NZ economy out of balance
This opinion piece was first published on Stuff on 28 June 2023.
Three years after COVID-19 emerged, New Zealand is grappling with economic imbalances that have been amplified by the pandemic, our response, and its aftermath. The gap between our exports and imports has not been worse in almost 50 years, the only way to grow the economy seems to be by opening the migration tap, and housing affordability remains as critical as ever. We must strive for better, more sustainable, ways to increase productivity and grow the economy – and soon.
The old export recipe is failing us
The current account deficit arguably provides the most accurate representation of New Zealand’s imbalances. It’s an indicator that seldom gets attention – even most economists have failed to get excited about the current account throughout the last 15 years. But with the deficit recently blowing out to 9.0% of GDP, its largest in nearly half a century, the alarm bells are ringing loudly. The last time the deficit was bigger was back in 1975, when New Zealand was struggling with the twin shocks of oil prices more than tripling and the UK joining the European Economic Community, slashing its demand for our exports.
This time around, it would be easy to blame the pandemic’s effect on tourism and expect the deficit to shrink as visitor numbers recover. That viewpoint has some validity, given the services balance last year was at its worst since 1983. But how quickly will the continuing recovery in tourism take place? After an initial surge when the borders reopened, visitor arrival numbers have plateaued over the last five months at about two-thirds of pre-COVID levels. Higher airline ticket prices and a weak global economy look set to dampen any further recovery in tourism earnings. There must also be doubts about our ability to revive the Chinese market, which was declining in 2019 already before COVID-19 struck.
Even more concerning is the goods balance, which is at its worst since the mid-1970s. Imports are part of the problem, with their annual value surging 35% since the end of 2019, reflecting strong demand stimulated by government spending and low interest rates. By comparison, the 21% increase in export values over the same period is disappointing.
Goods exports are feeling some of the same pressures as services exports, with the stuttering global economy dampening demand for our agricultural products and weighing on prices. Export volumes have also been constrained by international shipping disruptions during the pandemic. But these temporary factors are distractions from an emerging inability to further grow the value of our primary sector production. Our farming sector is rightfully being compelled to consider its environmental costs more fully, including carbon emissions and the effects on water quality. We cannot continue to grow our export incomes via the method of the last 40 years, so unless we find a way to do things differently, we won’t be able to afford an ever-increasing volume of imports.
Growth through more people is just a mirage
New Zealand is officially in recession, but the numbers would look a lot worse if the economy’s engines weren’t being powered by bringing more people into the country, reprising the immigration-fuelled growth of the second half of last decade. GDP per capita has declined 2.0% over the last six months, and it could shrink by another 2% over the next year. Declining GDP per capita means that, on average, our real incomes are falling.
Once again, distortions caused by the COVID-19 pandemic over the last few years mean some caution is required with the numbers. Business growth during that time was inhibited by the border closures, meaning there is a catch-up underway in sourcing skills from offshore workers. Nevertheless, New Zealand’s longstanding poor productivity performance is exemplified by our need to bring in people from overseas to facilitate economic growth. Education and training outcomes continue to decline against global benchmarks, so we have to resort to bringing more people into the country to grow the economy. So much for working smarter, not harder.
This influx of migrants also looks likely to cause the housing market to bottom out sooner than it would have otherwise. Despite falling 17% since late 2021, house prices are still 21% higher than they were at the end of 2019, and they have been rising considerably faster than incomes for more than two decades. Housing might be cheaper than it was two years ago, but it certainly could not be described as affordable. The breakdown of Labour and National’s bipartisan agreement provides little hope for any improvement in the supply of housing.
An imbalance in and of itself, the sustained unaffordability of housing could exacerbate some of New Zealand’s other economic imbalances. Persistently high housing costs will continue to drive young New Zealanders overseas – higher incomes and more affordable housing making Australia an attractive option, for example. High house prices also tie up an outsized amount of capital, reducing the scope for Kiwis to pursue more productive investments, such as starting and growing businesses.
Considering these issues against the backdrop of slower Chinese economic growth, it is difficult to be overly optimistic about New Zealand’s medium-term economic prospects. There have been positive facets to our economic performance over the last 40 years, but too often we have ignored problems and failed to plan for the future. The emerging imbalances are now signalling that we’re not as well-off as we might have thought.