III. ECONOMIC TRENDS AND OUTLOOK MAJOR TRENDS AND OUTLOOK: In 1994 the New Zealand economy was growing strongly, with GDP expected to continue growing at about 3 percent per year into 1996. This growth was accompanied by productive investment, which is also expected to continue to be strong, requiring the import of the sort of capital goods which the United States is well placed to supply. Inflation, measured by the annual growth rate of the consumer price index (CPI), was low, only 1.3 percent in early 1994, and is expected to remain at about this level into 1996. In mid 1994, the government balanced its budget for the first time in sixteen years, and budget surpluses are expected to continue, enabling the government to begin repayment of the large foreign and domestic public debt, totaling 47 billion New Zealand Dollars (NZD) (26 billion U.S. Dollars (USD)) in mid 1994. This gross public debt figure, when financial assets of NZD 11.1 are subtracted, results in a net public debt of NZD 35.6 billion (USD 19.7) or 44.5 percent of GDP. Unemployment is falling slowly, declining to 9.1 percent in March 1994, and is expected to be between 7.7 percent and 8.5 percent in early 1996. Shortages of skilled labor may appear in some areas, but these are not expected to severely constrain growth. Agricultural products will continue to be an important part of New Zealand's export trade, but manufactured products, including those produced from local agricultural, fisheries and forestry resources, should continue to increase as a share of exports. New Zealand expects to gain significantly from the GATT Uruguay Round Agreement, when it comes into force in 1995, and progressively removes international barriers to agricultural trade, and reduces agricultural export subsidies. PRINCIPAL GROWTH SECTORS: Approximately 5.5 percent of GDP, agriculture, not including food processing, is expected to remain one of the largest components of the economy, and to grow by an average of 2.3 percent per annum through 1998. Food processing, including beverages and tobacco, accounts for 6.5 of GDP, and is expected to grow by 4.3 percent annually through 1998. Accounting for about 2.5 percent of GDP, forestry and logging is expected to grow by only 0.2 percent per year through 1998, while wood manufacturing, approximately 1.1 percent of GDP, is expected to grow by an annual average of 5.6 percent through 1998. Manufacturing of metal products, machinery, transportation equipment, and professional and scientific equipment, already about four percent of GDP, is expected to grow at an average annual rate of 7.7 percent through 1998. Construction, at more than three percent of GDP is expected to increase at an average annual rate of 4.5 percent through 1998. The wholesale and retail trade, restaurant and hotel sector accounts for more than 15 percent of GDP, and is expected to grow at an average of 2.7 percent per annum through 1998. Finance and insurance, also at about 15 percent of GDP, is expected to grow by a similar rate. The transportation and storage sector, about five percent of GDP, is expected to grow at an average of 3.8 percent per year through 1998. Cutting across several of the above industry categories, tourism is growing rapidly, with foreign exchange earnings of NZD 3.5 billion (USD 1.9 billion) in the year ending March 1994, and an annual growth rate of above ten percent. Tourism now earns more foreign exchange for New Zealand than meat, its largest merchandise export. GOVERNMENT ROLE IN THE ECONOMY: New Zealand prides itself on having removed the government from most previous roles in the economy. After ten years of economic restructuring, the economy operates almost completely on market forces, with very little government influence. The principal remaining influences are the government's spending and tax powers, and the Reserve Bank Act of 1989 which sets the primary function of the Reserve Bank as achieving and maintaining price stability. A subsequent agreement between the Reserve Bank and the Treasury defined price stability as an annual consumer price index (CPI) growth rate of between zero and two percent, resulting in the low price inflation cited in part III above. While the government once owned major economic enterprises, such as the railroad and telephone monopolies, these have been progressively privatized. The main economic activities still owned by the government are the production and transmission of electric power, some radio and television broadcasting, and some forests. In mid 1994 the government was reviewing its future role in the electric power industry. BALANCE OF PAYMENTS SITUATION: The current account deficit, NZD 1.654 billion (USD 881 million) for 1993, is expected to remain at or about that amount, or about two percent of GDP, for the next few years. While merchandise exports earn an annual surplus of about NZD 3.2 billion (USD 1.8 billion), services run a deficit of approximately NZD 1.5 billion (USD 830 million). Invisibles are expected to remain strongly negative at about NZD 4.5 billion (USD 2.5 billion) under the influence of the deficit in both services trade and investment income. In fact the invisibles deficit almost equals the investment income deficit, which is primarily due to the burden from the interest costs of external debt. TRADE AND INVESTMENT BARRIERS: Barriers to trade, already minimal for most products, will be further diminished by the Gatt Uruguay Round Agreement. Tariffs are low for most products. The exceptions are for motor vehicles, tires, footwear, textiles, carpet, and apparel. Even these once highly protected industries will have had their tariffs reduced to about 25 percent by July 1996. In late 1994 the government will begin plans for further tariff reductions from 1996 until 2000. It is expected that tariffs for the above listed industries will be lowered by about another third from 1996 to 2000. With the GATT Uruguay Round Agreement, the only unbound tariffs will be those on used vehicles and used clothing. While all foreign investments above NZD ten million (USD 5.9 million), and all investments in commercial fishing and agricultural land, regardless of the value, must be approved by the Overseas Investment Commission (OIC), in practice, the OIC has rejected less than 0.1 percent of investment applications in recent years. The existence of an OIC however sets an unhealthy precedent for the region. The government's wide-open welcome for foreign investment is typified by the privatization and sale to U.S. interests of the government railroad and telecommunications monopolies in the early 1990's. An American-based multinational also took control of the biggest New Zealand food processor in 1992. Significant forestry cutting rights have also been sold by the government, primarily to United States and Asian interests. LABOR FORCE: The New Zealand labor force is well educated and well motivated. While the improving economy has uncovered some skills shortages, and half the 153,000 unemployed are considered to be long term, and possibly skills-deficient, the basic trainability of New Zealanders is high. Some skills shortages are due to the government and private employers cutting back on training as they reduced employment in the downturn which preceded economic recovery. The Employment Contracts Act (ECA) of 1991 greatly increased labor market flexibility, which contributed to the economic recovery of 1993/1994. MAJOR LOCAL AND THIRD COUNTRY COMPETITORS IN SPECIFIC SECTORS: 1. Medical Equipment: Australia, Germany 2. Paper and Paperboard: Canada 3. Industrial Organic and Inorganic Chemicals: UK 4. Agricultural Chemicals: Australia 5. Agricultural Machinery: Australia 6. Auto Parts and Service Equipment: Japan 7. Aircraft and Parts: UK 8. Books and Periodicals: UK, Singapore 9. Sugar Confectionery: Australia, Malaysia 10. Soybean Meal: Australia 11. Fresh Fruit: Australia 12. Bovine Semen: Canada, Netherlands INFRASTRUCTURE SITUATION FOR GOODS/SERVICES DISTRIBUTION: New Zealand has an excellent transport and marketing infrastructure with the majority of the country well serviced by road, air and sea distribution systems. Eighty-five percent of the population lives in urban areas, making for easy access for products. There are about 59,700 miles of roads and streets, traversed by over 1.9 million motor vehicles. There are 74 national and state highways in New Zealand, comprising 7,114 miles of roadways. This network includes major routes that carry the greatest volume of traffic between residential communities, commercial and industrial areas. In addition, there are 9,233 miles of urban roads and 42,257 miles of rural roads. New Zealand has nearly 2,485 miles of railroad track which link almost all the principal centers of population. The New Zealand Government corporatised its railroad assets (later to be known as New Zealand Rail Limited) in 1982, and sold it to a consortium of foreign and domestic companies headed up by Wisconsin Rail in 1993. New Zealand Rail carried 5.5 million tonnes of freight over an average 180 miles (eight months ended June 1991). It provided about seven million passenger trips in its first eight months of operation. New Zealand Rail's InterIsland Line operates the only ferry service between the North and South Islands. This service carries passenger, rail and road traffic. Other intercostal shipping services also carry container and roll-on/roll-off traffic between major cities. The deregulation of domestic aviation commenced in 1983 and was completed in 1990 with abolition of air service licensing. Air New Zealand and Ansett New Zealand are the major domestic carriers. International air services are operated in accordance with formal bilateral air transport agreements. In early 1994 there were 21 international airlines operating out of New Zealand. (United Airlines was the only U.S. passenger carrier.) In 1992, a total of 55,149 gross tonnes was unloaded and 78,625 gross tonnes loaded as overseas air cargo. There are three international airports (Auckland, Wellington, and Christchurch). Additionally, there recently has been some activity to open small regional airports to international traffic for special tourist charter activity. Over 90 percent of New Zealand exports and imports by value, and almost 99 percent by volume, are carried by sea. Conference lines handle much of the country's overseas shipping. Port companies established in 1988, operate 13 major commercial ports. These ports are undergoing vast improvements in productivity and usage due to corporatisation, and in one case, privatization. In 1992, a total of 15.8 million gross tonnes was loaded onto and 8.3 million gross tonnes was unloaded off overseas cargo vessels. Most of this was handled by bulk vessels. Coastal trade focuses on cement, coal and coke, petroleum products, sand and shingle, motor vehicles, container goods and other miscellaneous items. In total, 7.1 million gross tonnes was loaded on and 6.7 million gross tonnes was unloaded from coastal vessels in 1992. MAJOR INFRASTRUCTURE PROJECTS UNDERWAY: 1. Expansion of Auckland International Airport Terminal 2. Auckland Airport roadway access from Manukau 3. Thorndon Bridge widening, Wellington 4. Auckland Harbor Bridge widening 5. Auckland traffic control metering 6. Oceanic Air Traffic Control System, Airways Corporation 7. Differential Global Positioning System, Airways Corporation 8. Microwave Landing System, Auckland International Airport 9. Integrated air traffic control system, Airways Corporation 10. Wellington Airport expansion 11. New Queenstown Airport 12. Invercargill International Airport terminal 13. Wellington sewage system 14. Auckland water system repair and enlargement