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Productivity Reset Needed To Help Push Inflation Down, Says ASB

New Zealand’s low productivity performance is likely to be a factor behind New Zealand’s sustained high inflation according to ASB. Low productivity is a key reason we are less well off than many OECD peers, with New Zealanders having lower incomes, working harder and retiring later.

Research released today by ASB shows New Zealand’s long-term productivity decline has compounded since the start of the pandemic and this lacklustre performance has likely persisted.

“New Zealand’s continuing downward productivity trend should be a warning sign to us all. If this decline becomes embedded, it will have far-reaching economic, social and political implications,” says ASB Senior Economist Mark Smith.

“Low productivity growth may well be a factor in why inflation in New Zealand has been slow to cool. Our research suggests that industries that have experienced lower productivity growth have tended to be those that have seen higher increases in output prices. This in turn has likely pushed up the cost of doing business and kept inflation high.”

The report notes inflation rates in New Zealand have been slower to fall than for most OECD counterparts, despite having higher interest rates than in other OECD countries and with the New Zealand economy currently in a protracted downturn. It also points to low capital intensity as one of the main reasons for the country’s poor productivity performance.

What can we do about it?

Smith says New Zealand needs more productive investment and needs to boost economic efficiency by focussing on the four key pillars of productivity: education/skills, innovation, the adoption and diffusion of best practice methods and technologies and increasing exposure to competition. A population policy could be developed to provide more clarity for investment and broader planning decisions.

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“We need to get productivity up if we are to bring inflation sustainably down without crunching the economy. We all stand to benefit from being more productive and this should be a key priority for the government, households and firms alike, everyone should have skin in the game.

“Improving productivity could also make the RBNZ’s job easier by helping to tackle inflation. This could build a virtuous cycle, with a sustained period of lower interest rates and better investment opportunities that could be used to fund productive investment, growing the economy and improving living standards.”

Smith says he remains hopeful of New Zealand’s future economic performance, despite the headwinds posed by climate change, the ageing population and post-COVID challenges.

ASB’s longer-term estimates of annual trend growth for the economy is around two per cent. This is slightly lower than pre-COVID norms, but considerably above where the economy is at now.

The full ASB report can be read here: https://www.asb.co.nz/documents/economic-research/economic-note.html

This report follows a Business Productivity in New Zealand report by the NZIER, released by ASB in February.

About Mark Smith

Mark is a senior economist at ASB with over 30 years of experience in policymaking and market institutions in both the United Kingdom and New Zealand. He has a strong research interest in issues that matters for New Zealanders, with his current focus on seeing how the country’s growth performance and living standards can be enhanced.

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