A “very, very healthy economy”?

In his press conference with the Minister of Finance, the day before taking office last week, the new Governor of the Reserve Bank offered some brief and gratuitous thoughts on the state of the New Zealand economy.

Orr said he was happy with where the economy was at the moment.

“I’d say that we are running a very, very healthy economy at the moment,” he said.

In one sense, it doesn’t greatly matter what the Governor of the Reserve Bank thinks.  His primary (monetary policy) job is to keep core inflation near 2 per cent (something Graeme Wheeler failed to do).  There isn’t much connection between whether or not an economy is doing well in some medium-term fundamental sense and the average inflation rate.

Then again, Orr is now the most prominent (and powerful) public sector economist, and was sharing a stage with the Minister of Finance.  Intended or not, his comments could reasonably be seen as an endorsement of economic management and performance by past and present governments. An endorsement of the status quo in fact.

Perhaps that wasn’t the Governor’s intention. Perhaps it was just the first thing that came to mind on his big day and he didn’t stop to think what he was saying? But perhaps he genuinely believes it, which in some ways would be even more concerning.   Especially as it is presented as an unconditional, absolute, statement, with two intensifiers.  If we take the Governor seriously, things must really be doing well here.

I’m not sure what the Governor had in mind.  But when I rack my brain and look for whatever positives I could find, this is what I came up with:

  • the terms of trade are near record levels,
  • government debt is pretty low, and the government operating accounts are in surplus,
  • the financial system appears to be sound,
  • after nine years above, the unemployment rate is now finally down to around the level the Reserve Bank thinks of as the NAIRU (the non-accelerating inflation rate of unemployment).

Try as I might, I couldn’t find anything more that suggested a “very very healthy” economy.  There were a few other indicators that perhaps a lay observer might try to cite, but economists probably shouldn’t:

  • employment rates are quite high.  We don’t put too many regulatory/tax obstacles in the path of employment (a good thing), but employment is a still cost –  foregone leisure –  not a particular achievement.  Unemployment and underemployment rates are typically the better indicators (when lots of people want work and can’t find it that is a problem),
  • interest rates are low.  As they are around the world, reflecting how difficult the advanced world has found it to achieve sustained growth since the last recession.  Ours remain well above those in most other advanced countries,
  • our balance of payments current account deficit is less than it was (and the external debt –  % of GDP –  is less than it was).  This is partly a reflection of unexpectedly low interest rates –  servicing costs are less than they were, and partly of pretty subdued investment,
  • headline annual GDP growth rates have not been high –  by standards of earlier growth phases –  but have sounded respectable enough (typically with a 3 in front of them).   But much of that simply reflects unusually rapid population growth rates.

And on the other hand, and in no particular order

  • how could we go past house prices?  How can the Governor –  of all people –  consider our economy to be “very very healthy” when house and urban land prices are so far out of whack that few young can any longer afford to buy a basic first home?
  • even if, on some metrics, we’ve done less badly than some countries in the last decade, almost the whole advanced world has done absolutely poorly.  Investment and productivity growth have typically been weak, and interest rates have needed to be astonishingly low for prolonged periods (not yet over) simply to support demand and activity.
  • real per capita GDP growth, even at peak, has been weaker than in previous recoveries,
  • if most of the advanced world has done quite poorly, New Zealand started so far behind that we needn’t have been badly affected.  Simply catching up some way towards the frontier would have been a considerable achievement.  But we haven’t. There has now been almost no labour productivity growth here for the last five or six years, and that shows no sign of changing yet.
  • inflation has been (is still) persistently below target (and thus below the level successive governments and Governors have considered desirable for the best possible economic outcomes),
  • although interest rates are low in absolute terms, they remain above those in most other advanced countries, for reasons that have nothing to do (see above) with superior productivity performance.
  • rates of business investment remain very subdued (despite, for example, the strong terms of trade, or rapid rates of population growth).
  • the growth in the economy has continued to be concentrated in the non-tradables sectors, rather than the bits in which New Zealand firms successfully compete against international competition here or abroad.   I haven’t shown this (indicative) chart for a while
  • T and NT to Dec 17
  • relatedly, the export share of GDP has been shrinking, when a typical aspect of any successful economic catch-up has involved a rising share of exports, as the success of domestic policy and domestic firms translates into more firms and more products beating the world (in turn, enabling more of what the world produces to be imported).
  • the real exchange rate remains very high, well out of line with developments in relative productivity and terms of trade trends.
  • meanwhile, among the other relatively poor OECD members many that did far more wrenching economic reforms than we did 25 or 30 years ago (and they needed to do more) really are making progress to catch the OECD leaders. In some cases, their average productivity levels are already at New Zealand levels, and almost all are growing faster than New Zealand.

And all that without even getting to the risks and costs that seem set to flow from grappling with things like improving water quality, and with successive government’s commitments to reducing carbon emissions, in a country with some of the highest marginal abatement costs anywhere.

Quite how the Governor can seriously think –  if he really does –  that this is a “very very healthy” economy is a bit beyond me.  It has the feel of ill-considered quasi-political rhetoric.  In a post a few weeks ago (with charts illustrating some of the points above) I called it a rather moribund economy, and that still seems right to me.

My young daughter asked me “what boring stuff are you writing about this morning”.  I told her it was about the health, or otherwise, of New Zealand’s economy.  “Does the economy have cancer?” she asked.  It isn’t like that I said, more like some chronic condition that won’t kill us, probably won’t even end in a crisis, but constantly holds us back from achieving what we might, from delivering better material living standards for New Zealanders.   The Governor of the Reserve Bank has a defined and limited job to do, which he can do whether or not the chronic ailment is fixed.  But he shouldn’t use his office and bully pulpit it provides to help politicians evade responsibility for the decades of disappointment.  The status quo has failed, is failing, and seems set to go on failing.

29 thoughts on “A “very, very healthy economy”?

  1. Right. We have this very,very healthy economy.
    Try to reconcile that with Ritchies wanting to bring in 110 coach drivers because they cannot find them locally. Auckland Transport buses are 200 drivers short. Is it healthy that we are unable or more probably unwilling to pay enough to get local drivers to do the job considering the difficult shift hours?
    Why do CMDHB have inadequate numbers of nurses and possibly because they cannot recruit to planned levels of service because purely of budget constraints?

    Liked by 1 person

    • Ritchies is in business to make a profit otherwise why bother? The running costs of a bus is pretty much all known. The revenue and how much you can charge is also limited by how much you can charge before people stop using the bus and get back into their cars.

      Double decker buses and double lengthened buses are now the norm in Auckland.Therefore the only remaining option is to lower the cost of the bus driver.

      Our big $15 billion export GDP in Tourists and International students require more and more foreign workers. It is a service industry. The best Service is in having more people rather than less people.

      Liked by 1 person

      • If you do not want this continuity of cheap and cheaper migrant labour then you need to change the industry focus so that there are high skilled and high paid jobs available. You either flood the market with cheap unlimited migrant labour because if you restrict the numbers then you get this awful situation of $60k per annum poo cleaners because Kiwis do not want to do those jobs for less than $80k per annum.

        Stop the tourism industry and start moving government subsidies towards keeping manufacturers like Cadbury that just closed last week. Stop the sale of our only Space Rocket manufacturer and IP in NZ to US interests which sold last year.


      • It would be a better society if poo cleaners did earn more than $60k. Why shouldn’t they earn more than a policeman, nurse, teacher, librarian? In the past doing unpleasant work was rewarded especially when it was shift work..

        Liked by 1 person

      • The flaw in “Our big $15 billion export GDP in Tourists and International students require more and more foreign workers. ” is
        A. International students don’t require foreign workers
        B. We shouldn’t be importing low waged workers to support low paying industries.


      • When International students want to spend $4.5 billion every 12 months, how do you think they will spend it? They need to eat foreign food. So businesses start to spring up and gravitate towards investing in foreign bood. Then you need foreign chefs and cooks. It is really as simple as that, business will invest where there is a return. Or you tell local kiwis to learn to cook foreign food. That is an almost impossible pipe dream. So we get a shortage and we pay foreign workers more as immigration is tightened. So the wages of migrants increase but we will still not get local kiwis to cook foreign food.

        What about entertainment? They want to shop so retailers need staff that speak foreign languages. They want to party so pubs need foreign speaking staff. They go and become tourists in other towns who in turn also need to employ foreign speakers. Language becomes a skill. Local kiwis can’t speak the language so tough luck no jobs.

        Change the industry focus and you change the skills required. Unfortunately our focus is on tourists and on international students which breeds a requirement for foreign workers.


      • GGS argument is economic nihilism. Unless you factor globalism as a good. Personally I don’t think NZ workers should suffer for the role of the Catholic Church in the Phillipines (you’ll go to hell if you use birth controll).

        Liked by 1 person

      • $4.5b that works out about $40,000 per student. They are wealthier than when I was a student. If they can afford to spend that kind of money each year they must be middle-class what ever their origin so they shouldn’t be permitted to be taking jobs from our working class. The genuine students will still arrive.

        Liked by 1 person

    • With regards to Ritchies & AT – they don’t want to bear the cost to train drivers – its cheaper to import already trained people. Thus a good justification for placing a fee on every immigrant bought into NZ to balance up the costs.

      Liked by 1 person

      • Perhaps it is more to do with the time it takes to train a bus driver rather than the cost to train.


    • If Ritchie’s was to offer drivers $30 hourly, for argument’s sake, instead of $20, it would soon find enough NZ drivers. Yes this would effect profitability in the short run. But the market needs to be allowed to work.

      Liked by 1 person

      • Nope, because the other companies would do the same. At what high price do you think it would be uneconomical to employ a driver. $100-200-300 ?


      • Listening to RNZ 101.4 the other day, the focus should be on Auckland transport who contracts Ritchie’s to provide bus survives on a fixed price contract. Auckland transport sought a lowest price tender which means that ratepayers get the best lowest cost deal. Unfortunately that means that Ritchie’s is not able to increase prices to make a margin but instead has to lower costs. You can’t reduce running costs like fuel and repairs and maintenance. Therefore you are left with more capacity which is why Auckland is now a double decker bus city and getting cheaper bus drivers. But double deckers only get filled at peak hours. They are quite empty most of the time offpeak.

        Of course Auckland transport will not comment, distancing themselves from the controversy.


      • General opinion is that Ritchies only beat the other contenders out on the contract by thinking it could pay for it with cheaper labour costs. AT should like some other local bodies expect their contractors to honour the same wage structures they have imposed on themselves (Wellington CC?)


      • And immigrant labour simply shouldn’t be an option for roles of this sort. Companies should simply have to bid on the basis that the domestic NZ labour market is all they have access to. The scheme I’ve previously proposed – of a flat annual fee on employers of, say, $20000 per annum for every work visa person employed – would have much the same effect, without being an outright ban.

        Liked by 1 person

      • Your $20,000 proposal makes sense. Something similar was in place in PNG 30 years ago. However there are many working-holiday visas and I know from family and friends that some of them arrive and don’t work or return early or work a week or two here and there, for example fruit pickers. So split your $20,000 to $400 per week or $10 per hour and it would work. As simple to administer as KiwiSaver. The the money raised could be directed to improving facilities used by the immigrants: tourist facilities and hospitals for example which might make it more acceptable when countering the vested business interests that rely on cheap immigrant labour.


      • I’m wary about applying such an arrangement to working holiday visas. I suspect we’ve been a bit too generous with them – when we were trying to get votes for a seat on the Security Council – but the purpose is primarily about holiday, seeing the world etc, and at least notionally is reciprocal. I never used one abroad, but my wife did. I’d probably rather put on upfront fee of say $1000 on a working holiday visa, rather than in effect tax these people out of employment opportunities in NZ.


      • GGS: My point remains being suspicious of continual success. My example countries may not be chosen well since I believe Greece has had a history of going bust and simply never learned the lesson. Maybe that echos Michael Reddell’s point about NZ’s economy being in a long slow decline compared to OECD countries – a history lesson simply not appreciated by those keen to suggest we have a ‘very very healthy economy’.


    • There just ain’t a lot of spare people out there. Especially any with the relevant skills.Its hard to even find unskilled. Made worse of course by Jacinda paying them to go to Uni.


  2. A doctor friend of mine used to say NZ was like Australia with a chest infection.

    (About 2002. Now Australia is like Australia with a chest infection).


  3. Central Bamnks around the world know how to reduce inflation when it is getting near the top of the target they have but as yet they do not appear to know what to do when inflation consistently is below the targets they are trying to ‘hit’. any comment?


    • I’m sure I really buy the story, altho of course some central banks have got themselves stuck at the near-zero lower bound (and done nothing to remove or reduce the bite of that limit). I was just looking at the US – average trimmed mean PCE inflation from 2011 to now has been 1.75%, which isn’t far from 2% (certainly closer than the RBA and RBNZ have been to target midpoints on average in recent years. Norway also seems to have done a reasonable job, in the face of a big fall in the terms of trade. And in the US, the Fed has now been tightening for some time – if core PCE inflation isn’t yet at 2% it probably would have been if they had held fire for a bit longer.

      In the NZ and Aus case my sense is that there hasn’t been the will to get inflation to target midpoint – it is there is both central banks’ rhetoric. Asset prices, and fighting the last wars (including inflation getting a way a bit last decade) seem to have been allowed to shape decisions, in ways that don’t seem wise or appropriate to me. In the NZ case at least, the perpetual belief that monetary policy is already “very stimulatory” (ie neutral rates are much higher) also seems to have been a factor. In fairness, the RBNZ has been more dovish than the market commentators in the last year or two.


      • Ever since the RBNZ got hold of the macroprudential tool to limit lending to property and got John Key’s permission to liberally apply a 40% equity to LVR restriction, they have become rather dovish. They have also realised that they can tweak bank lending licences to to force lending restrictions behind the public scene, on property.

        People can’t spend their new found equity wealth if they can’t borrow off that increased equity to spend.


  4. It is surprising how many survivors of heart attacks claim they were feeling ‘very very healthy’ before it struck.

    I will leave the reality to economists but it does seem a strange remark. Any decline from ‘very very healthy’ will be blamed on the uniquely powerful Governor of the Reserve Bank. And even if the economy gets stronger with productivity and exports zooming up and up – well that would prove the Governor of the Reserve Bank had bad judgement.

    This reminds me of computer projects – the worst disasters were always presided over by optimistic project leaders who had never experienced failure. So do we need board members recruited from countries that really got it wrong: Ireland, Iceland, Greece?

    Liked by 1 person

    • Bank funding (other than equity by shareholders) now amounts to $419.3 bln, up just +3.6% from the February a year ago. (RBNZ L3) Just 16.6% of this funding is sourced from offshore, all ‘market funding’. Total ‘market funding’ (that is, wholesale funding) is 27.8% of the total with the balance, a whopping $302.7 bln funded from customer deposits (individuals and businesses) which grew +6.9% in the same year. This fast growth is allowing banks to reduce their reliance on offshore funding which at 16.6% is its lowest in two years (this data only goes back to March 2011).

      For the eight months to February, the Crown accounts are showing an expanding surplus. The OBEGAL surplus is now up to +$2.9 bln while the full surplus is up to +$6.2 bln.


      Bob, this not exactly a sign of an economy in trouble. Government debt is already very low. That surplus off the back of a very disciplined National government is now paying great dividends.


  5. In Auckland
    truck drivers are getting so fed up with being stuck bumper-to-bumper that they’ve given up the job

    NZ governments do self sabotage really well – With the cost of petrol going up in Auckland by 22 cents per litre will we see petrol stations become the new target for hold-ups and drive-offs and twofers – petrol and smokes one-stop balaclava stuff

    Regarding bus-drivers and truck-drivers – what are the economics of a bus-company importing drivers to fill vacancies – what caused the vacancies – was it migrant-drivers or work-visa drivers giving up or they couldn’t earn enough to justify the unfortunate Auckland traffic conditions. What would the story be for bus-drivers being held to a strict on-time time-table in such conditions. Its like throwing them to the wolves

    I reckon that this is just another example of unfettered immigration into Auckland while smoking “hopium” that everything works out in the long run

    Has the expansion of the Auckland roading network kept pace with the population increase?. Is the data available?

    Meanwhile, back to Adrian Orr. I’m too cynical. Very clever work on his part. Jumping ship after NZX rises 25%. New York rose 27%. They aren’t going to replicate that over the next few years. So time to get out. And right on time another one reading the tea-leaves Fellett of Sky-TV jumps ship after enjoying the monopoly ride up


  6. The NZ economy has been rather resilient in the face of the Christchurch Earthquake, the Kaikoura Earthquake and the GFC. The twin disaster events were funded out of mainly government operational budgets which the National government managed to even squeeze out a budget surplus. But the cost has resulted in underspending in infrastructure, in social housing, in health and in aged retirement and also a underfunded crippled EQC.

    What our Central bank failed to do was to recognise that this was a time for the RB to actually get involved and ensure that businesses and the Christchurch region was funded perhaps through a mini QE targetted at the Christchurch region. Instead we got 2 interest rate tightening in the face of a disaster recovery.

    The NZ economy is an open economy. It is therefore far more resilient due to automatic safety valve adfjustments. Our last recession in 2007 -2009 being orchestrated and engineered by the RBNZ rather than anything to do with the GFC.

    We do not have the same building activity that Ireland had and. From 2000 to 2007, approximately 75,000 housing units were built every year with dubious valuations and corruption in the banking sector.

    This proves that bank bailouts and currency intervention can cripple the government. In the years preceding the crisis, three Icelandic banks, Kaupthing, Landsbanki and Glitnir, multiplied in size. This expansion was driven by ready access to credit in international financial markets, in particular short-term financing which eventually lead to a sharp depreciation of the Icelandic króna in 2008 and increased difficulties for the banks in rolling over their short-term debt.

    Unrestraint, extravagant and corrupt borrowing and spending by the government who cooked the books. Our RBNZ OBR was copied from the Greek Haircut( by the Greece Central Bank.


  7. I’m in Japan at the moment (Kawasaki).
    My wife is Japanese. Today we went to Musashikosugi Station. That may have been where the Panasonic factory was (moved not close down?). My wife commented that ” this place has too many people now” as she pointed out 180m high mansion building (and others). She said the people here are snobby because you have to have a high income to live here (like Queenstown ). She said they are people who came from somewhere else (but 99% Japanese as far as I can tell) .

    I have been trying to compare it with Auckland and the NZ economy. I googled Tokyo + factory and stumbled across this article



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