New Zealand’s long-run economic growth has been about expanding the population, mainly through migration, and rising house prices, Reserve Bank chief economist Paul Conway says.
In response to questions after giving an online speech titled Beyond the cycle: Growth and interest rates in the long run, Conway said those ‘traditional drivers’ are ‘not optimal’ from a per capita perspective.
“You know, we are very good at thinking from a per capita perspective when it comes to medals in the Olympics. We are less good at thinking in per capita terms when it comes to our economy.
“But I would say those traditional drivers of growth in the New Zealand economy from a per capita perspective haven’t delivered as well as ideally they would and I do think the period when they have been dominant is coming to an end.”
“And I do think that has come to pass. Capital gains in the housing market have become a bit harder to find, which from my perspective, I think this idea of trading houses among ourselves at ever increasing prices, pretending that we are creating prosperity, like, I don’t think that is a pathway to long run prosperity and well being.
“Because with younger people – affordability comes into it. Not only is it an asset, but it is where people live and I fully appreciate that for many New Zealanders housing is their main investment. But the point of at least part of the speech is that if housing isn’t going to provide that capital gain going forward because we are getting better at supplying houses for a bunch of reasons, then we need other profitable investments for people to save with.
“We would get that with a more productive New Zealand economy. It would become more about equity and become more about businesses doing interesting things internationally and generating a strong return for New Zealanders.”
Conway was also asked about what happened to New Zealand’s ‘rockstar economy’ – a reference to a term coined by HSBC chief economist for Australia and New Zealand Paul Bloxham some years ago.
“I don’t think we’ve ever been a rockstar economy since the ‘50s. It was relevant to a cyclical period in New Zealand’s economic history where we were performing well. And it is great from a cyclical perspective for the economy to be going well. From a central bank perspective you want the economy at potential output with inflation at target.
“In terms of New Zealand’s long run performance we haven’t been a rockstar economy for decades.
“We did get a sort of productivity surge in the mid to late ‘90s when the effects of reform in New Zealand in the ‘80s and the early ‘90s kicked in and we were coming out of a huge recession in the early ‘90s, but it kind of faded away.
“Our economic performance to my mind at least has been – and you see it in the data – you know, we have been declining in all sorts of metrics relative to the rest of the OECD. And I think it is really important that we do look around internationally to gauge our performance and what’s possible. So, I think in terms of New Zealand being a rockstar economy – there’s been glimpses in the past – but I think if we play our cards right the best is yet to come.”
Conway also discuss the “very large revisions” made to GDP figures and released before Christmas.
“We are not going to talk about the Monetary Policy implications of those [revisions] because we will get to that in a few weeks” at the RBNZ’s next Official Cash Rate review on February 19, Conway said.
But he noted the revisions showed much stronger GDP growth than was previously measured over 2022 and 2023.
“For me, when I saw that, I thought that’s more consistent with what we were seeing in the bank at the time because at that time we were talking a lot about non-tradeable inflation, domestically driven inflation in the economy and it was a little challenging squaring that with a very flat GDP track.
“It makes more sense.
“For me those big revisions highlighted an issue of poor data in the New Zealand economy,” said Conway.
“Our economy is not particularly well measured. And the point I usually make around that is that investing in our data – which is fundamental to getting policy right – the cost of that is pretty miniscule when you compare it to the cost of us making a policy mistake because of dodgy data.
“We are investing in other data sources here at the bank and we’ve got a lot of high frequency data that we are all across, so, it is not all about GDP. But yeah, important data. It would be better if it was a bit more stable in terms of smaller revisions,” Conway said.
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