Employers used immigration of cheap workers to keep growing at the end of 2017, putting off the tough decisions and investment needed to boost productivity and real wages. Thomas Coughlan reports.
GDP grew a slightly lower than expected at 0.6 percent for the December quarter, Statistics New Zealand reported on Thursday. That took annual economic growth to 2.9 percent, GDP growth only tells half the story. The numbers show the continuation of a disturbing trend of GDP growth not translating into growth in GDP per capita. That means the economy is getting bigger because extra people are being added, not because people are being more efficient and becoming richer from their work.
The 0.6 percent number was only slightly below the market median forecast of 0.8 percent and the Reserve Bank’s forecast of 0.7 percent. Economists said it was good enough to show that the fall in business confidence reported after Labour took office had not fed through to the real economy.
But that's where the good news ends. GDP per capita, a measure of the economic gains booked per person, lagged far behind at 0.1 percent, down from an equally dismal 0.2 percent in the quarter before.
The growth in GDP per capita has in recent years failed to keep pace with GDP growth, but Thursday’s numbers showed the lowest rate of annual GDP per capita growth since 2011 at 0.7 percent.
CTU President Richard Wagstaff said GDP per capita growth rate was just a third of what it was in the 2000s, when it kept pace with overall growth. CTU Chief Economist Bill Rosenberg said his figures showed GDP growth per hour worked was 2.5 percent in calendar 2007 and barely below total GDP growth of 3.1 percent.
Rosenberg said GDP per hour worked in 2017 was 0.2 percent.
“So that 2.9 percent GDP figure is quite misleading,” he told Newsroom.
“The fact that we have record migration, particularly in low-skilled areas, is a contributor to that low per capita growth, given that it is not accompanied by more significant investment in businesses,” Rosenberg said.
Poor GDP per capita growth can be an indicator of poor wage growth as employers take on more staff rather than make increases in the productivity and wages of existing employees. The question came up in February as the Reserve Bank came under pressure to cut interest rates to further stimulate the economy and increase employment.
Wage hikes trigger inflation when the economy is overheated, which forces the Reserve Bank to raise interest rates to cool the economy. The bank faces criticism for not cutting rates further as its current low rate has not triggered inflation, suggesting there is still some slack in the job market. There were 122,000 people unemployed in the December quarter or 4.5 percent of the workforce, while there were 340,000 people or 12.1 percent of the workforce who said they were unemployed or would work longer hours if offered the chance.
Today’s numbers should add further impetus to calls for the bank to cut rates in the hope it might stimulate sufficient growth to lift wages and absorb spare capacity in the workforce.
“There’s a story about poor productivity but even poorer wage growth,” said Rosenberg.
But he said he would look for the effects of the minimum wage increase in April and hoped the increase would encourage employees invest in their workers’ productivity.
“If they respond positively, everyone could be a winner in terms of that higher productivity growth,” he said.
'RBNZ should cut, but is unlikely to'
There was probably some room for a rate cut, but that was unlikely given the bank’s cautiousness, economists said.
Kiwibank senior economist Jeremy Couchman said Thursday’s numbers were the continuation of a slowing growth trend over the last year, but he expected the economy to pick up in the second half of this year.
“Things like the families package will trickle through,” he said, “and we should also see the Kiwibuild programme kick in”.
He said that the Reserve Bank would be cautious before making any moves on the OCR.
“It wants to make sure that it sees sustained increase in inflation pressures and be confident that that is the case before it starts hiking,” he said
“Back in 2014-15 it got caught out when it last started to hike because no other central bank was doing it,” he said.
The contrast between today's positive GDP growth and the dismal GDP growth per capita could also add fuel to calls for GDP to play less of a role in the way economic decisions are made.
There have been growing calls for other economic measures like wellbeing to be used alongside GDP. Grant Robertson will deliver the first "Wellbeing Budget" 2019, which will use some of these measures.