A New Zealand's Recent Economic Performance

New Zealand's economic performance has been weak for some time ...

So far, New Zealand has managed to avoid the financial market instability and deep falls in economic activity that some other countries have experienced in recent years. However, the recovery from recession has been gradual and slower than experienced historically. Per capita real GDP is still below its pre-recession level, despite the economy growing for over two years (figure 2). New Zealand’s overall growth performance has been weak for some time, pre-dating the onset of financial turmoil. The average income of New Zealanders, as measured by real GDP per capita, is currently similar to its level in 2004.

Figure 2: Cross-country real GDP per capita income; 2001-2011

Source: IMF World Economic Outlook September 2011

At the household level, the impact of weak economic conditions has been most visible in the incomes of the top 20 per cent of households. Average income for this group declined between 2006/07 and 2009/10, due to falls in earnings from self-employment. For other households, gross income from wages and salaries, investment, and self-employment was broadly static on average over the same period, but their average disposable incomes increased as a result of higher government transfers and tax reductions (figure 3).

Figure 3: Household disposable income; 1987/88, 1997/98, 2006/07, and 2009/10

Source: The Treasury

Erratum: Figure 3 was mistakenly labelled household disposable income. Disposable income is defined as market income earned adjusted for direct taxes paid and income support received. The actual data shown is household gross income, defined as market income earned plus income support.  Trends in household gross income and household disposable income are similar over the period shown.

... reflecting poor productivity growth, and a deterioration in competitiveness

Following an increase in trend growth over the 1990s, the deterioration in New Zealand's economic performance over the past decade reflects a stalling in productivity growth and a pattern of growth biased towards consumption. Domestic demand, fuelled by rapid increases in private sector debt and government spending, has increasingly dominated overall activity. The more-productive tradable sector declined, as ongoing growth in the non-tradable sector drew in resources (figure 4) and resulting capacity constraints put additional upward pressure on costs and on interest and exchange rates. Although average real interest rates were lower during the 2000s than in the previous decade, they have remained high relative to other developed countries', and have contributed to the persistently high level of the real exchange rate. At the same time, growth in New Zealand's labour costs exceeded productivity gains (ie, unit labour costs have increased) by more than for many of our major trading partners since 2000. This has exacerbated the negative impact on our international competitiveness of the high nominal exchange rate (figure 5).

Figure 4: Real GDP: tradable, non-tradable & central government administration & defence; 1990Q1-2011Q2

Source: The Treasury, Statistics New Zealand

Figure 5: New Zealand real and nominal exchange rate (trade-weighted index); 1990Q1-2011Q1

Source: IMF

Weak growth has been associated with increasing vulnerabilities ...

This pattern of growth has also been associated with a build-up in macroeconomic imbalances. In the years leading up to 2008, household debt levels rose sharply and the current account deficit widened. More recently, the fiscal position has moved from surplus to large deficit. New Zealand's long-standing large net external liability position (as reflected by our international investment position) was at a level in 2008 that was comparable with many of the countries that have since suffered severe economic crises, as markets came to doubt their ongoing solvency (figure 6).

Figure 6: Net international investment positions - selected countries; 2008 & 2010

Source: Statistics New Zealand, IMF

... but robust institutional settings have helped to smooth the necessary adjustment to shocks

New Zealand's strong institutional settings, particularly overall policy credibility, our relatively low starting level of government debt, credible monetary policy arrangements, healthy banking sector, floating exchange rate, and generally flexible microeconomic policy settings have been important differentiating factors that have protected New Zealand from a more serious economic downturn. Furthermore, in contrast with developments in many of the troubled European economies, there has been some reduction in imbalances. Reflecting an increase in private sector saving relative to investment, New Zealand's current account deficit has narrowed. This, together with reinsurance inflows, has seen a decline in our net external liability position (figure 6). However, partly because of the extra investment needed for the Canterbury rebuild, much of the reduction in the current account deficit is likely to be temporary. The PREFU forecasts an increase in net international liabilities equivalent to nearly 10 per cent of GDP over the next five years.

More adjustment is needed and risks will remain elevated

The risks associated with New Zealand's net external liability position were highlighted by rating agencies Fitch Ratings and Standard & Poor's in their recent downgrades of New Zealand's sovereign creditworthiness. If market perceptions of the risks associated with New Zealand were to deteriorate significantly, the consequences could be severe, as currently evidenced by developments in some European countries.