Treasury analyst says national income data shows New Zealand's economy in a better light than our productivity performance

New Zealand’s economic performance has shown flashes of light in the first two decades of this century, which contrast with prevailing gloom, an economic seminar has been told. 

This information came in a study of economic trends from the late 1990s to 2019.   

It was presented to a seminar organised by Treasury, the Productivity Commission and research institute Motu. 

It came amid widespread pessimism over stubbornly low productivity.

The seminar heard that New Zealand's productivity had indeed been lacklustre and it heard the familiar story of a dramatic decline from 1970 to 1990.

And this problem continued. Between 1995 and 2002, New Zealand’s real GDP per hour worked was 66% of the median of a sample of 19 OECD countries.  And by 2019, this had slipped further to 62% of the median.

But a senior Treasury analyst, Matthew Galt, told the seminar there was more to the story than just this. He looked at another method of analysis which examined Gross National Income (GNI) per capita, which is a more favoured measurement than GDP. 

This had increased from 68% of the OECD median to 81% of the median.  And the performance was even better regarding real Net National Income (NNI) per capita, which is an even more sophisticated measurement.

This rose from 69% of the median to 85% of the median – a 16 percentage point improvement.

Galt says growth in real NNI per capita comes from many things:  changes in real GDP per hour worked, hours worked per capita, terms of trade impacts, net international income, and the cost of depreciation.

He says New Zealand’s growth in real GDP per hour worked is close to that of most other OECD countries, but it has outperformed in several other sources of income growth.

The biggest single contribution is an increase in the share of the population in employment, which gives New Zealand higher labour market participation than in many other nations.  

The second biggest source of growth was rising terms of trade, stemming mainly from higher export prices relative to import prices. Just this year, there has been a record current account deficit. But the study period showed favourable price trends for exports relative to imports.  

There was also a reduction in New Zealand’s net international income deficit, due to falling global interest rates, and a reduction in the level of New Zealand’s net foreign liabilities.

There was also no significant change in New Zealand’s depreciation burden, though this is thought to be partly due to lower investment in machinery in the first place, which means there is less value to depreciate than there is in many similar countries.  

Galt's paper then goes on to suggest good luck rather than strong policies might have played a part in this relatively good record, but it does not draw a conclusion and says further research is needed. 

And there is a risk that New Zealanders might have been trading off growth in GDP per hour worked to obtain other sources of income growth.

And there is another risk: a possible lack of permanence.    

"The lack of convergence of New Zealand’s productivity (real GDP per hour worked) to the global frontier remains a risk for New Zealand’s long-term prosperity, given that other sources of income growth may not continue or could reverse in the future," Galt writes. 

"Nonetheless, New Zealand’s strong, broad-based employment growth and the contribution of the changing import mix to the terms of trade suggests that the New Zealand economy has been performing better than an assessment of real GDP per hour worked on its own would imply."