Listener 12 March, 1994.
Keywords: Growth & Innovation;
The available indicators suggest that the New Zealand economy was growing quickly at the end of 1993, at around four percent a year. For some this is the triumphant proof of the long promised benefits of the Rogernomic economic strategy. For others the indicators are misleading (certainly, not everyone or all parts of the economy are benefiting from the growth). For myself, the new data provide a chance to re-examine the underlying state of the economy.
The upswing, which began in late 1991, has been unusually long. That is good news, because it implies that there is underlying economic growth. However, much of the 1992 growth was a rebound from the economic collapse in early 1991 that followed the inept measures introduced after the 1990 election, and was fuelled by an excessive government deficit. So, perhaps the true upswing has lasted only four or five quarters. Moreover, although unemployment was below eight percent of the labour force before the 1990 election, today it is above nine percent, despite recent falls.
To what extent is this rapid expansion sustainable, and to what extent is it temporary? Probably the best way to think about the long term is to look at export growth. The official and unofficial forecasts I have looked at suggest that the trend rate of export volume growth is about three percent a year. Also, the share of imports in expenditure is tending to rise. A long-term export growth rate of three percent a year translates into an underlying annual GDP growth rate of somewhere between one and two percent. That suggests that the current economic expansion is unsustainable.
In the past an unsustainable expansion has come to an end when imports flooded into the economy, and the balance of payments turned sour. The indications are that imports are rising rapidly, although we must wait some months to learn what the current account deficit for the March 1994 year will be. (It was around $1500 million, or two percent of GDP, for the March 1993 year.)
The forecasters recognise this threat, but some argue that, since a major source of the additional imports is investment goods overseas, investors will treat the deterioration as benign. Moreover, some see the balance of payments improving, despite the high economic growth. One optimistic way of forecasting this is to assume that export prices will improve markedly. We have been assuming this for 20 years.
Another threat to growth is labour shortages leading to inflationary pressures. Although unemployment is high, there are growing shortages of skilled labour -stemming from the collapse of the upskilling programmes over the past decade. The Employment Contracts Act depresses wages when there is a labour surplus, but boosts them when there is a shortage. So, we cannot rule out an inflationary burst, should demand for labour increase, checked by the Reserve Bank hiking interest rates and the exchange rate (which would compound any balance of payments difficulty).
So we might expect to see some reduction in the recent rapid economic growth over the next year. Which leaves the government with an interesting political problem. The expansion at about the time of the election probably enhanced its vote. But the economy could look quite stagnant by the end of 1995. This could be another pressure for a mid-1995 snap election, as soon as the MMP rolls allow.
In suggesting that growth will slow down, I recognise that there are many other events which will also be influential. (Perhaps the terms of trade will boom.) My point is that it would be foolish to assume that the current expansion will continue indefinitely. There could even be a return to stagnation or contraction if the balance of payments deteriorates.
But, suppose the economy expands at an underlying rate of, say, three percent a year. Would that justify the Rogernomic policies? I think not. First, in the period from 1950 to 1966, when the terms of trade were flat to slightly falling, the average annual volume (ie, real) GDP growth rate was 4.3 percent. That is the sort of sustained growth rate we need in the future, especially if we want to reduce unemployment to tractable levels by the end of the decade.
A second doubt is that the first seven years of the Rogernomics regime were disastrous, as the accompanying table shows. Economic and productivity growth was poor, unemployment rose. Only the inflation figure is creditable, and that was after high rates through most of the period. When the policies were commenced New Zealand per capita output was 90 percent of the OECD average, by 1992 we were 76 percent. So poorly did we perform. that. if in the future New Zealand grew one percent a year faster than the OECD, we would not be back to the 1985 relativity until the year 2010. We have a lot of catching up to do.
Economic Performance: 1985-1992
Inflation (private consumption deflator) % p.a.
Unemployment (% of Labour Force)
Current account deficit (% GDP)
GDP per head (OECD = 100)
GDP growth (%)
Labour productivity growth (% p.a.)
Data sourced from OECD Economic Outlook, June 1993.