, actually, you’ve just got to keep a balance. So, yeah, there’s some challenges. We shouldn’t talk ourselves into a funk. We should focus on what we now know works for New Zealand, and that is we’ve seen a recipe over the last five or six years which is really working for this country. This is a reminder that we keep pushing in those directions, that we keep opening up to world trade, that we keep encouraging investment in our economy, that we keep building the innovation in our industries. Those are the things that are important.

>How do we do that? Where do we go from here? What are the concrete steps from here and what is Mr Fix-It going to do to fix it?

Well, there’s four things… Let’s not get into that. But there’s four things that we need to do as a country, I believe. You look out 10 or 15 years how to make ourselves more resilient. And we’re much more resilient that we were six or seven years ago. But let’s talk about those things. One is we’ve got to unambiguously get into this encouragement of free trade. I mean, this whole debate about TPP is a bit silly cos it’s all about access to our farmers and access for our businesses in world markets. And we’ve got Tim Groser with another one — Pacific Alliance, which is a South American opportunity for us, right as we speak. And if that comes off, that will be very big as well. So we’ve got to get further into that. We have to do more to encourage investment as a country, and one of the things I’m taking through Cabinet at the moment is a joined-up national investment attraction strategy which will have four or five big agencies that are involved in this phase working together under Peter Chrisp from NZTE, and their job will be to show a pipeline of private sector investment opportunities to international investors so that they can come in, invest particularly in our regions, and encourage opportunities to grow new industries and put more capital into existing industries across the regions.

>So that’s going through Cabinet at the moment?

That’s right.

So what exactly is it? Are you looking for foreign investors to come in and work with…

That’s right. We need both domestic and foreign investors. I mean, why New Zealand grows, and we’ve seen this in recent times, is more investment.

What’s different with what’s going through Cabinet now than what you’ve been trying the whole time?

Well, it’s actually… In the past it’s been a very unjoined-up process. It’s sort of like whoever wanders in the door, we’ll say gidday to them and see what we’ve got around to encourage them. This is actually a more proactive government-led private sector participant investment strategy. We’re also working with the Australians to attract investment down to our neck of the woods; Australia and New Zealand around infrastructure and investment.

Give me a practical example of how this might work.

Well, I’ll give you an example. Manawatu-Whanganui is a region that struggled historically. We’re putting out… We’ve got a lot of work with them at the moment, coming out with a regional opportunities report in the next little while. It’s going to show up some quite significant investment opportunities in that region. One of them, for example, is the poultry industry. Waikato has quite a big poultry industry. Manawatu-Whanganui doesn’t. Another one is the food industry. The horticulture of growing of food. To get those going, they will need significant investment, and that will be about attracting international investors.

So where does this investor come from? What country does this investor come from?

We don’t have a strong view at all. They can come from America, they can come from Europe, they can come from South East Asia, China, wherever.

Sure. Part of this… Is this about getting China to invest as well, because we know with the QDII2, which people won’t know about…

Not even sure if I do, Paddy.
>Well, this is the unleashing of China’s investment; allowing more Chinese to invest offshore. Is that the kind of money that you’re looking at rather than go into the housing market.

I think you’ve got to be careful not to be over-focused on China, because they have made some significant investments, and they’ve been good for New Zealand so far. So if you look through the greater Waikato, they’ve got their ice-cream factory on the Hauraki Plains. You’ve got the Pokeno dairy factory and so on. That’s all been good. They are also investing in tourism. One of our hardest areas to get going is the Far North, as we know. And there’s a Chinese company that has bought the Carrington Resort up there. They are going to invest there. But also the Malaysians invest here. The Japanese. They have King Salmon is a Malaysian-owned company. And they provide jobs in regional areas, and we have to redouble our efforts in that regard, and I think that’s a very important part of the story.

And the fundamental fear around this kind of thing is the old ‘becoming tenants in our own land’ or the profits being made here and taken offshore. Will there be anything done to stop that when you’re encouraging this?

If you’re going to encourage investment, whether they’re from New Zealand or offshore, you have got to allow them to make a profit, otherwise why would they bother? Second, though, is New Zealand has always been built on international investment. You go back far enough, our meat industry, a whole range of areas, have come in from international investment. What’s important is that the activity takes place in this country, it creates jobs in this country, which gives New Zealanders the opportunity and the capital to build their own investments. Now, the other side of that is we have a whole range of other clever companies in IT and high-tech manufacturing that are growing here and then starting to export offshore, and they will need assistance.

What I want to know, before we move on, is this – is there going to be any fundamental rule or law change or anything, or is it just going to continue to be a big advert to foreign investors to come here? Are you actually going to do anything more to encourage them?

You don’t need a law change, actually, Paddy. That’s the important thing – you don’t need a law change in this particular area. Other areas you do need law change, so we’ve talked about the RMA; that actually is helpful to have a law change, and we’re working on that through the House.

But will there be anything more than a cosmetic sort of flashing sign saying ‘come and invest in New Zealand’?

Well, actually, you may play that down, but that’s a very, very important part of the opportunity.

I’m not playing it down. I’m just saying is there anything more to it?

Yes, there is, actually. As I say, there will be a pipeline of effort. I don’t want to overplay it. It’s just one thing of a number of things. You know, we’ve got the whole business-growth agenda across a whole range of areas. You know, the right skills, the ICT, the high-tech, the engineering. It’s also encouraging the innovation area, and, you know, we’ve had the criticism for the right on what we’re doing with R&D grants, but actually, that’s a really important part of the story, and the infrastructure space as well – broadband and so on.

I want to get back to milk again, quickly, because this milk glut has got so bad that the United States are actually dumping milk up in their north eastern states. Goldman Sachs has just come out and said the milk glut will go on for five years.

I think you’ve gotta be careful with individual commentators. Look, nobody’s arguing…

Sure. Here’s another individual commentator – the Prime Minister said in May the milk price won’t stay low for long. So how long?

We literally don’t know the answer to that question, and I don’t think anybody does, including the Goldman Sachs.

But do you agree with the Prime Minister that it won’t stay low for long?

The point the Prime Minister makes – and he’s right – the fundamentals are right. High-quality food, particularly dairy, is in big demand. Now, I’ll give you a couple of examples here. Last month two New Zealand companies, Synlait and GDP that make infant formula and selling it into China, they can’t make enough of this stuff. So, yep, there’s challenges in the short term, but don’t forget, the dairy price, the long-run average dairy price over the last 10 years is about $5-something a kilo, so, yes, it’s come down a long way from the highs, but actually, it’s only reasonably close to its long-run average. It’s a bit below it at the moment. And also to note that at the same time, our exchange rate’s come back 19%. So I’m not arguing that it isn’t a tougher time for dairy, because it is a tough time for dairy, but it will be important not to talk ourselves into a funk about it and get on and do the things that we know workers are confident…

But the point is this – we’ve got a whole cohort of commentators saying there could be a five-year low in dairy prices.

No, actually, you’ve got a couple. But, actually, look…

Let’s put the numbers to one side for second. Isn’t the question here that did you not see this coming? Did you get it wrong?

Well, actually, we have been… If you’re saying, ‘Should we diversify the New Zealand economy?’ which I think is the subtext, that’s exactly what we’re doing. We’re spending all this money encouraging the R&D and the ICT industry, which is growing at the rate of 14% a year. You’re right that it’s still reasonably low, but it’s actually gonna pass wine and kiwi fruit, which are big export earners, fairly soon. And then you’ve got the high-tech manufacturing sector – we’re investing a log there alongside those companies, again subject to some criticism. It’s the skills that are creating these opportunities. So I would argue actually this is exactly what we have been working for in terms of the diversifications of the New Zealand economy, and the other part is opening out our markets, because it’s really important you keep doing that. You can’t be all about China forever. We know that, and this is a bit of warning that it can’t be, and so that means getting out and getting on with TPP, getting out and getting on with the Pacific Alliance…

Realistically, where does this current set of economic conditions put our chances of a surplus next year? Because you’ve talked a lot about the dollar today. That is in that downside scenario of the May budget that was saying no surplus till 2017.

Well, actually, you’ve got to be a bit careful there, because the downside scenario didn’t actually have the sort of dollar that we’re at now and didn’t have the interest rates of the Reserve Bank, and these are the automatic stabilisers. The downside talked about lower dairy prices…

And a lower dollar.

No, not much lower. And certainly not at the numbers we’re at now, and assumed, also, steady interest rates.

Where’s the chances of surplus next year?

On Tuesday, you’ll be pleased to know the May accounts are coming out, and Bill English will be sharing those with the country, and I think, once again, they will show some of the weaknesses of Treasury’s forecasting – in a good way. But, look, it’s still on the line as to whether we’ll get a surplus in 14/15, and if we get one in 14/15, it’s a lot easier to get one in 15/16. So I think, broadly, our fiscal position – good, strong, conservative fiscal position, which is a heck of a lot better than most countries in the world. We’re much better as a country in terms of how much we owe the world. I mean, we’re down to about 50% of GDP for our international liabilities compared to a few years ago. Our balance of payments are staying stubbornly low. So these are all good things, and New Zealand’s in a much more resilient space. Now, I think…

Let’s just come back to that question around the Prime Minister saying that milk prices won’t stay low forever, and then commentators like Goldman Sachs saying that there’s a five-year low. Who’s right?

Well, I think Goldman Sachs are out of reach. I think we all acknowledge that that they’re out there, and commentators at the end of the day have got to make themselves a headline, otherwise nobody knows that they exist, right? But I think— that’s true. The ultimate answer to these things is actually it will recover over time. We don’t know—

How much time?

Well, nobody knows exactly how much time. I always thought it might be slightly longer than Fonterra, I thought, at the outset, but we’ll just have to continue to work—

In two years, three years?

I have great faith in New Zealand’s dairy sector.

Are you talking years?

We have the best dairy industry in the world.

Yeah, so how long until it recovers?

And they are the most resilient. And you saw some of those guys in your clip say, ‘Actually, we cut our cloth a bit,’ and I saw it at the Fieldays, and I talked to a lot of farmers. They said, ‘Yep, we’ve seen all this before. It’ll be a bit tougher, but we’ll get there.’

Last question. Timeline – when’s the milk price going to recover like you and John Key say it is?

I literally don’t know the answer, and anybody who says they know the answer is actually, with the greatest degree, having a bit of a whistle in the wind. The really important thing is we keep doing the things that this country needs to do to grow and become more resilient again. That’s investment, that’s innovation, that’s skills and that’s being open to the world. We do those four things, and I’m telling you we’ll be the most prosperous little country in the world in 10 or 15 years’ time.

Thank you, Minister. That’s a good place to leave it. Thank you very much for coming in.

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