But what lies behind the RBNZ’s headline monetary policy move? The answer reveals deeper questions about New Zealand’s economic future that monetary policy alone cannot fix.
Hidden in the forecasts of the RBNZ’s Monetary Policy Statement was a concerning outlook for New Zealand’s productivity prospects.
The RBNZ projects trend labour productivity growth - that is, how much more each worker produces per hour - to remain weak between 0.1 and 0.4 percent annually for the next three years. Treasury’s Budget 2024 forecasts had painted a more optimistic picture, expecting productivity growth of around 1.1 percent per year.
This stark difference matters. When an economy fails to become more productive, real wages stagnate and living standards suffer. Recent GDP figures show an economy struggling to generate sustained momentum, despite some recent upward revisions to growth rates.
Last month, Treasury’s chief economist Dominick Stephens gave a sobering speech previewing December’s Half Year Economic and Fiscal Update. His message was clear: New Zealand faces major fiscal challenges as slower economic growth translates into weaker tax revenue.
Recent GDP revisions paint a marginally better picture, with annual growth for the year to March 2023 revised up from 2.7 to 3.5 percent. However, such statistical adjustments do not alter the fundamental productivity challenge facing the economy.
To understand how we got here, some historical context helps. In the decades before Covid, New Zealand’s GDP per hour worked typically improved by just under 1 percent per year. This was hardly stellar, but it provided a foundation for modest improvements in living standards.
That growth engine started sputtering around 2014. Productivity growth slowed to virtually zero. There was a post-pandemic surge, but it proved temporary. Now, the RBNZ expects productivity to remain essentially flat through to 2027.
The weakness is reflected in current economic indicators. Electronic card spending remains 1 percent lower than a year ago. Manufacturing and service activity indicators remain at contractionary levels. Despite this, at least business confidence has improved markedly, doubtless in part driven by expectations of further cuts to the OCR.
But the roots of New Zealand’s economic malaise run deeper. Treasury’s Stephens points to several structural factors: weak business investment, poor spread of innovation across the economy, and fewer international connections than in the past.
New Zealand’s geography and external vulnerabilities amplify these structural weaknesses. The country’s small, distant market makes it hard to achieve economies of scale. As an export-dependent economy, New Zealand is particularly exposed to brewing international trade tensions. The prospect of new US tariffs threatens to disrupt the free-trade environment that has supported New Zealand’s economic model for decades.
The capital markets lack depth, while poor regulatory settings do not help. And despite recent reforms, housing market distortions still push investment away from productive businesses.
The RBNZ’s aggressive rate cuts might provide some short-term relief to an economy in recession. Yet even this relief appears modest. Following the latest 50-basis-point cut, fixed mortgage rates have barely moved, with one-year rates dropping by just 20 basis points. This underscores how monetary policy’s effectiveness is waning.
In any case, lower interest rates cannot solve New Zealand’s fundamental productivity challenge. If anything, very low rates risk keeping zombie firms alive while discouraging efficiency-improving investment.
This leaves policymakers facing tough choices if they want to stimulate economic growth. However, the solution does not lie in government spending. In fact, quite the opposite. The government must tighten its belt to reduce the deficit while pushing through reforms to boost productivity. And indeed, that is just what the government is doing.
Associate Finance Minister David Seymour’s foreign investment reforms mark a significant shift. His changes will speed up approvals and invite foreign capital. For a country ranked last in the OECD for openness to foreign investment, that change is long overdue.
These changes will address real problems. Under current rules, investing in New Zealand is treated as a privilege rather than an opportunity. Processes are slow, complex and off-putting. Seymour’s reforms flip this presumption on its head.
This change of approach has already yielded results. Foreign investment applications have increased in recent months. More importantly, the quality of those investments appears strong.
Labour market reforms are also gathering pace. Workplace Relations Minister Brooke van Velden has just announced she will exempt high-paid jobs – those above $180,000 – from unjustified dismissal claims. While affecting only 3.4 percent of the workforce, these are often the roles that matter most for productivity. Making it easier to get the right people into leadership positions signals a broader shift toward a more flexible, dynamic labour market.
Urban planning reform offers another boost to productivity through faster consents and financial incentives for councils to grow. The focus on council incentives is particularly important: when local authorities directly benefit from economic growth, their infrastructure and planning decisions improve markedly. Housing remains central to New Zealand’s productivity puzzle, with household capital disproportionately tied up in residential property rather than flowing to productive businesses.
Infrastructure presents a particular challenge. New Zealand needs better roads, rail and utilities. But funding them through more government debt would be counterproductive. New funding models combining public and private capital deserve serious consideration.
Education reform could also boost productivity in the longer term. Recent moves toward knowledge-rich curricula and explicit teaching methods show promise.
Fiscal discipline must underpin all these reforms. With both productivity and economic growth historically weak, a return to surplus looks unlikely without spending cuts. And without such cuts, reducing New Zealand’s uncompetitively high corporate tax rate will remain impossible.
The RBNZ’s rate cut might grab the headlines for now. But New Zealand’s economic future depends more on structural reforms.
The good news is that the Luxon government has started many of these reforms.
The more sobering news is that many more such reforms are needed to get New Zealand’s productivity growing sustainably again.
Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.
The RBNZ projects trend labour productivity growth - that is, how much more each worker produces per hour - to remain weak between 0.1 and 0.4 percent annually for the next three years. Treasury’s Budget 2024 forecasts had painted a more optimistic picture, expecting productivity growth of around 1.1 percent per year.
This stark difference matters. When an economy fails to become more productive, real wages stagnate and living standards suffer. Recent GDP figures show an economy struggling to generate sustained momentum, despite some recent upward revisions to growth rates.
Last month, Treasury’s chief economist Dominick Stephens gave a sobering speech previewing December’s Half Year Economic and Fiscal Update. His message was clear: New Zealand faces major fiscal challenges as slower economic growth translates into weaker tax revenue.
Recent GDP revisions paint a marginally better picture, with annual growth for the year to March 2023 revised up from 2.7 to 3.5 percent. However, such statistical adjustments do not alter the fundamental productivity challenge facing the economy.
To understand how we got here, some historical context helps. In the decades before Covid, New Zealand’s GDP per hour worked typically improved by just under 1 percent per year. This was hardly stellar, but it provided a foundation for modest improvements in living standards.
That growth engine started sputtering around 2014. Productivity growth slowed to virtually zero. There was a post-pandemic surge, but it proved temporary. Now, the RBNZ expects productivity to remain essentially flat through to 2027.
The weakness is reflected in current economic indicators. Electronic card spending remains 1 percent lower than a year ago. Manufacturing and service activity indicators remain at contractionary levels. Despite this, at least business confidence has improved markedly, doubtless in part driven by expectations of further cuts to the OCR.
But the roots of New Zealand’s economic malaise run deeper. Treasury’s Stephens points to several structural factors: weak business investment, poor spread of innovation across the economy, and fewer international connections than in the past.
New Zealand’s geography and external vulnerabilities amplify these structural weaknesses. The country’s small, distant market makes it hard to achieve economies of scale. As an export-dependent economy, New Zealand is particularly exposed to brewing international trade tensions. The prospect of new US tariffs threatens to disrupt the free-trade environment that has supported New Zealand’s economic model for decades.
The capital markets lack depth, while poor regulatory settings do not help. And despite recent reforms, housing market distortions still push investment away from productive businesses.
The RBNZ’s aggressive rate cuts might provide some short-term relief to an economy in recession. Yet even this relief appears modest. Following the latest 50-basis-point cut, fixed mortgage rates have barely moved, with one-year rates dropping by just 20 basis points. This underscores how monetary policy’s effectiveness is waning.
In any case, lower interest rates cannot solve New Zealand’s fundamental productivity challenge. If anything, very low rates risk keeping zombie firms alive while discouraging efficiency-improving investment.
This leaves policymakers facing tough choices if they want to stimulate economic growth. However, the solution does not lie in government spending. In fact, quite the opposite. The government must tighten its belt to reduce the deficit while pushing through reforms to boost productivity. And indeed, that is just what the government is doing.
Associate Finance Minister David Seymour’s foreign investment reforms mark a significant shift. His changes will speed up approvals and invite foreign capital. For a country ranked last in the OECD for openness to foreign investment, that change is long overdue.
These changes will address real problems. Under current rules, investing in New Zealand is treated as a privilege rather than an opportunity. Processes are slow, complex and off-putting. Seymour’s reforms flip this presumption on its head.
This change of approach has already yielded results. Foreign investment applications have increased in recent months. More importantly, the quality of those investments appears strong.
Labour market reforms are also gathering pace. Workplace Relations Minister Brooke van Velden has just announced she will exempt high-paid jobs – those above $180,000 – from unjustified dismissal claims. While affecting only 3.4 percent of the workforce, these are often the roles that matter most for productivity. Making it easier to get the right people into leadership positions signals a broader shift toward a more flexible, dynamic labour market.
Urban planning reform offers another boost to productivity through faster consents and financial incentives for councils to grow. The focus on council incentives is particularly important: when local authorities directly benefit from economic growth, their infrastructure and planning decisions improve markedly. Housing remains central to New Zealand’s productivity puzzle, with household capital disproportionately tied up in residential property rather than flowing to productive businesses.
Infrastructure presents a particular challenge. New Zealand needs better roads, rail and utilities. But funding them through more government debt would be counterproductive. New funding models combining public and private capital deserve serious consideration.
Education reform could also boost productivity in the longer term. Recent moves toward knowledge-rich curricula and explicit teaching methods show promise.
Fiscal discipline must underpin all these reforms. With both productivity and economic growth historically weak, a return to surplus looks unlikely without spending cuts. And without such cuts, reducing New Zealand’s uncompetitively high corporate tax rate will remain impossible.
The RBNZ’s rate cut might grab the headlines for now. But New Zealand’s economic future depends more on structural reforms.
The good news is that the Luxon government has started many of these reforms.
The more sobering news is that many more such reforms are needed to get New Zealand’s productivity growing sustainably again.
Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.
3 comments:
What we need is a common sense initiative think tank that tackles the productivity problems of NZ before inviting overseas investment from the likes of hedge funds and others who are more interested in control.
To be more productive you have first have to produce something.
NZ manufacturing is going backwards, mills closing, oil and gas closing.
How about we focus on making stuff in NZ
How does the good Dr. reconcile his desire for higher productivity with his desire for high, low skilled immigration? We can have one or the other, but never both.
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