The Treasury has published a paper today on the global productivity slowdown and how it is playing out in New Zealand: The productivity slowdown: implications for the Treasury’s forecasts and projections.
The Treasury Paper examines recent trends in productivity and the potential drivers of the slowdown.
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’ income
The report notes that productivity is 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.
It is no secret that New Zealand’s productivity growth is one of the worst among developed economies.
A report from the recently terminated Productivity Commission in July last year said serious long-term commitment and investment are needed to turn it around.
The study showed growth in productivity in recent decades had been achieved by more New Zealanders working longer hours.
Commission chair Ganesh Nana said New Zealand was “capital shallow” and ranked 26th out of 37 OECD countries in its spending on research and development.
A report from the NZ Institute of Economic Research (NZIER) in February this year similarly said NZ productivity continues to lag behind international peers, requiring New Zealanders to work harder but produce less.
The report – prepared for the ASB — looked at growth opportunities and what business, the government and banks can do to grow productivity and found lifting productivity growth from 1.5% to 2.5% would see real GDP hit $500 billion by 2045, an increase of about 5% on current projections.
“When we look at other more productive small, advanced economies, business is leading the way with support from government and the finance sector,” she said.
“NZ business needs to be more ambitious, embrace innovation and invest in capital, knowledge and research and development as an engine for growth and sustainability.”
The Treasury report released today says the world has been experiencing a productivity slowdown, from which New Zealand has not been exempt.
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.
The paper finds that a range of factors are likely to play a role in the productivity slowdown in New Zealand and across the world. These include lower productivity benefits from innovation, weak investment relative to employment growth, and a slowdown in international trade and connections.
The Treasury’s Chief Economic Advisor Dominick Stephens commented:
“The productivity slowdown was a key factor behind the downward economic revisions that the Treasury provided with the 27 March Budget Policy Statement. This matters because sustainable improvements in our living standards depend upon productivity. While not the topic of today’s paper, the Treasury continues to look for opportunities to boost productivity growth in its advice to Government.”
The paper provides a brief analysis of potential causes of the productivity slowdown to inform judgements about whether recent trends are likely to continue. It says:
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
Policy options for lifting New Zealand’s productivity performance were outside the scope of the paper.
Point of Order 