A few HYEFU thoughts

At the time the PREFU was published in August, I ran a short post illustrating that not even Treasury seemed to believe there was any prospect of increasing the export share of GDP in the next few years.  Their projections were that, on the then-government’s policies, the decline in the export share would continue unabated over the years to 2021.

The next set of Treasury forecasts were published in the HYEFU yesterday.  We have a new government  –  even a Minister for Export Growth –  so I was curious to see what the updated forecasts looked like.

This chart captures the actual export share of GDP, now through to the June 2017 year, and shows separately the PREFU and HYEFU forecasts.

exports hyefu

There is a bit of a lift between PREFU and HYEFU, but interestingly the downward trend is still in place in the last set of numbers.

What has changed?  Mostly the exchange rate.   Here are the assumptions/projections for the exchange rate in the two sets of forecasts.

TWI hyefu

Over the full forecast horizon, the exchange rate is now assumed to be around 5.5 per cent lower than was previously assumed –  more or less just treating the fall in the last few months as if it will be sustained.   Some of that fall will flow through into the domestic price level, but it is still a real exchange rate fall of around 5 per cent.    But even though that fall is assumed to be sustained for several years –  4.5 years to the end of the forecast horizon –  there is no sign of the decline in New Zealand’s export share of GDP being reversed.  Presumably it would need (policy changes that brought about) a much larger sustained decline to really begin to make a substantial difference.

I know some commentators think the exchange rate could soon fall quite a bit further –  after all if the US keeps on raising interest rates, they’ll soon have a Fed funds target rate equalling our OCR.   But Treasury doesn’t think that is likely: they still have large increases in the OCR (and 90 day rates) forecast for the next few years, far larger (and sooner) than anything in the Reserve Bank’s numbers.   Frankly that still seems unlikely, but these are the projections/advice of the government’s leading economic advisory agency.  On their numbers, the prospects for the tradables sector don’t look good.

There are other sobering aspects in the numbers.   Take this chart for example.

output gap hyefu

The solid line is the Treasury estimate –  on their numbers the output gap is still estimated to be negative, bringing to 10 years the period in which our leading economic advisers think the economy has been running below capacity.   When things like that happen –  and they shouldn’t –  it is usually an adverse reflection on macroeconomic management.  It also isn’t very clear why things should suddenly come right next year –  with a forecast of the biggest change in the output gap in the last decade, suddenly moving the economy into an excess demand situation.  We’ll see.

And there are also some heroic forecasts for productivity growth.  Recall that we’ve had no productivity growth at all for five years now.  Treasury don’t expect any this year either.  But then suddenly things come right, and over the subsequent four years growth in real GDP per hour worked is expected to exceed 1.5 per cent per annum.  On quite what basis –  other than wishful hope –  it isn’t really clear.  Apart from anything else, the optimistic assumption probably flatters the fiscal numbers.

But in some ways the biggest mystery in the entire document is the bottom line fiscal numbers themselves. As I noted before the election, I found it hard to conceive that people voting for a change of governmnet, for a left-wing government, were really voting for government spending as a share of GDP to keep on falling.  On the government’s – perhaps over-optimistic numbers, core Crown expenses in the last forecast year is expected to be smaller, as a share of GDP, than in any year of the previous National-led government.    To be sure, lower government spending will keep some pressure off the real exchange rate, but there are other ways to deliver that outcome.   And it is curious to think that the governing parties campaigned on the existence of all sorts of deficits in the provision of public services, and yet their fiscal numbers keep net debt (including the assets in the NZSF) dropping away to almost nothing.

net debt

I doubt it will happen: the economy is likely to be weaker (and it would be unprecedented if we got to 2022 without a recession) and spending pressures are likely to be greater than allowed for in these numbers, but these are plans the government is articulating and defending.  I’m not entirely sure why.

But that is something to speculate on next year.  This is the last post from me for the year.  I imagine I’ll have found interesting stuff to write about  –  and the urge to do so –  by the second week of January or even earlier, but it might depend on whether the glorious Wellington summer continues.

 

Exports in a cross-country perspective

Across the advanced world, exports have been becoming a larger share of most countries’ GDP.  This chart shows the median export share for OECD countries going back to 1971.

export % of GDP OECD

The OECD only has complete data for all its member countries since 1995, but in that time total exports as a share of total OECD GDP have risen from 19.5 per cent to 28.3 per cent.

There is some short-term variability –  I’m not sure what explains the 2016 dip –  but the trend has been pretty strongly upwards.  That’s encouraging: trade (imports and exports, domestic and foreign) is a key element of prosperity.

For quite a while, New Zealand’s performance was very similar to that of the median OECD country

export %

and then it wasn’t.    The last time New Zealand’s export share matched that of the average OECD country was around 2000/01, when our exchange rate was temporarily very low (and commodity prices were quite high).   At very least, we’ve been diverging for 15 years now, although it looks to me that the divergence really dates back at least 20 years to the early-mid 1990s.

Once upon a time –  well before these charts –  New Zealand traded internationally much more than most other countries.   With a high share of exports in GDP, and a high GDP per capita, a common line you find in older books was that New Zealand had among the very highest per capita exports of any country.    These days, not only is GDP per capita below the OECD median, but so is our export share of GDP.

Small countries typically have a larger share of exports in their GDP than large countries.  That isn’t a mark of success for the small country, just a reflection of the fact that in a small country there are fewer trading partners.  If your firm has a great world-beating product and yet is based in the US quite a large proportion of your sales will naturally be at home.  If your firm is based in Iceland or Luxembourg, almost all your sales will be recorded as exports.  US exports as a share of GDP are about 12 per cent at present, but divide the country into two separate countries and even if nothing else changes the exports/GDP shares of both new countries will be higher than those of the United States.   The median small OECD country currently has gross exports of around 55 per cent of GDP  (New Zealand 26 per cent).

On the other hand, we also expect to see countries that are far away do less international trade than countries that are close to other countries (especially countries at similar stages of economic development).   That isn’t just a statistical issue, an artefact of where national boundaries are drawn.  Distance is costly –  there are fewer economic opportunities for trade.     That has become over more apparent in recent decades as cross-border production processes have become much more important: in the course of producing a complex product, component parts at different stages of assembly may cross international borders (and be recorded as exports) several times.   This has been a particular important possibility in Europe, and has been part of the success of formerly-Communist countries like Slovakia.    Distance is an enormous disadvantage –  enormous distance (such as New Zealand suffers) even more so.

The OECD is now producing data on the share of domestic value-added in a country’s exports.  The data only go back to 1995, and are only available with quite a lag (the latest are for 2014) but you can see the difference between New Zealand’s experience and that of the median OECD country.

value-added

These opportunities (gains from trade that weren’t economically posssible a few generations ago) generally aren’t available to New Zealand based firms.  Then again, a widening in this particular gap isn’t the explanation for the divergence between New Zealand’s export performance over the last decade and that of the median OECD country (since the gap hasn’t widened further).

New Zealand has just been doing poorly.

Here is one comparison I found interesting.

nz vs fr

France has more than ten times the population of New Zealand and yet its foreign trade share now exceeds that of New Zealand.    The United Kingdom –  similar population to France –  also now has a higher trade share than New Zealand.   And the difference isn’t just down to components shuffling back and forth across frontiers in the course of manufacturing (eg) Airbus planes.  New Zealand’s exports have a larger domestic value-added share than those of the UK or France, but adjust for that and all three countries now have export value-added shares of GDP of around 21 per cent.  In a successful small country you would expect –  and would typically find –  a much higher percentage.

Remoteness looks like an enormous disadvantage for New Zealand, at least for selling anything much other than natural resource based products  (even our tourism numbers aren’t that impressive by international standards).   Here is the comparison with another small remote country, Israel  (it is both some distance from other advanced country markets, and made more remote by the political barriers of its location/neighbours).

nz vs israel

The Israel series is more volatile than New Zealand’s –  probably partly reflecting the extreme macroeconomic instability in the Israel earlier in the period –  but the overall picture is depressingly similar (and that in a country where R&D spending is now around 4 per cent of GDP).    The other similarity with New Zealand: very rapid immigration-driven population growth, into an economically difficult location.  As I’ve illustrated in previous posts, Israel has struggled to achieve much productivity growth and has a similarly low level of real GDP per capita.

Looking back over the last few decades, it is sobering to note that natural-resource dependent advanced economies are foremost among those that have struggled to achieve higher international trade shares of GDP.    It isn’t some sort of fixed rule: if, like Australia, vast new deposits of minerals become economically exploitable, a remote natural resource dependent economy can see its export share of GDP rise.  And if you have enough natural resources and few enough people, you can be very well-off indeed, even if the export share of GDP isn’t rising (Norway is the only OECD country where exports have’t risen at all as a share of GDP since 1971).  But if you are very dependent on natural resource exports –  and that dependence doesn’t seem to be changing –  then you’d probably want to be very cautious about actively using policy to drive up the population unless –  as with Australia –  there are new waves of nature’s bounty to share around.

New Zealand –  apparently structurally unable to secure rapid growth in exports based on anything other than natural resource –  looks not only like the last place on earth, but the last place in the advanced world to which it would make sense to actively set out to locate ever more people.  And yet is exactly what one government after enough does, apparently blind to paucity of economic opportunities here.    They might wish it was different, and perhaps one day it even will be, but for now there is just no evidence to support their strategies.  Every year, in following that course, governments make it harder for New Zealanders as a whole to prosper.

Oh, and what changed in the last 20 years or so –  to go back to that second chart?  After 20 years of quite low levels of immigration, active pursuit of large non-citizen immigration targets became a centrepiece of policy again.   Without great economic opportunities here –  already or created by the migrants –  that renewed population pressures just made it even harder, despite all the good work on economic reform in the previous decade –  for outward-oriented firms to succeed, and made the prospects of ever closing the income and productivity gaps to the rest of the OECD more remote than ever.

No fix for the flawed fundamentals

I’ve had fairly low expectations of what a change of government might mean for overall economic policy, but at present the new government seems to be charting a course to under-deliver even those low expectations.

The Minister of Finance yesterday gave his major public speech since taking office, explicitly selling it as an outline of the government’s economic strategy.     Sadly, there wasn’t very much there, and much of what was there focused –  as his speech title did –  on sharing and redistributing, with very little on reversing the decades of dismal economic underperformance.   Simply cutting the pie differently is no long-term solution to the sort of failure that has seen almost a million New Zealanders (net) leave New Zealand for a better life, for them and their families, abroad.

During the election campaign I was somewhat critical of Labour for simply accepting the National government’s narrative that the economy was basically doing fine.  But at least then I could sort of understand why they might do it –  something about not scaring the voters in the centre ground and not coming across as alarmist when they didn’t have much of a solution.    It is bit more surprising, and much more disappointing, to see that narrative carried over into office.

Here is what the Minister of Finance had to say this morning

While the fundamentals of our economy were, and are, strong, the purpose of it had become lost.

Again, perhaps after some bad business confidence numbers he doesn’t want to scare the horses.  But (a) you don’t produce better outcomes without actually facing what has gone wrong in the past, and (b) it is starting to seem as though the Minister of Finance actually believes the story on some level.

Grant Robertson was born in 1971.  Even by then, our economy had been in relative decline for a couple of decades –  and all the contemporary experts knew it.  But if we were no longer among the most productive and wealthiest of the then advanced economies, at least we were still in the middle of the pack.  Since then, we’ve just lost further ground –  the relative decline was particularly bad in the 1970s, but there has never been a sustained period since then when we’ve looked like reversing any of the relative decline.  Not under National governments, and not under Labour government’s either.    When Grant Robertson went off to university, eastern and central Europe was still Communist-run, with highly inefficient poorly-performing economies.    These days, the better performing of those countries –  Slovakia, Slovenia, the Czech Republic – are closing in on New Zealand levels of productivity/income, and places like Hungary and Poland aren’t that further behind.   Turkey is on the brink of going past us.   They’ve done quite well, but still have a long way to go to catch up with the West European leaders.  We’ve just done really rather badly; mediocre at a (generous) best.

Economies that are performing well  are typically ones in which the tradables sector of the economy is growing.   Local firms are finding more products and services which they can sell to, or compete with, the rest of world.   But we’ve had no growth in real per capita tradables sector GDP since around 2000.  Exports are a share of GDP are, as I illustrated the other day, now at the lowest level since 1976.

Over the last quarter century – even after the economic reforms –  our productivity growth has been among the lowest in the OECD (and we started from a bad position).  Most starkly –  and this a point that Robertson does mention –  we’ve had no productivity growth at all for the last five year.

And then, of course, there is the disastrously dysfunctional housing/land market: a country with so much land nonetheless has some of highest house price to income ratios anywhere in the advanced world.

Frankly, the “fundamentals of our economy” are pretty poor, especially if what we care about is the ability to support high incomes (fairly shared) for all of our people.  Yes, there are some things we can chalk up on the other side:  we’ve largely avoided a domestic financial crisis, our government accounts are sound, our people are pretty highly skilled (we’ll come back to that one), and our unemployment rate isn’t too bad (even if it is still above a NAIRU).   But mostly those are ‘inputs”: the “outputs” and “outcomes” don’t look very attractive at all.  And that makes it all the harder to deal effectively with some of the pressing social (and environmental) issues.

You might think an incoming government was well-positioned to point this stuff out.  But I guess there is no point in doing so if you haven’t got a strategy that is likely to be (a) materially different from what went before, and thus (b) likely to produce material different outcomes.

Instead, they seem to want to play down the dismal economic data and follow The Treasury down the not-particularly-well-grounded path of the Living Standards Framework (which I wrote about a couple of weeks ago)

I have asked the Treasury to further develop and accelerate the world-leading work they have been doing on the Living Standards Framework.  This focuses on measuring our success in developing four capitals – financial, physical, human and social. These give a rounded measure of success and of how government policy is improving our well-being.

This is a far better framework for judging our success.

As I’ve suggested previously, it looks more like a way of avoiding confronting our really bad long-term economic performance and the very large trend outflow of our own people.

The Minister of Finance claims they will keep a focus on productivity.

Low productivity has been a cloud over the New Zealand economy for decades and previous governments have failed to tackle this issue – this government will not.

Which sounds okay, perhaps even momentarily encouraging.  But how are they going to do this?  The Minister identifies only two areas.   The first is skills.

Lifting the skills of our people is critical to solving the productivity challenge.

In fact, there is not the slightest evidence for this proposition, which would lead the reader to suppose that skill levels in New Zealand lagged behind those in other, more economically successful, OECD countries.   No doubt we can do better (and there are specific pockets of underperformance), and there have been some disconcerting developments in the PISA results in recent years.  But the OECD produced data only last year suggesting that New Zealand workers were among the two or three most highly-skilled in the OECD.      They used three measures and this was one of them

oecd problem solving

As I summed it up at the time

Looking across the three measures, by my reckoning only Finland, Japan, and perhaps Sweden do better than New Zealand.

Increased subsidies for tertiary education (the policy Robertson then advances) will, no doubt, serve a redistributional function (even if one of questionable merit –  and I say that as a parent with three kids likely to go to university in the next eight years).  But there is little evidence they will do anything to close aggregate productivity gaps –  which, in New Zealand, aren’t about the skills or energies workers bring with them, or even about our legal institutions, but about the profitable business opportunities firms can find here.

And the second strand to Robertson’s response to our productivity failure is R&D.

Also critical for lifting productivity is increased investment in Research, Development and Innovation. The first step in this is the introduction of an R and D Tax Credit.  Beyond that we will move to work smarter, adding value to change the mix of our exports and using and creating new technologies.

I’m not aware of any serious observer, even among supporters of R&D tax credits, who believe that such credits are likely to make a transformative difference.

This is the data from the national accounts (March years) for research and development spending as a share of GDP.

R&D

It would be interesting to know quite what was going on in the 1970s, but really ever since then there hasn’t been much change in the share of GDP devoted to R&D (as captured by Statistics New Zealand).  Interestingly, the most recent year saw the highest R&D share in the 45 year history of the series.

Many observers point out that New Zealand is relatively unusual among advanced countries in not having an R&D tax credit.  There are various other countries, including Denmark and Switzerland, but on the extreme far end of the OECD’s chart of a summary indicator of such matters are New Zealand and Germany.

And yet here is the OECD’s data on R&D spending.  For this particular series they don’t have data for New Zealand for every year, but the picture is still clear enough.

R&D 2

The New Zealand R&D spend (as a share of GDP) is well below the OECD total, and Germany’s has been consistently above (as are those in Denmark and Switzerland).   And neither country has R&D tax credits.  In fact, when the OECD totted up all the different sorts of government support for business R&D, the New Zealand government was considerably more generous than Germany.

It suggests, as I’ve argued here for some time, a need to stand back and think about what it might be in the New Zealand economic environment that means so little R&D occurs here.  Firms typically take the risk of investing in R&D when they think the opportunities for profitable businesses are good.     That doesn’t appear to have been the case in New Zealand (in contrast, say, to Germany), and consistent with that overall business investment as a share of GDP in New Zealand has been low by advanced country standards, for decades, even though our population growth rate has been much faster than that in the typical OECD country (more people will typically require more business investment if living standards are to keep pace).   This is not the place for a lengthy discussion of factors that might discourage firms from investing here, but high interest rates (relative to those abroad), an out of line real exchange rate, and being the most remote advanced country on earth (at a time when personal connections, value-chains etc seem to have become more important) might be things to think about.  Not one of them appears in the Minister’s speech.

 

Perhaps the closest he comes is in a summary of the government’s approach

In other words, we’ll be swapping out population growth and the buying and selling houses to each other as our two main growth drivers for much more sustainable ones. That sounds like a good description of our plan.

But they aren’t changing the medium-term immigration targets at all (and various media report that the Prime Minister isn’t even keen on implementing Labour proposed changes re student and work visas),  and simply buying and selling houses has never, of itself, been a “growth driver”.

There is the beginning of an idea here, but sadly nothing in government policy –  as outlined so far – is likely to represent any sort of fix.  After all, a key thrust of government policy is to build lots more houses, and they plan to just keep on keeping on issuing 45000 residence approvals a year for people to settle in such a remote, unpropitious (from an economic perspective) location.  Perhaps worse still, they seem keen on continuing, and beefing-up, the previous government’s misguided approach of trying to steer migrants to places other than Auckland (which is, on my telling, to put the cart before the horse).

One gets to the end of the speech confident that the government knows how it wants to redistribute more/differently than what went before (much the same could be said of Phil Twyford’s housing speech yesterday), but without any sense of a compelling strategy that is likely to do anything to reverse New Zealand’s long-term economic underperformance, to fix those flawed fundamentals.  I hope they really care about fixing the fundamentals and are just keeping quiet because they don’t have any compelling ideas –  and aren’f finding them in The Treasury’s post-election advice.  I fear that, a bit like their predecessors, it is some mix of putting the problems in the too-hard basket, and of no longer really caring that much.

An underwhelming top 200

In last Friday’s Herald there was a weighty supplement headed “Dyanamic Business”, reporting/celebrating the results of the annual Deloitte Top 200 (companies that is) business awards.  It seemed to be an opportunity for mutual self-congratulation, bonhomie, and a bit of virtue-signalling thrown in as well (eg the MBIE-sponsored award for “diversity and inclusion”).  And a few oddities as well: the award for “excellence in governance” went to a company that is majority state-owned and subject to quite real moral hazard risks (see 2001), and I don’t suppose the Reserve Bank will have been best-pleased to see the chair of Westpac New Zealand Limited –  the subsidiary just last week subject to Reserve Bank sanctions for failures of governance –  as a runner-up the “Chairperson of the Year” stakes.

But what caught my eye flicking through the supplement was this table for the top 200 (non-financial) companies in New Zealand.

Annual % growth 2016/17
Revenue 4.3
Pre-tax profits -6.4
Tax paid 22.7
EBITDA 2.9
Assets -5.7
Equity 2.9

(Tax aside) those numbers didn’t look very impressive.  Total revenue was up 4.3 per cent (and the accompanying article says that in the previous year revenue actually fell).  Profits and total assets actually fell, and both EBITDA and total equity were up by 2.9 per cent.

And what happened to the whole economy?  The Top 200 numbers use the latest audited accounts of each company, so there is a mix of balance dates.   But in the year to June 2017 (the latest quarterly data we have), nominal GDP rose by 5.9 per cent.  The last annual national accounts came out late last week: on those numbers, nominal GDP has risen 6.2 per cent in the year to March 2017, and 5.1 per cent in the year to March 2016.   Against that backdrop, the performance of the top 200 companies was, if anything, surprisingly weak.

Big companies, in aggregate, doing less well than the economy as a whole needn’t be a concern.  It could, after all, be a sign of thrusting new companies surging ahead and displacing the tired old giants.  But there isn’t really much sign of that sort of process in at work in New Zealand –  see, for example, the tech sector.   And, of course, our overall per capita growth in real GDP (let alone productivity growth) has been pretty deeply underwhelming.

In a way, a simple list of the top 10 most profitable companies (dollar value of profits) is quite revealing:

Fonterra
Spark
Air NZ
Ryman Health
Kaingaroa Forest
Auckland Airport
Transpower
Z Energy
Meridian Energy
Mercury

Of those 10, we have four majority state-owned companies (one a natural monopoly), a chain of petrol stations, a property-boom play, and a co-op whose profits are largely driven by swings in global commodity prices.   There wasn’t much new or very dynamic about it.  In a way, the list of top 10 money-losing companies looks more interesting – in addition to Tasman Steel (No 1) and Kiwirail (No 2), it does feature Xero and Orion Health.

It is a very different list than, say, one of the top most profitable non-financials in the US, which does feature (relative) newcomers like Apple and Alphabet (Google) and where almost all the companies have a strong international focus.

I mentioned those new annual national accounts numbers.  No doubt I’ll be using the numbers in various posts in the next couple of months, but for now just a couple of charts.

I’ve noted in various recent posts the fall in the export share of GDP over recent years.  There was always the hope that some of that might have been revised away when the annual numbers were published.  But no.

X and M share of GDP

As a share of GDP, imports haven’t been lower since the depths of the recession in the year to March 1992.  Exports haven’t been lower, as a share of GDP, since the year to March 1976 –  more than 40 years ago.     There was, so it was claimed, a policy focus on increasing the outward orientation of the New Zealand economy.  If so, it failed.

And what of business investment as a share of GDP  (as previously, this is total gross fixed capital formation less government and residential investment)?

bus investment

It picked up a couple of years ago from recession-era lows, but has gone sideways since, and is nowhere the rates reached in the previous expansion.

When profit growth in our top 200 companies has been relatively subdued perhaps it shouldn’t be surprising that not very much business investment is occurring.   And those export/import numbers shown earlier strongly suggest that what business investment is occurring will have been disproportionately concentrated in the non-tradables bits of the economy, those that don’t (be definition) face much international competition.

Deloittes and the Herald might think this is a “dynamic economy” –  and I’m sure there are plenty of small exciting firms in it –  but once we stand back and look at the aggregate numbers the picture isn’t very encouraging at all.  If change is constant, the change here seems –  in aggregate –  to more akin to drifting slowly backwards.

That was the legacy of the now-departed National-led government.  That government’s policies were not, in relevant areas, materially different than those of the previous Labour-led government.    The worry now is whether there is any realistic basis for expecting something different, and better, from the new centre-left government.  At present, it isn’t obvious why the future should be any better than the performance over the last 20 years or so.

 

 

Committing pointless economic suicide?

There has been some silly nonsense published in various overseas publications about the change of government – all that on top of things like the Wall St Journal‘s weird pre-election suggestion that Jacinda Ardern was some sort of Trump-like figure.

I’ve written about some egregious examples of ill-informed commentary here.  There was, for example, Nick Cater’s piece in The Australian praising the reformist nature of the previous government, the outperformance of the New Zealand economy, and specifically John Key and Bill English who “stand as inspiration to the rest of the developed world in these anxious and volatile time”.  And then, more recently, there was the Washington Post column by an Auckland-based American lifestyle journalist who sought to convince his readers that the new government was controlled by the far-right.   It was a case, we were told, of “Ardern may be the public face, it’s the far right pulling the strings and continuing to hold the nation hostage”.

Sure we are small and remote and not of that much objective significance to the rest of the world.  But the scope for really badly-informed commentary is still a bit of a surprise: in both cases, it seemed,  involving the authors projecting onto New Zealand what they wanted to see, and causes they themselves wanted to champion (in Cater’s case, genuine reform from the centre-right government in Australia, and in Ben Mack’s case probably a desire for something well to the radical-left of what any party in Parliament stands for).

Another example of detached-from-reality commentary turned up yesterday on Forbes magazine’s website, by an American investment adviser/commentator named Jared Dillian.  I’d never heard of him before, but apparently he has a following in some circles, and is clearly willing to speak his mind.  By the look of his new article on New Zealand, doing a little basic research first might help though.

His article has a moderate enough headline, New Zealand, An Economic Success Story, Loses its Way.    In fact as a headline in 1960 it would have been spot-on.   Without the constraints of magazine editors, his message was then amped-up when he tweeted out the link to the article, under the heading “New Zealand commits pointless economic suicide”.

I probably wouldn’t have bothered writing about it, but TVNZ asked me to go on this morning and comment on it, and preparing for that involved reflecting a bit more (than the piece really deserved) on where he was wrong and why.

I suspect the author must have been raised on some mythology about the 1980s reforms, which (rightly) got a fair amount of attention internationally then and for a decade or more afterwards.

There is the gross caricature of the pre-1980s New Zealand economy for a start (“most of industry was nationalized”, “extraordinary levels of government debt” [well, not much more than half –  as a share of GDP –  current debt levels in the US]).   And then the claims about the subsequent period that are utterly detached from any sort of data: “New Zealand is a supply-side economic miracle”, “New Zealand enjoyed unprecedented economic growth”, “it became one of the richest countries in the world”.

All this in a country which over the last 30 years has had one of the lowest rates of productivity growth of any advanced country –  none at all in the last five years –  and which looks set to be overtaken by Turkey and such former communist states as the Czech Republic, Slovakia and Slovenia.   We’ve just drifted slowly further behind most of the rest of the advanced world.  Numbers of those leaving fluctuate cyclically, but over the post-reform decades we’ve had one of the largest cumulative outflows of our own people of any advanced country in modern times.

But what of the suicide note that Dillian appears to believe the new government’s policy agenda represents?

Top of his list is any changes to the Reserve Bank Act.  He is, clearly, a big fan of the Reserve Bank and of New Zealand’s lead role in introducing inflation targeting.  That’s fine, and reasonable people can differ on whether there is a strong case for change, and the extent to which possible changes (details yet unseen) might change substance (as distinct from appearance/style).   But Dillian apparently knows already.

At 4.6%, unemployment is already low, but she wants to take it well below four percent, for starters. She would rather that the central bank tolerate higher levels of inflation in order to get unemployment lower, risking all that the RBNZ has achieved over the years.

A bit of basic research would have told him that the government has repeatedly indicated that they will not be seeking to give the Reserve Bank a numerical unemployment target, and that they recognise that other structural measures are needed if unemployment is going to be sustainably lowered very much further.  And in his press conference a couple of weeks ago. Grant Spencer “acting Governor” of the Reserve Bank didn’t exactly seem to think the baby was about to get thrown out with the bathwater.  If he did think so he could easily have said; after all he is retiring in four months’ time.  And the Bank had one of their friendly foreign academics, on a retainer from the Bank, out making pretty reassuring noises the other day too.  As he points out, the rhetoric from the government talks of modelling the Reserve Bank’s goals on those used in Australia and the United States –  central banks which, mostly, behave much the same way our Reserve Bank does when it is following its current mandate.

It isn’t just goal changes that worry Mr Dillian.

She also wants to include an external committee in the RBNZ’s monetary policy decisions, which will certainly give the bank a more dovish tilt.

When central banks as diverse as those of the UK, Australia, Sweden, the United States, Israel and Norway include external members on their monetary policy decisionmaking committee, it is difficult to take seriously the suggestion that moving to such a committee will “certainly” make New Zealand monetary policy more “dovish”.   What it may, perhaps, do is reduce the risk of the sort of false starts we’ve twice had to put up with from successive Governors this decade.

Then there is the forthcoming legislative ban on non-resident non-citizens buying existing residential properties.

New Zealand has, by anyone’s measure, one of the biggest housing bubbles in the world. Banning foreign ownership of property sets the country up for a possible real estate crash.

Set aside for the moment the question of whether the market is a “bubble” (I don’t think so, on any reasonable measure) but somehow adopting the same policy as Australia has had for years is suddenly going to fix our housing market problems.  If only.

What of immigration?

Ardern also opposes high levels of immigration, along with her coalition partner, Winston Peters. It is set to drop dramatically. Immigration, especially skilled immigration, has been a big contributor to economic growth over the years.

Actually, the Labour Party policy, which will be the government’s immigration policy, does not change the number of non-citizens annually given the right to live here permanently by even one person: the target remains at 45000 per annum (or around thre times per capita the rate in the United States).  Official policy supports continued high rates of immigration.  On immigration, Winston Peters won nothing beyond the rather limited, one-off, changes that Labour has proposed.

But, yes, really rapid increases in the population, driven by net immigration numbers, have greatly boosted headline GDP over the last few years.  Meanwhile, per capita real GDP growth –  surely the metric that matters rather more –  has been pretty anaemic at best.  And –  have I mentioned it before? –  there has been no productivity growth at all in the last five years.

Dillian ends with two final predictions.   Having heralded our high rankings on some of the economic freedom indices, he now asserts that “New Zealand will probably lose its status as one of the most open, free economies in the world”.    Frankly, that seems pretty unlikely.  As I’ve shown previously, on the measure he appears to cite our score has been pretty flat for 20 years now, through the ebbs and flows of the policy changes put in place by both National-led and Labour-led centrist governments.

econ freedom

Perhaps this government will prove different, but on the evidence to date – the published policy programmes – there isn’t much sign of it.

And what of Dillian’s final prediction?

It seems likely that New Zealand will experience a recession during Ardern’s term.

As it is now seven years (or eight, depending on how you count these things) since the end of the last recession, any detached observer would have to think there is a non-trivial chance of a recession in the next three years.  Periods of expansion don’t typically die of exhaustion, but New Zealand has never gone 10 years without a recession of some sort or other (and although some Australians like to boast of their 25 year run, in fact even they have had an income recession in that time –  a sharp correction in the terms of trade in 2008 for example).   Our modern history is a small sample of events, but it wouldn’t be too surprising if something went wrong in the next few years.

Of course, most –  but not all –  of our recessions have had a significant international dimension to them.   And that is still probably our greatest area of vulnerability in the next few years –  some shock, or series of shocks, arising out of insufficiently-weighted (or priced) areas of vulnerability, accentuated by the fact that most other countries now have little room to use fiscal policy for counter-cyclical purposes and almost none to use monetary policy (most policy rates being very close to, or below, zero). When the next foreign recession hits it is going to be difficult for other countries’ authorities to respond effectively.

Could we mess things up ourselves?  It is always possible –  and monetary policy mistakes are among the possibilities –  but even if you think the new government’s policy platform will reduce potential growth (or potential productivity growth) and even if there is some sort of “winter of discontent” fall in confidence next year, it is difficult to see what in the current mix of proposed domestic policies would tip New Zealand into recession.   Lower headline GDP growth seems quite possible, but was also likely if the previous government had returned to office.

Dillian’s story seems to rest on the forthcoming “housing crash” and cuts to immigration.  But if net migration is a lot lower in the next few years than it has been in the last few that is most likely to be because the Australian economy –  our largest trading partner – is doing better.    Policy itself is designed to maintain a high average net inflow of non-citizen migrants (and is the poorer for that).  As for housing, unless/until land use laws are substantially liberalised, the idea of a crash in house prices is just a scary fairy tale –  and were land use laws to be substantially liberalised, it would be more likely to be a force for good –  including allowing some productivity gains – than one that would drag the economy down (tough as some of the redistributive consequences might be for some people).    Among our good fortunes is that if demand does look like weakening materially, the Reserve Bank still has a fair amount of room to cut interest rates –  not enough probably, but more than almost all other advanced countries.

All of which Mr Dillian could have found out with the slightest amount of digging.  If there is a “suicide” dimension to economic policy in New Zealand, it is the wilful blindness of successive governments led by both main parties, who keep on doing much the same stuff, and either believe they’ll get a different and better (productivity) result, or who just don’t care much anymore.

Looking for a successful outward-oriented economic strategy 

I could bore you with thoughts on (a) Supreme Court rulings on the duties of trustees to disclose material to members/beneficiaries, or (b) even more recondite rulings on severability (the conditions under which, having inserted an invalid and unenforceable provision into a deed, the discovery of that invalid provision invalidates (or not) the rest of the deed).  Doing so might help straighten out my thinking for a meeting this afternoon, but it would bore you witless.

Instead, I’ll just leave with a link to a piece I wrote that appeared on the New Zealand Centre for Political Research website over the weekend.

A month or so ago, on the day the new government was to be sworn in, I wrote a post here about the apparent tension between the government’s stated ambition to increase the outward-orientation of the New Zealand economy (including the appointment of a Minister for Export Growth) and various specific policies the new government seeemed committed to, which seemed likely to reduce exports as a share of GDP (all else equal).  In some cases, those policies represented overdue elimination of explicit or (more often) implicit subsidies.  In other cases, no doubt some sort of case could be made for each of the policies on their own merits.  Nonetheless, taken together they looked likely to continue to shrink the foreign trade share of the New Zealand economy (the actual outcome under the previous government, despite the regularly restated goal to substantially increase exports as a share of GDP.

In that earlier post, I included this chart, of exports and imports as a share of GDP, back to 1971/72.

trade shares

There are some data revisions due out later this week.  It would be very surprising if they changed the broad picture.  Foreign trade has been becoming less important as a share of New Zealand’s economy, even though every successful case of economic transformation I’m aware of has involved getting the preconditions right that result in more domestic firms successfully taking on the world market.

There are some unavoidable factors that explain a temporary diversion of resources towards the domestic economy: the repair and rebuild process after the Cantervury earthquakes being the most obvious. But the peak of that process has passed, and yet Treasury’s advice in the PREFU was that the downward trend (in exports/GDP) would continue.  The problems look structural.

A few days after that earlier post I was mildly encouraged to see references in the Speech from the Throne to the need to lift productivity in New Zealand.  Exports were highlighted in this paragraph

This means working smarter, with new technologies, reducing the export of raw commodities and adding more value in New Zealand. For example, by securing the supply for forestry processing, greater investment in fishing and aquaculture, increasing skills and training, and more research and development to add value to dairy and other products and to create new technologies.

I couldn’t track down old Speeches from the Throne, but it did strike me as the sort of stuff almost any government could have (and probably did) say for at least the last 50 years.   The previous government, for example, claimed to be keen on aquaculture, and removing regulatory roadblocks to it.  Forest processing as a big theme in the 1950s when the government led the formation of Tasman Pulp and Paper (and my old hometown of Kawerau).  And so on.

And yet, as the old line has it, if one does the same stuff over and over again, why would one expect a different result?  We’ve been drifting behind the rest of the advanced world –  and have had no productivity growth at all in the last five years –  and foreign trade as a share of GDP hasn’t been sustainably increased for 25 years now.

Muriel Newman, former ACT MP, at NZ CPR saw that earlier post and asked if I’d like to do something shorter, and a bit more policy-focused for their newsletter.    The result is here.

I noted that there are lots of things that could be dealt with to lift our economic performance

I hope that the new ministers are going to turn their minds pretty quickly to how they might achieve the sort of reorientation in the economy that their own campaign recognised is needed. Regional development funds aren’t likely to be the answer; in fact, over the last 15 years, “the regions” have generally done better than “the cities”.   Auckland has been the laggard (again in per capita terms).

There are plenty of things that could be done to lift the competitiveness of the New Zealand economy.  For example, we now have a company tax rate that is above that of the median OECD country.   Lower taxes on the returns to business investment are one of best ways of getting more such investment.   We also already have one of the highest minimum wages rate, relative to median incomes, of any OECD countries.  Reforming our land use and planning laws could markedly lower the cost of housing, and help ensure that people and businesses can locate in the best locations.

In response, Muriel Newman asked a bunch of other regulatory issues.  I noted that I agreed that there was plenty of room for improvement on many fronts

But it is worth remembering that things on the regulatory front are typically not worse here than in most other advanced countries (indeed, we often score a little better than average on summary measures).   There is a lot we could do to remove roadblocks in these areas, but if we are to understand why NZ has continued to do badly relative to other advanced countries, i think we need to focus on things that are different here than abroad.  As per the column, our company tax rate is now high, and our minimum wage is high (both relative to other OECD countries).  But we are also very remote, in an era when personal connections seem to matter more than ever, and we have an immigration policy that is very unusual by international standards.  Of other OECD countries, only Australia and Canada come close to our target inflow (and Israel will take any Jewis person who wants to come –  that is a different issue).

And to revert to the concluding paragraphs of the NZCPR article

Defenders of our very high target rate of immigration talk constantly about skill shortages.  But OECD data show that New Zealand workers are already among the most skilled around.  We don’t need more workers – skilled or otherwise.  In fact, because of how difficult it is to base internationally competitive businesses here, there is an almost irreconcilable tension between continuing to drive the population up, wanting to deal with the pressing environmental issues associated with natural resource exports, and still wanting First World living standards.  The best way to square the circle would be to cut back sharply on the target rates of non-citizen immigration.

There isn’t anything necessarily wrong, in principle, with a growing population.  But successive governments have been putting the cart before the horse – driving the population up in the idle hope that a bigger population might somehow spark higher productivity growth.  In a location that isn’t a natural home to lots of people, that was never very likely.  Instead, we need to focus instead on the able people we already have – and to heed the wisdom of the New Zealanders who’ve been leaving.   Without a change of course, we seem set to slowly drift ever further behind other advanced countries, increasingly unable to offer our people the world-leading living standards we once delivered and could, with the right policies, once again aspire to.

It is a shame that the new government shows no interest in tackling our anomalous, and deeply unfit-for–this-location, immigration policy (indeed, there are now reports they are in no hurry even to fix the manifest problems around student visas and associated work rights).  Unless they do so –  and in the process achieve a substantial sustained reduction in the real exchange rate –  it is very difficult to see a path through which the Minister for Export Growth will get to the end of his term and be able to point to a sustainable turnaround in performance, and a trajectory for exports (and imports) as a share of GDP that might offer some hope of New Zealand one day catching up with the rest of the advanced world again.

Competitiveness indicators well out of line

In my post yesterday, buried well down amid long and fairly geeky material, I showed this chart.

wages and nomina GDP phw an unadj.png

Using official SNZ data, it suggests that over the last 15 years or so nominal wage rates in New Zealand have risen materially faster than the income-generating capacity of the New Zealand economy (nominal GDP per hour worked –  a measure that takes account of the terms of trade).   Since a big part of what New Zealand firms are selling when they try to compete internationally is (the fruits of) New Zealand labour, it probably shouldn’t be too surprising that our tradables sector producers have been struggling. As a reminder, we’ve had no growth in (a proxy measures of) real tradables sector GDP since around 2000 –  two whole governments ago.

The OECD publishes a real exchange series, all the way back to 1970, using real unit labour cost data.  Unit labour costs are, in effect, wages adjusted for productivity growth.  The real exchange rate measures compares how our economy has done on this competitiveness measure.

OECD real ULC

(There are other real exchange rate measures in which the fine details are less stark, but the picture is very similar.)

Broadly speaking, our real exchange rate was trending gradually downwards for the first 30 years of the series.  And each trough was a bit lower than the one before it.  That was, more or less, what one might have expected.  New Zealand’s productivity performance had been lousy relative to those of other OECD countries, and countries with weak relative productivity performance should expect to experience a depreciating real exchange rate.   On one telling, the weaker exchange rate helps offset the disadvantage of the lagging productivity.  On another, given that tradables prices are set internationally, a country with a weak productivity growth performance will tend to have weaker (than other countries) non-tradables inflation.    Another way of expressing the real exchange rate is the price of non-tradables relative to the (internationally set) price of tradables.

But over the last 15 years or so, we’ve seen something quite different.  The real exchange rate isn’t trending downwards any longer.   In fact, there has been a really sharp increase.   Competitiveness, on this measure, has been severely impaired.

It is not as if, after all, productivity growth has suddenly accelerated in New Zealand relative to other advanced countries.  We’ve done no better than hold our own against the median of the older advanced economies, and we’ve been achieving much less productivity growth than, say, the former communist eastern and central European OECD countries.     But on this measure, the real exchange rate recently has been 40 per cent above the average level in the 1990s, and even higher than it was in the early 1970s.

But aren’t the terms of trade extraordinarily high too?  Well, in fact, no.     They’ve increased quite a lot in the last 15 years or so, but here is a chart showing the terms of trade back to 1914 (using the long-term historical research series on the SNZ website and, since 1987, official SNZ data).

TOT back to 1914

Current levels aren’t much different from the average level for the quarter-century after World War Two.

On this OECD measure, the real exchange rate is higher than it was in the early 1970s (the previous peak in the terms of trade).  But since then, productivity growth (real GDP per hour worked) is estimated to have been far less than the median advanced economy experienced over that period.  In other words, the median OECD country (those 22 for which the OECD has data for the whole period) managed productivity growth  of around 150 per cent over 1970 to 2015 (the most recent year for which there is data for all countries) and New Zealand managed productivity growth of only 75 per cent.  It would take almost a 50 per cent increase in New Zealand’s productivity –  all other countries showing no growth –  to recover the relative position we had in 1970.

Competitiveness is a really major issue for the New Zealand economy.  It isn’t so much of an issue for the firms that operate here now –  they’ve survived and adapted.  It is more about the firms that never started-up, or which started up and couldn’t make it, or which started, flourished and found that they could prosper rather better abroad.   As trade shares (of GDP) shrink, in many respects this is a de-globalising economy.

Which made it rather odd to hear the (economist purporting to be the) “acting Governor” of the Reserve Bank declare that he, and the Bank, were comfortable with the level of the real exchange rate after the recent 5 per cent fall.  He declared that the exchange rate was now close to “sustainable, fair value”.    Taking a real economic perspective, it is anything but.

Such imbalances don’t have anything much to do with monetary policy, but they are symptoms of policy failures that need addressing urgently if we are to finally begin to turn around many decades –  stretching back even 20 years before 1970 –  of sustained economic underperformance.