By Alex Tarrant in Tokyo
The official New Zealand line is that Australia has Dutch Disease.
Prime Minister John Key told a business audience in Tokyo, Japan, that the NZ government thought its Tasman cousin was suffering from the economic illness coined by The Economist magazine in 1977.
It describes how large inflows of foreign currency into Holland, due to a sizable natural gas discovery, drove up Dutch currency, to the detriment of its other exports and manufacturing sector.
Meanwhile, Key labelled quantitative easing policies enacted in the US and Europe as deliberate attempts by authorities there to devalue their currencies, sending the New Zealand dollar upwards.
Mitigating the high Kiwi was the fact imported components of New Zealand exports were cheaper, while the competitive NZ-Australian exchange rate also helped the bulk of New Zealand exporters.
Aussies turn orange
Australia had a very interesting economy at the moment, Key said.
"We think Australia’s got Dutch Disease."
He has previously noted Australia had a 'two-speed economy' dominated by the mining sector.
“It’s got a booming mining industry – Western Australia’s growing at 14.5%, Northern Queensland’s growing at 9%; the rest of the states around Australia have got very low levels of economic growth," Key said.
“That’s because the exchange rate is so high, it’s knocking its tourism industry, [and] its general exports in lots of other areas. So that’s a problem,” he said.
NZ vs the 800lb gorilla
Asked about the government's view on the high New Zealand dollar, and whether any action could be taken to lower the currency, Key noted the NZ-Australian exchange rate was competitive
The currency was part of the issue facing New Zealand's export sector right now, but the high dollar against currencies other than the Aussie did provide some upside.
“As was discussed at [at APEC in] Vladivostok, I think 60% of the world’s trade is now in what’s called intermediate goods," Key said.
“We produce something that’s ultimately a component part for somewhere in the world. So it’s not strictly true that the exchange rate always hurts us, because some of our exporters are commodity linked, and some of them have imported components, which are much cheaper," he said.
“Oil prices would be much more expensive in New Zealand if the exchange rate was lower.”
The New Zealand dollar was so high against the US dollar and euro right now, fundamentally due to inherent weakness in the US and EU economies.
“And a deliberate attempt to have an exchange rate adjustment through a quantitative easing policy that both Europe and the United States are following," Key said.
"They can’t engineer their exchange rates lower through monetary policy, because their interest rates are basically zero, so the only way they can do that is through quantitative easing," he said.
“The problem we’ve got is, we are this very small chimpanzee against the eight-hundred pound gorilla, and the eight-hundred pound gorilla is weighing very heavily on our currency. I don’t know quite how to change that.
“So even if the government said, ‘well look, we want to have a lower exchange rate,’ how could we do that? The answer would be we’d have to move away from a floating exchange rate," Key said.
“We’re a massive capital importer - we don’t have the luxury that some countries have. And if you look at what [intervention is] currently costing the Swiss National Bank, New Zealand cannot afford to follow a policy like that. It’s inherently very risky," he said.
Key said while new Reserve Bank Governor Graeme Wheeler was coming on board very soon, and was in the process of having to renegotiating a new policy targets agreement with the Minister of Finance, the early advice he'd had was it was very unlikely there would be any significant changes to the PTA.
"If there was an easy way of moving our exchange rate down, certainly [with] the New Zealand-US exchange rate we’d certainly do that, but I don’t think it’s easy," Key said.