Brian Easton tracks the path of stagnation and contraction the NZ economy has been on

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

In this column I use the less familiar measure of GDP per capita instead of the GDP measure favoured by the commentariat. I became familiar with it when I began doing international comparisons because of the population differences between countries, while I depended upon the measure while working on New Zealand’s economic history because of significant population change. The measure is also better for thinking about distributional issues.

The most recent (seasonally adjusted) GDP figure published by Statistics New Zealand showed a 0.6 percent fall in GDP per capita in the June quarter 2024 over the March quarter. Except for a minor blip in the June quarter 2023, per capita GDP has been falling for almost two years. That’s about the same time as the stagnation associated with the GCF when it took five years for per capita GDP to return to the level it had been when that GFC stagnation started.

It is hard to work out what was happening just before this decline began, because of the disruption from COVID, but the current level of GDP per capita is much the same as it was five years ago in late 2019 just before the disruption.

What is disturbing is that the current account deficit in the balance of payments (the external account) has deteriorated from about $10b a quarter before 2020 to around $30b today. That means that exporting is weak and not driving the economy. The volume of exporting has been near-stagnating since 2019.

Another factor in the decline has been that the Reserve Bank has consciously engineered a contraction to restrain inflationary pressures, using higher interest rates which cut back investment, thereby weakening the economy and making it harder to raise prices and wages. Higher interest rates tend to add to the current account deficit too.

It is not possible to tell yet whether the economy is entering a long-term stagnation phase, but had it continued to grow at the rate in did between 2005 when the GFC stagnation ended and 2019 just before the COVID stagnation began, the economy would be 8 percent larger than it is today. That might mean your income would be 8 percent higher, and with tax revenue up 8 percent the government would have more room to move on the fiscal front. Perhaps some of its more brutal cuts could have been avoided.

The 0.6 percent fall is an average (as is the 8 percent loss). Some people will be experiencing greater reductions in their incomes, while there will be others who experience a real income increase. We don’t have good measures to monitor such change (and there is a lot of dynamic change as people enter the labour force and retire). It seems likely that recent immigrants have taken up a higher share of incomes, so that the fall for those who have been here longer has been bigger than the average. That would certainly include those with significant mortgages who are paying higher interest rates – very often families with children.

So the story is a contracting economy partly induced by the RBNZ, partly by a weak external performance. The indications are that Labour lost power in 2023 because it was out of touch with its electorate on many dimensions, but the struggling economy added to the grumbling and gave the government no room for buying off the grumblers.

The Coalition Government may be more in touch with its support – except the diversity of the three parties means there are sharp differences within the support base – but it too faces a struggling economy. The austerity measures it has been taking may seem sensible in the immediate term, but I shant be surprised if by the time of the next election the resulting failure in government delivery as a consequence of the cutbacks will become apparent.

I am not going to say much about what needs to be done to get the New Zealand economy out of this stagnation. Obviously, both the investment sector and mortgage-holders expect some relief as the RBNZ reduces the OCR. You will routinely hear claims that we need to improve productivity performance but the trope is weaker when it comes to explaining the mediocre performance and how that weakness connects with the policies being advocated. The infrastructure build makes sense but I am not sure that much of it will boost productivity, even though it will improve the quality of life and the sustainability of the environment.

The historical record emphasises the importance of the export sector to economic growth, especially when it could sell to booming economies. For the last few decades that has been those centred on China and a group of economies around it which have taken our export volumes and given us good prices. It is probably not accidental that New Zealand has recently been struggling as long as China has. I am not optimistic that China will return to its previous vigorous growth.

We need to give thought to the possibility that New Zealand is entering another period of long stagnation, although that may be also happening in most affluent economies. We need to move away from the uncritical optimism that things are going to get better if only we adopt a set of policies which are ideologically, rather than empirically, driven (and that means doing a lot more thoughtful empirical research).

You know the story of the woman who sued for divorce from her economist husband on the basis of non-consummation? ‘He stands at the end of the bed, beating his chest and saying things are going to get better under his policies, but they never do.’

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.