By Alex Tarrant
After a year of her lot researching the New Zealand economy, the Chief Economist of the Organisation for Economic Development came to town with some good news and some bad news.
Immigration has caused GDP per capita to stay weak, which has affected our spending power today. But that same immigration will become an asset and help drive future growth – you’ve just got to harness it right.
Catherine L. Mann’s appearance was timely. Stats NZ had just released figures showing annual real GDP growth of 3%. That was good news. But real GDP per head of population was not so hot at 0.9%. Worse news was that quarterly GDP per capita fell in the March quarter after a fall in December.
So how concerned should we be about it? Mann’s presentation to media in Wellington had just contained a load of warnings on why having a downward trend in GDP per capita was cause for concern.
Some context; we’re not alone. “For many parts of the world, those measures of current growth rates of GDP per capita are well below long-term historical averages.”
There are differences though. The reason GDP per capita is low in New Zealand is down to the denominator. “Because of the immigration; the per-capita part.”
For other parts of the OECD, it’s growing slowly relative to historical averages more due to the numerator – the GDP part. At least we’re not part of that club.
But again, should we be concerned a little even? We’re told immigrants are overrunning our housing market, healthcare system, schools, transport and anything else we want to complain about.
“It makes a difference today in terms of spending power, but if we think about the source of economic growth in a longer-term perspective, then the source of growth coming from immigration – educated workers supporting the capacity of the economy to grow in the longer term – this is clearly an asset for New Zealand going forward.”
We should be encouraged about the longer term by recent immigration rates, then?
Immigration has been particularly robust over only a short period of time, Mann said. “The fruits of all those people coming in are only going to gain over time as people enter their middle age earning years.”
In fact, New Zealand is experiencing benefits already. These people are generally skilled, higher-earning and working. They’re a factor in our lower unemployment rate, high participation rate and high employment rate.
We’re already seeing the benefits flow through to GDP. “It’s only when we look at GDP per capita that the denominator stands out.”
There’s always a ‘but’
Mann’s earlier presentation kicked off with her saying New Zealand’s real GDP growth was “a good sign.”
“It’s a really good picture in terms of a trend upward.”
There’s always a ‘but’ though.
“On the other hand, there’s some other indicators we can look at..and that is GDP per capita.”
Some good news globally: For most economies around the world, GDP per capita is projected to be rising over the next few years compared to the previous few.
However, this will still be below the average between 1987 and 2007. And that creates a bit of a problem.
“Why that matters is, peoples’ expectations are based on a longer-term time horizon associated with that [historical GDP per capita growth average],” Mann said.
“What they would have expected for the increase in their own wages for example, are related to GDP per capita. Their expectations for what the probability that their children will be able to do well is based on this historical average.
“And also the expectations that a national healthcare system and medical system, and pension system can be financed, is based on this historical norm.
People concern themselves with “whether or not we’re going to be able to make good on those expectations that were formed over a longer time horizon.”
Remember, that comment about GDP per capita growth set to rise over the next few years regarded ‘most economies around the world.’
Unfortunately, New Zealand isn’t part of that.
“For New Zealand, there’s an additional question mark over the projection period [2017-18] because…GDP per capita in the projection is actually lower than previous periods. Why is that? It’s because of immigration,” Mann said.
“Very large immigration is the denominator of GDP per capita.”
It might sound concerning, but there could be a happy ending.
Immigration means “great potential.” Potential going forward to increase the capacity of the economy to deliver on promises. That’s the good part.
“But it might take some time.”
During that transition, we need to think about how to position the New Zealand economy to take advantage of all that recent immigration.
“There’s some bumps along the road perhaps.”
And if we ride out those bumps?
We might find we get higher real wages, Mann said. New Zealand real wages are even expected to rise at rates above the historical norm from 2018 – better than in the US and Euro area.
“That’s important when we’re thinking about expectations, confidence, for the kinds of growth going forward.”
“It has the foundation of both improved employment prospects as well as improved real wage prospects. Both of those are key underpinnings of more broad-based growth for New Zealand.”
Another ‘but’ (Auckland house prices are involved)
There’s always a ‘but’ though. (I know I’ve used that already, but there were a few buts).
“The concerns that we have [are] when we look below the averages.”
Unemployment rates are quite distinct in different regions. Below 3% in the most robust regions but above 8% in others.
“That disparity is something that we do see as a concern. It intersects with the housing market, because with such high house prices in the most vibrant regions, it makes it very difficult to move to that region in order to take advantage of the opportunities there – the higher wages there, jobs.”
So that’s a problem. High house prices make it hard to keep up a city’s growth rates because it becomes harder for the required workforce to move there.
We’re finding it difficult to match peoples’ skillsets to the jobs that require them, partly due to high Auckland house prices.
“If we could get a better match for jobs and skills, the productivity growth for New Zealand could be about two-and-a-quarter percentage points higher.”
And that means a higher per-capita growth rate.