NZ must resolve low productivity issues to address inflation concern
New ASB research shows a close correlation between low productivity among the New Zealand labour force and high inflation rates, indicating a pressing need to resolve the former to address the issue of soaring prices of goods and services.
The long-term productivity decline, according to ASB research, began during the coronavirus pandemic and it appears that productivity has remained lacklustre since. If this continues, ASB warned, it has long-term socioeconomic and political implications in the country.
“New Zealand’s continuing downward productivity trend should be a warning sign to us all. If this decline becomes embedded, it will have far-reaching economic, social, and political implications,” said Mark Smith, senior economist at ASB.
“Low productivity growth may well be a factor in why inflation in New Zealand has been slow to cool. Our research suggests that industries that have experienced lower productivity growth have tended to be those that have seen higher increases in output prices. This, in turn, has likely pushed up the cost of doing business and kept inflation high.”
The ASB research also noted that, compared to its OECD peers, the inflation rate in New Zealand is falling too slowly, notwithstanding the existing high interest rates. The ASB research stated that New Zealand’s economy also suffers from a prolonged decline.
The report pinpoints low capital intensity as one of the culprits while labour productivity in the country has not improved in the past years.
To address the issue, Smith stated that New Zealand must focus on creating productive investment and boosting economic efficiency by concentrating on education and skills development for the New Zealand workforce; the adoption and diffusion of best practice methods and technologies; increasing exposure to competition; and innovation.
Smith also said that the government must create and develop a population policy, which provides clearer guidelines for investment and comprehensive planning decisions.
“We need to get productivity up if we are to bring inflation sustainably down without crunching the economy. We all stand to benefit from being more productive and this should be a key priority for the government, households and firms alike, everyone should have skin in the game,” he said.
“Improving productivity could also make the RBNZ’s job easier by helping to tackle inflation. This could build a virtuous cycle, with a sustained period of lower interest rates and better investment opportunities that could be used to fund productive investment, growing the economy and improving living standards.”
