Friday Graph: Weakest Productivity Growth Cycle Recorded

In an article Setting the Sails in late November 2011, Business Roundtable chairman, Roger Partridge observed that the two main economic problems the country faces are structural imbalances and the slump in productivity growth.

Yesterday Statistics New Zealand updated its most accurate estimates of productivity growth for New Zealand to include the year ended March 2011.  These estimates exclude the areas of economic activity in which productivity is hardest to measure, which is primarily in the public sector.

The results were very poor being no change in multifactor productivity and a drop of 0.1 percent in labour productivity.  (Productivity measures the volume of output per unit of input.  Multifactor productivity uses a weighted sum of the volume of labour and capital for the unit of input.)

Productivity is difficult to measure and is cyclical.  It is more important to look at the trend as well as at the latest figures.  Statistics New Zealand has attempted to address the cyclical problem by identifying start and end points for each cycle between 1978 and 2011.  The latest cycle is for the 2006-2011 period.

This week’s Friday Graph plots the annual change in multifactor productivity growth and its average annual growth rate during each cycle, as calculated by Statistics New Zealand.

click graph to view larger

The graph shows that the average annual growth rate of minus 0.6 percent during the 2006-2011 cycle was the worst recorded, but it was not aberrant.  Instead it followed a markedly poor outcome during the 2000-2006 cycle.

Because the timing of these cycles is inevitably somewhat problematic, it is pertinent to note that there is strong evidence that the productivity performance during the 1990s has been vastly superior to that since 2000.

The key policy features of the 2000-2011 period have been renationalisation, a deluge of intrusive regulation and one of the biggest five-yearly increases in government spending in New Zealand’s history.  That increase has been associated with pressure on the exchange rate and a weak traded goods sector performance, despite very favourable prices for exports relative to imports.