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
- 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.