A report shows the economy is careening forward ahead of the rest of the world – but New Zealand needs to quickly find a new way to feed the economic beast without the ‘sugar rush’ of population growth.
There are new warnings that New Zealand’s slow vaccine rollout will make it harder for the country to maintain its leading position in the worldwide fight against Covid’s economic impact.
A global report by Ernst & Young says New Zealand can no longer rely on immigration to grow spending in the economy – it must now look for smarter ways to upskill its own population and drive companies’ productivity. That’s echoed by Dr Ganesh Nana, chairman of the Productivity Commission in an interview with Newsroom about its Government-commissioned inquiry into immigration.
The EY report says New Zealand is – for now – in the No 1 position in the global fight against the negative economic and health impacts associated with the ongoing Covid-19 pandemic.
Its new Global Covid-19 Economic Index factors in GDP growth and employment, as well as the strength of balance sheets for households, government, central banks, non-financial corporates and financial institutions – and by all those measures New Zealand was ranked in the top six countries in the world. The international consultancy says these criteria provide a broader assessment of the critical factors driving economic strength and a country’s ability to recover from the pandemic.
Households may feel wealthier when their assets (notably, their houses) appreciate in value, and increase their spending; businesses with strong balance sheets tend to feel more secure in taking risks, increasing debt and investing.
On both the primary health ranking of the numbers of Covid deaths per 100,000 population and on the aggregated economic index, New Zealand comes out at the top of the ranking of 25 developed nation whose data could be reliably compared. Australia is in second place.
“You’re talking about skills and workforce development and infrastructure – that all takes time to put in place. Whereas the spending from population gain gives you a sugar rush quite quickly. And you end up delaying changes on the production side because you get hooked on that sugar rush.”
– Dr Ganesh Nana, Productivity Commission
It comes ahead of this week’s monetary policy statement, in which the Reserve Bank will indicate whether it agrees the economy is at full capacity, the jobs market at ‘maximum sustainable employment’, inflation at risk of climbing above 2 percent and staying there – and whether the Bank must prepare to hike interest rates to rein in the careening beast.
EY Oceania chief economist Jo Masters said New Zealand was well placed to emerge from the Covid-19 pandemic in a strong position, topping the table for employment and coming in third on GDP growth.
But she warned that a “relatively slow vaccine rollout and closed international borders” would make it challenging for New Zealand to maintain its strong economic position.
Using publicly available data, the EY Global Covid-19 Economic Index has captured the current state of five balance sheets for each country, as well as economic activity (using GDP and employment markers) and compared that with Covid-19 mortality rates per capita. A score of 100 indicates a country has had an average economic performance. Above or below 100 indicates outperformance or underperformance relative to the rest of the countries.
In New Zealand, EY partner Chris Money said success was not risk free, and he stressed the importance of economic policies focused on productivity growth.
“By striking the balance between an aggressive and early public health response to Covid, combined with strong and enduring fiscal support across the economy, New Zealand continues to have relatively strong employment and economic growth prospects,” he said.
“However, as global borders begin to reopen, New Zealand may be at risk of losing this privileged position due to a more staggered approach to the vaccine roll out. This is particularly true due to New Zealand’s historical reliance on international labour markets to address short-term skills shortages.”
Money concluded: “New Zealand’s continued success now rests more heavily on the shoulders of productivity-enhancing reform in place of growth that has historically relied on immigration."
The Productivity Commission is looking at the long-term drivers that can help New Zealand businesses increase their hourly output, but it is not writing off a role for immigration in the long-term.
Indeed, Minister of Finance Grant Robertson has asked it to conduct an inquiry into the "working age" immigration system and advise how best to adjust it to promote long-term economic growth and the wellbeing of New Zealanders.
"I think it's clear that we've relied on population growth to drive our economic growth for quite some time, and in the end it doesn't do much for our wellbeing – which is the objective."
– Dr Ganesh Nana
Chair Ganesh Nana said immigration had provided New Zealand with a "sugar rush", but that was not a sustainable way to grow productivity. Increased numbers of new New Zealanders spending their money on New Zealand goods in New Zealand shops wasn't enough; we needed to find ways to produce our goods and services more efficiently, to sell them to the world.
Nana said comparison of the best New Zealand medium-sized businesses – what the commission calls "frontier firms" – with their compatriots in similar, small developed European nations showed the overseas companies were more than twice as productive.
And New Zealanders were desperately playing catch-up, not by working smarter, but by working harder. Every week, Kiwis worked two hours longer, on average, than workers in similar countries.
"I think it's clear that we've relied on population growth to drive our economic growth for quite some time, and in the end it doesn't do much for our wellbeing – which is the objective."
"Prime Minister Julius Vogel led a nation-building phase, and wanted population to go beside that. Then after World War II we wanted to be a good global citizen by resettling the European refugees coming out of the war. So at various times through history there have been different purposes for immigration – and it's only reasonably latterly that the focus has been on using immigration to fill the skills gaps in our workforce."
– Dr Ganesh Nana
The closing of the borders had exacerbated the need to look again at the drivers of economic growth. "Unfortunately that production side of the economy takes a lot longer to crank up," he said.
"You're talking about skills and workforce development and infrastructure – that all takes time to put in place. Whereas the spending from population gain gives you a sugar rush quite quickly. And you end up delaying changes on the production side because you get hooked on that sugar rush."
Nana said the Commission did believe there was a role for immigration – but the question was how much, and why? Their preliminary work had revealed that nowhere had the Government ever spelled out the objectives of its immigration policies.
"What is the underlying purpose of immigration?" he asked. "I go back to the original purpose when the Treaty was signed in 1840. That enabled the first wave of immigrants into New Zealand.
"And then Prime Minister Julius Vogel led a nation-building phase [1873-76], and wanted population to go beside that.
"Then after World War II we wanted to be a good global citizen by resettling the European refugees coming out of the war. So at various times through history there have been different purposes for immigration – and it's only reasonably latterly that the focus has been on using immigration to fill the skills gaps in our workforce.
"Why are we doing it? To me, that's the critical question. What would be the 'why' if we were to seriously address these challenges that we can't avoid. There is certainly some role for immigration into the future, at the very least because we have to replace New Zealanders who have a habit of going abroad. No amount of Covid or anything else is going to stop that flow resuming."
