NZ economy shows stamina

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NZ economy shows stamina

Economic growth may be cooling after a strong performance in 2004, but it’s not all doom and gloom, according to Infometrics Managing Director Andrew Gawith. Infometrics’ latest forecasts predict the economy will expand by more than 3%pa over the next five years – a prediction very much in line with the OECD’s thinking on New Zealand’s medium-term economic prospects.

Higher productivity will be the key to sustained economic growth. Investment in plant and equipment has climbed by 36% over the last two years, indicating that firms are looking for ways to increase their capacity other than simply hiring more staff. Moreover, the tight labour market will push businesses to reduce their dependence on labour to achieve higher output.

“The 10% rise in New Zealand’s terms of trade since 2003 hints at smarter production decisions behind the scenes,” says Mr Gawith. “Farmers have been changing how they use their land and their expertise to produce higher-value products. These changes, plus high world prices for many products, have helped keep primary producers profitable despite the surging currency.”

Higher quality government spending is potentially an important source of increased productivity. Given the government’s interest in lifting productivity, and opposition parties’ concerns about sloppy spending and their keenness to cut taxes, there is a good chance of realising some of the potential productivity gains from the government sector.

Mr Gawith says that a key concern over the next couple of years is a possible slump in real estate values that would dent household confidence and spending. “But the rapid decline in new house building will limit the extent to which the market becomes oversupplied, and therefore house prices in most areas are likely to stagnate, rather than fall. Households, in other words, will get to keep most of the wealth gains they’ve accumulated since 2001/02.”

ENDS

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