In various commentaries on yesterday’s GDP data, I saw suggestions that the revisions to recent years’ data suggested that the New Zealand economy had been growing “strongly” in recent years.
As context for that observation, and perhaps shedding a bit of light on the sadly diminished expectations that appear to have taken hold in New Zealand, consider this chart, of real GDP per capita growth.
After a deep and quite long recession, the peaks in growth in per capita real GDP were a pale shadow of what had been achieved in the previous two economic cycles. 2 per cent annual per capita growth over the long-term would be a reasonably impressive result, but when the growth rate peaks at 2 per cent, and recessions come along every decade or so, it is no more than mediocre at best. For the last couple of years (these are annual average numbers) per capita growth has been at levels only previously experienced – last 25 years – on the eve of a recession.
But my main interest in yesterday’s numbers was the productivity estimates derived from them. As I’ve been pointing out for a couple of years now, there has been next to no productivity growth at all in New Zealand for some years. But in making that observation one is always somewhat at the mercy of the major annual SNZ data revisions. Sometimes what looked to be in the data gets revised away completely.
How about labour productivity? Recall that SNZ does not publish economywide productivity estimates – there is no obvious reason why, when their Australian and British peers do – so I’ve calculated one, using an average of the two measures of GDP (production and expenditure) and the two measures of hours (QES and HLFS). And this is the resulting chart.
No labour productivity growth at all for the last three years, and a total of 1 per cent productivity growth in the past six years. Productivity growth under the previous Labour government wasn’t spectacular, but in the six years to the end of 2007 (just prior to the recession) we managed 8 per cent productivity growth. But only 1 per cent this time round. It is dreadfully bad, and there are no acceptable excuses. You’ll hear people talk about global productivity growth slowdowns, and that is true to some extent, but it is largely irrelevant here, given that we start so far behind the leading OECD countries – those at or near the productivity frontiers. We have so much room to catch-up, and yet if anything again we’ve been drifting further behind.
Sadly there is little prospect of much change for the better. Neither the previous government nor the current one appear to take New Zealand’s appalling productivity record seriously, in the sense of doing anything much about it, or even commissioning expert analysis and advice (reluctant as I’d be to suggest another “working group”). And in a sense they’ve been accommodated in that stance by their self-proclaimed lead economic advisers, The Treasury. Treasury publishes their HYEFU forecasts each December and buried in the supporting tables are forecasts for labour productivity growth (on an hours basis). I could only find those tables back for the last five years, but here is what they have been forecasting (I’ve shown the four complete forecast years for each set of projections).
|HYEFU forecasts for labour productivity growth published in Dec|
|Forecasts for June yrs||2014||2015||2016||2017||2018|
They seem to have become quite a bit more pessimistic about the medium-term outlook in their latest forecast, but they are still picking almost 5 per cent labour productivity growth in the next four years, when over the last four years we’ve had almost none. Look at the first column in the table done at the end of 2014: Treasury was actually expecting quite strong productivity growth over that period. It is pretty clear that they simply do not understand what is going on, and do not have even roughly the right model. Their productivity projections are wrong, in material ways, year after year. And if they might be getting a little less unrealistic in the latest set of forecasts, that is small consolation because there is no sign they are offering advice to the government that might turn around the disastrous underperformance. Too busy with the feel-good “wellbeing Budget” perhaps?
It has been another poor year for New Zealanders at the hands of our policymakers and their lead advisors:
- no serious action to address and reverse the house price disaster that successive governments have been inflicting on us now for 25+ years (house and land prices up again),
- no action at all to address the decades-long productivity growth underperformance (particularly bad over the last few years) that now sees a country once among the most productive in the world languishing in the league tables among former eastern bloc states, far far behind our former peers among the leading group of OECD countries,
- and no sign that either the government or the Opposition really care,
- or that our Treasury really understands at all the factors that explain the utter (and ongoing) productivity failure.
Governments, of course, don’t create productivity. But they can and do put roadblocks in the path, often initially unwittingly. But over time every such roadblock comes with own vested interests. There is the old line from Upton Sinclair about
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
Perhaps that explains the resistance of many in the business community to the changes that are needed. It can’t explain Treasury’s failure. I suspect that for them, and perhaps for many of our politicians, it is more a matter of ideological commitments, and an unwillingness to shine the light on the issues and policies that really matter if we care at all about lifting economic performance for our fellow New Zealanders.
Whatever the explanation, it is well past time for a change of heart, and for beginning again to take seriously finally reversing the decades of (relative) failure.