The New Zealand economy is changing fast. Find out below what drives the economy and the sectors which contribute most.
Overview of the Economy
New Zealand is a small, open economy that has undergone significant change in the last 20 years or so. Formerly suffering from a high degree of regulation, the global financial crisis has led to reappraisal of the structure of the economy by the government.
Implementing a series of reforms has led the OECD to now rate the economy as one of the least regulated. New Zealand is highly competitive in agricultural commodities, especially dairy products, which form well over 50% of its total exports and strong prices are driving a positive improvement in the country's terms of trade.
This positive recent performance should be set against a backdrop where New Zealand's average GDP per capita growth for the last 6 decades has been lower than all other OECD countries. Given the relatively small size of the economy, it will be difficult to generate substantially faster growth internally. Therefore, much of the growth will have to be generated via dramatic improvements in export performance.
The government has identified 5 key areas which form part of its policy to improve the long-term performance of the economy. They include
- Building a stronger economy
- Investment in world-class infrastructure
- Better public services
- Rebuilding Christchurch (following the earthquakes in 2010-11 which caused an estimated $40 billion of damage, or 20% of annual nominal GDP)
- Building a safer New Zealand
Unemployment hit an all-time low of 3.5% in December 2007 but increased sharply to 6.6% in 2009 as the onset of the Global Financial Crisis impacted the economy. In part to improvements in global conditions and in part due to legislative improvements designed to improve labour market flexibility, unemployment has fallen from a peak of 7.2% in September 2012 to 6% in December 2013. The initial impact of the Canterbury earthquakes was negative on employment as employers suffered severe dislocation. However, the rebuilding operation has seen the pace of employment growth pick up and this process is expected to continue.
The demand for labour remains solid, reflecting solid growth in the economy. According to the Household Labour Force Survey, total employment increased by 83,000 (3.7%) between June 2013 and June 2014.
Strong migration is also supporting domestic demand and expanding the labour supply. Annual net migration has increased every month since 2012, reaching an 11-year high in June 2014. The total population is estimated to have increased by around 1.5%, the highest rate since 2013. Migration is the cause of most of this as the natural rate of increase is the lowest since 2005.
The increase in net migration is also having the effect of supporting the housing market and retail industry. In addition, the lower rate of departures (fewer Kiwis going to Australia) is indicative of how the New Zealand economy is seen to be on a positive trend.
When looked at by industry, the largest contributors to employment growth were Construction, up 16.8% and Wholesale Trade up 20.3% in the year ending June 2014.
The largest fallers were Agriculture, forestry and fishing, down 5.8% and Information, media and telecommunications, down 16.8%.
Agriculture, horticulture, forestry, mining and fishing all play an important role in the economy. They contribute 6% of real GDP and over 50% of total export earnings. It is estimated that some 23% of total exports are generated by just one company, Fonterra, which is a global, co-operatively owned company and the world's largest exporter of dairy products.
New Zealand is set to benefit from a long-term improvement in global food markets. As the growing middle classes across Asia continue to westernise and enrich their diets, so New Zealand is well placed to take advantage of these trends.
In the year ended September 2013, manufacturing accounted for around 13% of real GDP. It also employed around 11% of the labour force. As many be expected, given New Zealand's strong agricultural/dairy production, primary sector processing makes up a significant proportion of the manufacturing sector.
Food manufacturing is able to take advantage of the country's natural environment that is particularly favourable for pastoral agriculture and year-round production. It also has an excellent global reputation helping exports of meant and dairy products reach about $16.7 billion in the year to September 2013.
Despite the strength of New Zealand's commodity industries, services still make up around two-thirds of GDP. It too has benefited from the changes in the competitiveness of the economy and was able to maintain growth, albeit subdued, through the global financial crisis. One area that has required, and received, substantial investment is infrastructure.
Given the geographic spread of the country, split over two, mountainous islands and a scattered population, the establishment of a comprehensive network of roads and railways linked to ports and airports has, despite the heavy capital costs, allowed New Zealand to successfully leverage its commodity industries and get them to the markets of Asia. The efficiency of the transport network has played an important role in the country's economic growth.
Given the relative remoteness of the country, New Zealand has allowed ensured a competitive, open shipping industry as 99% of total international trade is carried by sea. Maintaining strong connections with the rest of the world has also meant that the government has pursued a policy of reciprocal ‘open skies’ agreements.
The relatively easy access afforded to New Zealand has also allowed its tourism industry to expand. As well as being one of the largest sources of foreign exchange revenue (international tourist expenditure reached some $9.3bn in the year to March 2013), the range of outdoor activities, stunning scenery and exposure from a series of films over the last decade such as the Lord of the Rings trilogy, the two Hobbit films, King Kong, Avatar (the screen industry recorded revenues of $3.28bn in 2011/12 financial year) have allowed the industry to grow strongly.
Reflecting the rise of Asian and other emerging markets and the consequent shift in global trade patterns, New Zealand increasingly is focused on the countries around the Pacific Rim. The three largest export markets, Australia, China and the USA account for over 47% of total exports and over 40% of total imports.
Australia – as may be expected given the geographic proximity and close ties, Australia is New Zealand’s largest trading partner with very close trade links and substantial amounts of investment. Through a series of trade agreements there is full free trade between the two countries and this has boosted the de fact domestic market from 4.5 million to more than 25 million. Not only is trade fee, there is a free labour market where each citizen has the right to enter, live and work in each other’s country.
China – in 2008 China overtook the USA to become New Zealand’s second-largest trading partner. The first free trade agreement between a developed country and China was signed in 2008, perhaps indicating how important China’s demand for New Zealand’s commodities was. As China’s industrialisation broadens and deepens the wealth of the middle classes, demand for the exports from New Zealand is only likely to increase.
United States – Whilst New Zealand mainly exports meat and timber products to the USA, its major imports include aircraft parts, computers and motor vehicles. It’s likely that as trade with China and Asia increases, trade with the rest of the developed world will decline in overall importance.