Newsroom Pro's 8 things at 8 am: A recipe to fix a productivity recession

In today's email we look at the latest GDP figures, and the latest recommendations from the OECD on how to tackle the productivity issues they reveal.

1. A productivity recession

Yesterday's GDP figures were surprisingly weak and again showed population growth was responsible for all of the growth in output.

New Zealand is growing by adding more people and working more hours, rather than by retooling its economy to produce more output per hour worked. New Zealand's productivity story is continuing to worsen, relative to our previous history and relative to Australia and our major trading partners.

New Zealand's real wages and prosperity can only grow in the long run with improved output per hour worked -- productivity. That measure of economic performance has been falling for the last year and a half and is now at record lows. (See chart below)

Total GDP grew 0.5 percent in the March quarter, which was less than the 0.7 percent consensus forecast from economists. It was also less than the 0.9 percent forecast by the Reserve Bank and the 1.1 percent forecast by Treasury. The fall was driven largely by a surprise fall in construction activity and a negative contribution from net exports.

GDP per capita fell 0.1 percent in the March quarter and had fallen 0.2 percent in the December quarter. It was up 0.9 percent in the year to March, while overall GDP grew 3.0 percent in the year to March. The key difference was the 2.1 percent rise in the population for the year.

GDP per hour worked fell 1.3 percent for the year. The difference was the increased number of workers in a larger population, many of whom worked longer hours.

Essentially, New Zealand's economy is growing solidly because it is adding more people who are working longer hours, rather than being more efficient and productive.

The Treasury chart above shows the extent of the productivity recession in the last two years, and how weak it has been for much of the last five years.

2. A productivity cure?

The other big set piece yesterday was the release of the OECD's bi-annual survey on the New Zealand economy, which is essentially a report card on how the economy is travelling with recommendations on how to improve in the long run.

It had an unusually high profile this time because OECD Chief Economist Catherine Mann came out to New Zealand to release the survey and had a full news conference with Finance Minister Steven Joyce.

The OECD was largely positive about the short term out-performance of the New Zealand economy relative to others, but it warned that households were vulnerable to a housing correction and that New Zealand's productivity was poor.

The report's focus on productivity proved topical, given GDP figures for the March quarter showed a second consecutive quarterly fall in GDP per capita and a fall of 1.3 percent in GDP per hour worked in the last year.

The key factor in the fall in GDP per capita at the same time as a 0.5 percent rise in overall GDP for the quarter was a 0.6 percent rise in the population.

Mann said New Zealand's economic growth of three percent per year for the last three years was enviable.

“The challenge going forward is to enact reforms that will boost productivity, to improve on today’s strong performance and ensure that future generations also share in the prosperity," Mann said.

The OECD set out a range of ways New Zealand could improve its productivity, specifically by improving business investment, creating better connections with the rest of the world and generating more competition.

Those recommendations included:
- Narrowing screening of foreign investment to reduce compliance costs and predictability for foreign direct investment
- Considering reviewing income and corporate taxes, and looking at new tax bases
- Enhancing councils incentives to generate growth by sharing the tax base linked to economic activity and by applying user charging more broadly for infrastructure, including congestion charging
- Toughening competition law to focus on the effects of anti-competitive conduct, rather than the intent, and giving the Commerce Commission the power and resources to conduct market studies
- Increase government spending and tax breaks for research and development.

Mann highlighted New Zealand's poor productivity performance relative to the United States and Australia in a news conference with Joyce.

"There is also a bit of concern here when we see the trend," Mann said, pointing to a chart (below) showing New Zealand well below Australia and America.

"It’s lower and the trend is a downward trend, and that is opposite to the direction we would want to go when thinking about longer term potential output and the capacity of the NZ economy to make good on its expectations," she said.

The OECD chart was telling, illustrating how over the last four years Australia has continued to pull away from New Zealand and how we've been drifting lower since the early 1990s.

3. 'There's a lag'

A key focus of the discussion was around whether the immigration surge of the last three years was responsible for the productivity slump, or was about to generate a lagged surge in productivity.

Mann argued the high immigration of recent years was part of the reason for the low per capita output, but that higher productivity from migrants as they aged and settled in was likely to help in the longer run.

"The source of growth coming from immigration – educated workers supporting the economy to grow in the longer term – this is clearly an asset for New Zealand going forward," Mann told the news conference.

"The fruits of all those people coming in are only going to gain over time, as people enter their middle-aged earning years," she said.

"You see the benefits already from the standpoint that those people are skilled, they are high earning, they are working, they are part of the lower unemployment rate and the high participation rate. So you are already seeing benefits follow through to GDP, it’s only when we look at GDP per capita that the denominator (population) stands out."

That view was challenged overnight in a long blog post by former Reserve Bank economist Michael Reddell, who attended a subsequent presentation yesterday by Mann to Treasury and other officials. He argued New Zealand's migrants were less skilled than locals and that decades of relatively high net migration had not led to a step change up in productivity. The record proves the exact opposite, he wrote.

Michael's blog post is well worth a read for an alternative view.

4. Pensions advice

The other headline recommendations from the OECD were around pensions and water.

The OECD said New Zealand should bring forward its plans to raise the age of eligibility for New Zealand Superannuation and then index that age to life expectancy. The Government plans to raise the age by six months each year from 2037, reaching 67 by 2040.

Joyce was quick to kick that one into touch.

"The Government is confident that its existing plans for adjusting superannuation policy strike the right balance between ensuring sustainability of the scheme and providing time for current generations of working New Zealanders to be able to respond to any change," he said.

5. Water advice

Elsewhere, the OECD said New Zealand should expand water trading and pricing to ensure scarce water goes to the best use.

Joyce was more open to this one, but warned of the effects on the current owners of water rights.

"I think the challenge is always getting from where you are to where you want to go, and we’ve got a whole lot of investment made in productive industries in this country based on the current methods of water allocation so, like everything, there is no free lunch," he said.

"One you start changing that, and I think over time we will, you have to be cogniscent of the impact it has on existing investment in industries that involve significant water."

The Government has a technical group due to report back to it on water pricing in November - well after the election.

6. Support for councils

Another notable element of the OECD report was its support for councils who want to find other revenue sources to enable and encourage infrastructure investment.

It recommended councils be able to share in the tax base linked to local economic activity, and it also encouraged the use of user charging for infrastructure, including congestion charging.

The OECD was particularly keen to allow councils more revenue to increase their debt-servicing capacity.

"Options for increasing this capacity include sharing in a revenue base linked to local economic activity, such as GST, and using targeted rates to tax the windfall gains that accrue to local landowners from the provision of new amenities," it wrote on page 38 of the report.

"Property owners should lose underground property rights that unnecessarily add to the costs of infrastructure provision, as with Auckland’s underground rail line," it added.

Joyce has repeatedly ruled out sharing GST with councils. The Auckland Mayoral Taskforce on housing has recommended heavier use of targeted rates to pay for new infrastructure.

7. The other side of the economy

The other big news yesterday on the social side of politics (and the other side of the economy) was a very critical UNICEF report on New Zealand's treatment of children.

Newsroom's National Affairs Editor Shane Cowlishaw has taken a deep look at the report, which makes for sobering reading for those comfortable that strong economic growth is turning into better social outcomes. They are not.

Shane reported on Newsroom Pro yesterday that the global report card from UNICEF has ranked New Zealand near the bottom of its peers, describing the country’s performance as poor.

Building the Future: Children and the Sustainable Development Goals in Rich Countries was prepared by Innocenti, UNICEF’s research office.

It placed New Zealand 34th out of 41 EU/OECD countries, assessing data about how countries perform in relation to the 10 UN sustainable development goals (SDGs) agreed on by the international community in 2015 as most important for child wellbeing.

Dr Prudence Stone, UNICEF NZ’s national advocacy manager, said the report was a wake-up call for the country.

“The more we’ve focused on New Zealand’s economic wellbeing, the more we’ve lost sight of our children’s.”

8. Weekend Reads

It's that time of the week again where I highlight a few useful longer reads on economic, political and social issues from around the world.

I lived in Singapore for over a year in the early 2000s and got to understand a bit about how it operated. The influence of the late Lee Kuan Yew and his family was all pervasive, and largely benign.

But this week there has been a major break between Lee's son and current Prime Minister, Lee Hsien Long, and is brother and sister. This statement from the brother and sister accusing the Prime Minister of becoming a 'big brother' is extraordinary in the usually very locked-down and controlled Singaporean context.

Bloomberg has an interesting look at a big problem in the current global recovery: a lack of safe haven assets for risk-averse investors to put their money into. That means Government and council bonds. The frustration for the likes of Auckland Council must be palpable, given the huge demand for such bonds.

Buzzfeed has taken a longer look at the digital svengali behind Donald Trump's shockingly successful electoral campaign. Brad Parscale is a fascinating character and worth understanding if you want to know the direction of politics and campaigning in an age dominated by Facebook.