Treasury paper

The productivity slowdown: implications for the Treasury’s forecasts and projections

Executive Summary#

The world has been experiencing a productivity slowdown, from which New Zealand has not been exempt. This matters because sustainable improvements in our living standards depend upon productivity. Productivity is also a key driver of the Treasury’s economic and fiscal forecasts and long-term fiscal projections, which underpin its advice about fiscal policy and fiscal sustainability. This Treasury Paper is an exploration of recent trends in productivity and the potential drivers of the slowdown.

Both labour and multi-factor productivity (MFP) growth have been slowing since the turn of the century in advanced economies, and since the Global Financial Crisis (GFC) in emerging market and developing economies. For example, average labour productivity growth across the Organisation for Economic Co-operation and Development (OECD) countries was still close to 2% p.a. in the 1990s, before falling sharply to around 0.8% p.a. from the 2000s. Like other countries, New Zealand’s productivity performance has been slowing. Productivity for the whole economy averaged 1.4% p.a. between 1993 and 2013 but averaged only 0.2% p.a. over the last ten years. While New Zealand’s productivity growth has been weaker than expected over a long period of time, other factors contributing to GDP have been stronger than expected, which has broadly offset the impact of lower productivity on New Zealanders’ incomes.

This paper provides a brief analysis of potential causes of the productivity slowdown to inform judgements about whether recent trends are likely to continue. It draws from the evidence that we are aware of, including insights from the Treasury Guest Lecture Series (TGLS) ‘Productivity in a Changing World’ theme, which we have hosted over the past year. It also draws on the New Zealand and global literature, although it isn’t an exhaustive review. It explores both the global and the New Zealand context as, given the global nature of the slowdown, it is likely that common factors are playing out across countries. It looks for evidence of recent trends in productivity drivers, given that a credible suspect of the productivity slowdown must align with the timing of the slowdown.

A range of possible global drivers have been identified, including mismeasurement, weak investment, lower productivity benefits from innovation, the slowdown in trade and slowing dispersion of innovation and new practices across firms. However, there is debate around the drivers of the global productivity slowdown and uncertainty around how these are playing out in the New Zealand context. There appears to be no one factor driving New Zealand’s productivity slowdown, but a range of drivers contributing to the trend. We are likely to have been affected by slowing productivity growth in the frontier economies, particularly in the generation and dispersion of innovation or new technologies. The slowdown in trade is likely to have exacerbated the challenge of generating productivity growth through enhanced international connections. Investment has been growing but not strongly enough for a sustained increase in New Zealand’s capital to labour ratio.

Considering the evidence, the Treasury's view is that productivity growth is most likely to remain slow over the coming years. The potential challenges to productivity growth have also intensified in the global economy. People, business, and governments may feel less resilient in the wake of increasing uncertainty from geopolitical and climate risks, leading to reduced risk-taking and innovation. Declining school achievement trends are concerning for future productivity. There are productivity opportunities from new general-purpose technologies, such as Artificial Intelligence and ‘green’ technologies. However, their productivity potential is contested, and New Zealand may not be well-placed to successfully absorb new productivity-enhancing innovations given falling educational attainment, our relatively low managerial capability and low, albeit growing, levels of research and development (R&D).

The Treasury has been downgrading its productivity forecasts in its published economic forecasts since the middle of 2023. While the productivity outlook is uncertain, on balance, the evidence presented in this paper supports these forecast downgrades. The Treasury is still assuming an improvement in productivity growth over the next few years towards our long-run productivity growth assumption of 1% p.a. However, the recovery in productivity growth is slower, and productivity remains at lower levels, than previously forecast.

The longer-term outlook for productivity is more uncertain. The Treasury’s 1% long-run productivity growth assumption is based on a 30-year moving average of productivity growth. Given recent productivity trends, 30 years may no longer be a reliable predictor of future productivity growth. Other countries have been lowering their long-run productivity growth assumptions to reflect averages over shorter time periods, putting more weight on recent lower productivity growth.  

The Treasury will continue to update its productivity forecasts as new evidence emerges and will consider its long-term productivity growth assumption as part of its work for the next Long-Term Fiscal Statement (LTFS), to be released in late 2025. We welcome feedback on the ideas explored in this paper to help inform our forecasts and long-run projections. While the policy options for lifting New Zealand’s productivity performance are beyond the scope of this paper, we also encourage additional research which would inform our ongoing advice on lifting New Zealand’s productivity performance.

Acknowledgements#

Thanks to Paul Conway, Reserve Bank of New Zealand and Phillip Stevens, Malvern Severn, for their review of the paper.

Thanks also to Matthew Dilly, Wido van Lijf and other colleagues at the Ministry for Primary Industries for constructive feedback and input into the paper.

Thank you to people across the Treasury who provided input into the paper and feedback on drafts, particularly Bettina Schaer, Matthew Galt, Luke Crossen, Nairn MacGibbon, Ashley Lienert, Matthew Bell and Ken Warren.