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The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of New Zealand 2005 published on 4 July 2005.
Economic performance continues to impress…
The New Zealand economy has continued to expand at a vigorous clip, with last year’s growth of just under 4½ per cent bringing the annual average rate of growth since the recession of the early nineties to 3¾ per cent. More importantly, increases in real GDP per person have outpaced the OECD 10 year moving average since 2000, putting the country on track towards achieving the government’s longer term objective of lifting GDP per person back into the top half of the OECD, a position it has not held since the early 1980s. This is a deserved reward for the wide reaching macroeconomic and structural reforms put in place over the past 20 years. Much of the increased output has been generated by more hours of paid work: trend labour productivity growth has also improved since the mid 1990s, but it remains around ½ percentage point per year lower than the OECD median. Last year the country achieved a general government surplus of more than 4% of GDP, one of the largest among OECD countries and government net debt has fallen from over 50 per cent of GDP in 1992 to around 7½ per cent now.
Real GDP per person (1)
At 2000 Purchasing Power Parities
1. GDP per capita has been calculated in US$ at constant prices and constant PPPs.
2. 26 countries.
Source: OECD National Accounts database.
… and although a period of slower growth is widely expected,
medium-term prospects remain bright
With very strong employment growth and earlier slack now used up, the economy is running at full capacity, with the unemployment rate under 4%, skilled and unskilled labour harder to find, and wage and price increases having picked up. The Reserve Bank has raised official short term interest rates by 1¾ percentage points since the beginning of 2004, and financial conditions have tightened, while long term rates have moved up only little, reflecting global developments and the Bank’s credibility. The exchange rate has appreciated a further 6½ per cent since the start of last year. Overall, the pace of activity is expected to cool during the course of the year, bringing the economy onto a more sustainable growth path. Medium term prospects remain bright – growth in line with estimated potential for the rest of the decade would be between 3¼ and 3½ per cent per year. If realised, New Zealand would be on its way to achieving the government’s aforementioned goal.
The main challenge is to realise even faster increases in living standards
The task now is to build effectively on this strong base of economic success and take it forward in order to further accelerate gains in living standards for all New Zealanders. This presents policymakers with three broad challenges:
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The primary challenge is to raise productivity growth further, as this will become the more critical driver of growth in the future. Of course, no government can make productivity growth happen; the best it can do is to identify and remove obstacles to growth and provide an economic environment in which firms and individuals can flourish. Despite the extensive reforms already undertaken, some areas remain where further policy improvements could be made, including in the areas of product market competition, business taxation, infrastructure provision, labour markets, innovation and human capital formation.
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The second challenge is to boost participation among groups that remain under represented in the labour market. There are two groups that warrant particular attention. One is non-beneficiary mothers who would like to work but face financial or practical obstacles to doing so. The other is working-age beneficiaries of whom there are almost 300 000 (including sole parents), some of whom face limited pressure and receive minimal help to move from benefit dependency into work, despite increased emphasis on work activation measures over the past five years.
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The third challenge is to continue managing public finances prudently and effectively and maintain the gains from the fiscal consolidation achieved over the past decade. Fiscal caution is warranted, given ageing and other future expenditure pressures, while public spending needs to be more effectively channelled into the highest priority areas so as to deliver the best “value for money”.
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Return to the Economic Survey of New Zealand 2005 homepage
Go to Chapter 2
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
To access the full version of the OECD Economic Survey of New Zealand:
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Readers at subscribing institutions can go to SourceOECD, our online library.
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Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.Government officials can go to OLISnet's Publication Locator.
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For further information please contact the New Zealand Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Deborah Roseveare and Annabelle Mourougane under the supervision of Peter Jarrett.
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Also available: Etude économique de la Nouvelle-Zélande 2005 (French)
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