NZ doesn’t have to just ‘muddle along’ says Reserve Bank chief economist

Sunday, 8 December 2024

Reserve Bank chief economist Paul Conway has been banging the drum with increasing vigour on New Zealand’s low rate of productivity growth, but he does believe there is a solution.

Conway threw a wet blanket over hopes for a strong economic recovery when he appeared in front of a select committee after the bank’s latest rate cut.

The Treasury had already pushed back its expected start date for a recovery until next year.

But Conway told MPs that, even then, the Reserve Bank was only projecting a return to “pedestrian, New Zealand level” annual growth of between 2% to 2.5%.

The Treasury itself has been making similar noises and has signalled it will downgrade growth forecasts when it releases its next forecasts in the run-up to Christmas.

If the effect has been to signal something underwhelming – the dim light dusk rather than blazing sunshine at the end of the tunnel – then it seems that was entirely as Conway intended.

“We muddle along. Of course, I'm thinking of ‘productivity’; the Achilles’ heel of this economy,” he tells The Post.

“The clear stand-out area of relative under-performance in New Zealand is around our productivity.”

That’s relevant for monetary policy, he notes, because productivity sets the maximum potential growth rate of the economy – which determines how much inflation the bank will cause when it stimulates the economy.

“All problems don’t quite dissolve away, but become far more manageable when we are producing more for less.”

A recent assessment by Stats NZ that it has underestimated the size of the economy by about 2% will have masked some recent productivity gains, making productivity growth “less terrible”, he says.

“It's still going to be pretty bad. It's been particularly bad over the Covid period, and it's been very sub-mediocre prior to that. And we're just extending that trend out into the future, really.”

It’s easy enough to cast around for possible villains.

Productivity growth has been falling in most of the developed world.

The information technology industry now appears to have joined the hard sciences in delivering only incremental rather than revolutionary gains.

There’s a labour force increasingly saturated by tertiary education opportunities but burnt out by Covid and demotivated by pessimism over global warming and deteriorating geo-politics.

And there’s the argument New Zealand is hampered by having a competitive advantage in industries with less capacity for productivity growth than most, such as farming and tourism.

But Conway’s diagnosis is more text-book and hence potentially treatable.

There's great potential for New Zealand to lift productivity, but the problem is a lack of capital, he says.

“We grow the economy by throwing labour at it rather than investing in technology. Also, our firms are very small on average and our markets are very small and they tend to be insular.

“Despite what we tell ourselves, creative destruction doesn't work very well here, so we have a lot of ‘zombie firms’ that don't do much more than provide a sort of a lowish income to a couple or three people.”

New Zealand also doesn't invest much in knowledge-based capital, data and technology, he argues.

“Technology is moving in a way which mitigates the effects of economic geography on the New Zealand economy and takes the handbrake off – if we seize the opportunity.”

But specifying exactly what capital businesses should be investing in, but aren’t, is a good question, he acknowledges.

Speaking on the day the Reserve Bank lowered the official cash rate to 4.25%, Conway hinted he, like the Treasury, isn’t expecting any quick fix.

“We would love to be surprised on the upside around our productivity-growth projections.”

But he does take heart that it has now become a topic of more mainstream debate.

“I do like the way people are talking about productivity — it's a really good thing.

“Going back to a typically pedestrian ‘muddling along’ growth rate in the New Zealand economy is pretty unexciting and it doesn't have to be that way.”