Roger J Kerr says recent events are a real reminder of just how narrow the base of our economy is

 By Roger J Kerr

Comparisons between the New Zealand and Australian economies seem to be very much in vogue in the media over recent times and as it is the first All Blacks/Wallabies rugby test this weekend there is no reason not to continue to debate.

A few weeks back it appeared that all the stars were aligning for the NZ economy with high export prices, a record milk solids dairy payout and reasonably buoyant retail and construction sectors due to rising house prices and low mortgage interest rates. Record high business and consumer confidence levels therefore were the result.

Australian economic data by contrast was flat to depressing, highlighted by reduced jobs in July, whereas the NZ employment growth for the June quarter was robust.

Whilst all seemed rosy in “God’s Own country”, the more recent events that have impacted on us are real reminder of the still very narrow base of our economy. Not that a successful economy cannot be firmly based on a small number of industries that we do well in globally as we have comparative advantages.

However, the economy does carry higher risk levels when something goes wrong in your major industry as happened to Fonterra and the dairy industry last week. Those business risks just need to be managed very tightly and no doubt the various enquiries into the whey protein contamination will divulge where the problems were.

I cannot agree with some of the drivel written in the wider press since the Fonterra scandal broke, along the lines that New Zealand should be less dependent on farming and our agriculture exports give us a bad name etc.

The New Zealand economy always has been dependent upon primary industries, remains dependent and probably always will be dependent. It is our comparative advantage and we are pretty good at it.

New Zealand’s first world infrastructure and comfortable standard of living was built from the sheep’s back and continues with the flow of white gold. To state that our economy should not be so dependent on agriculture and farming needs to be reined in somehow is tantamount to wishing for a lower standard of living, lower incomes and sub-standard infrastructure. 

The critical importance of agriculture to the NZ economy continues to be poorly understood by commentators cloistered in their city apartments. Whilst there has been much debate over the years about the need for diversification of our economy it has never happened because economies of scale mean we cannot compete in most industry sectors and we remain ahead of the game in agriculture science and innovation. Stick to what you are good at, but just manage the risks better!

Whilst the Aussie economy has experienced the risks of being overly dependent on a single source (Chinese demand for metal and mining resources), the NZ economy will always carry risks of weather, disease and just plain bad luck. Drought climatic conditions do cause major economic consequences in New Zealand and disease (e.g. kiwifruit PSA) is another major risk.

It is not all just down to bad luck however; the milk contamination crisis and slack meat certification was all of our own doing. The final reminder of how our economy is heavily dependent on nature’s moods comes from a major seafood export company’s profits being downgraded as they harvest fish from the wild and some years due to changes in weather and water temperature in the oceans the fish are just not there in the same quantities.

Returning to the NZ/Aussie economic contest, whilst we have out-performed the Aussies so far this year we cannot be complacent (just as the AB’s will never be) as Australia is now about to enjoy the favourable tailwinds of a lower currency and lower interest rates for both their export and domestic sectors. Looking ahead six months we may well see Aussie economic data improving whilst ours is constrained by some of the aforementioned risks.


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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at

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