It's a long way to the top

Can the New Zealand economy regain its 'rockstar' status - and did we ever have it?

“I'm sick to death of people saying we've made 11 albums that sound exactly the same. In fact, we've made 12 albums that sound exactly the same.” - Angus Young

Paul Bloxham, HSBC’s chief economist for Australia and New Zealand, recently released a report with some suggestions for how our economy could get its mojo back. Paul made a name for himself about a decade ago by declaring that New Zealand would be the “rockstar economy” in the years ahead. Since then that phrase has truly reached meme status - even as people line up to give their own take on it, whether sincere or snarky, they’re still using it.

My own take has always been that the rockstar analogy was unintentionally apt. By 2014 first piracy, then streaming, had gutted album sales to the point that you only needed to sell a few thousand copies to make it into the charts. In a similar vein, the world economy was in such a parlous state in the years following the 2008 financial crisis that the hurdle for reaching ‘star’ status was fairly low. And for all the hysteria around Paul’s claim, at its heart was a fairly modest prediction: that our economy would grow by 3.4% over 2014. That’s above our long-term average pace, but it’s not the kind of number that’s going to set the night on fire.

How did his prediction pan out? Actually, pretty well. The New Zealand economy grew by 3.8% over that year - it was originally reported as 3.3%, but as is often the case, subsequent revisions to the GDP figures took it higher. That result put us in the upper end of the range of growth rates among developed economies in that year. What’s more, New Zealand retained its high-flying status through the rest of the decade (and even into 2020, when the cumulative impact on GDP from our Covid response was relatively small).

So what was it that got our motor running this way? Here’s how Paul described it recently:

The economy had a lot of things going for it. Dairy and meat exports were strong, as Asia's middle classes expanded. This was helped along by a free trade agreement with China, with New Zealand the first developed economy to sign one. Tourism was booming. Reforms delivered after the Global Financial Crisis, including to the tax system, were helping. A pro-growth trading partner focus was supporting the economy. Growth was also supported by the Christchurch rebuild.

I should point out that this list differs somewhat from the reasons that he gave at the time - and while the above list should come with the benefit of hindsight, I find myself agreeing more with what he said a decade ago. But the reason I want to look back at this period is not to determine who’s ‘right’, but to see what’s in there that might help us to recapture our glory days.

The first thing on my list is one that Paul didn’t mention: migration. New Zealand’s relatively welcoming approach to migrants meant that we experienced relatively high population growth for a developed economy in those years. In fact, if we adjust for population increases, our GDP growth rate falls back into the middle of the pack.

We do need to be a bit careful with using per-capita growth rates though. If we simply divide GDP by population, the unspoken assumption is that the new people (i.e. migrants) are just as productive on average as the existing population. That may or may not be the case, depending on the makeup of those migrants. For instance, in the 2010s a significant number of them were students, and since they weren’t working full-time it’s likely that they were less productive than average. (At least initially - many of them transitioned on to work visas once they finished their study.) against this headwind for per-capita GDP, the fact that we managed an ‘average’ growth rate is still a notable achievement.

What’s more, a growing population doesn’t guarantee you a growing economy. Look at last year for instance, when GDP was more or less flat at a time when we had the fastest rise in the population since the end of World War II. So there’s more to the ‘rockstar’ era that needs to be uncovered.

Next is the Christchurch earthquake rebuild, which Paul (rightly in my view) ranked the highest on his 2014 list. The rebuild took a while to get going after the 2011 quake, for various reasons including ongoing aftershocks and insurance disputes. But it would be fair to say that by 2014 the rebuild was at its peak growth pace (and high growth rates are easier to achieve when you’re coming from a low base).

As I’ve written before, rebuilding was better for the economy than not rebuilding, those being the only two options on the table. But it goes without saying that disaster recovery is not going to be a sustained source of economic growth.

Next: low interest rates. Along with strong population growth and a shortfall in new home building, this led to a rapid rise in house prices over much of the decade. It’s well documented that house prices have a strong influence on household spending, via the wealth effect. And regardless of how you feel about whether house values ‘should’ have so much sway over the rest of the economy, as a forecaster you’d be remiss to pretend this doesn’t happen.

So are lower interest rates the secret to reviving our economy today? Yes in a cyclical sense, given that monetary policy is intentionally ‘tight’ at the moment. But interest rates can only be cut as far as inflation pressures allow. Through the 2010s inflation was persistently soft around the world; whether we experience something like that again is beyond our control.

Next is dairy export prices. This was a rather unfortunate one in terms of the timing of Paul’s prediction. Dairy prices had surged in 2013, with whole milk powder consistently selling at around US$5,000 per tonne. By the end of the 2013/14 season, dairy farmers were on track to receive a then-record price of $8.40 per kilo of milksolids. (That’s about $11/kg in today’s dollars; for reference, Fonterra is currently forecasting this year’s milk price to be around $8.50/kg.)

But rather than being a sign of ‘rockstar’ levels of popularity, this was more like the record label buying up thousands of copies of your album to inflate the sales figures. Chinese buyers went on a spree through 2013, for reasons not entirely clear (fears that drought could lead to a supply shortage may have been a factor). Those buyers found themselves seriously overstocked by 2014, and they stepped back from the export market for the next year or so. World dairy prices tanked, and the farmgate milk price fell to $4.40 for the 2014/15 season and $3.90 for the one after that.

While this was an extreme case, we still see today that Chinese buyers can be a bit erratic, bidding up prices for a few months then stepping away from the market. Perhaps the lesson from this is that we should keep our expectations in check whenever we see world commodity prices moving in our favour - even our biggest exporters are still small players in a competitive global market. Not to mention that China is rapidly expanding its own dairy industry as part of its plans to increase self-sufficiency - and we know that when China decides to pursue something as a national goal, whether it’s profitable or cost-effective becomes a secondary consideration.

What about international tourism? Kind of. By 2014 we were seeing strong growth in overseas visitor numbers. But after the slump caused by the 2008 financial crisis, global air travel had already fully recovered by 2010, particularly short-haul travel. Long-haul travel took longer to recover - and New Zealand is a long-haul flight for most of the world’s population. So to the extent that we were seeing faster growth than the rest of the world in 2014, it’s because we were still playing catch-up in level terms.

We’re in a similar position today: global air travel has returned to and in many cases surpassed pre-Covid levels, but our visitor numbers seem to have stalled out at around 80% of pre-Covid. Even if we close that gap in the future, that won’t make us an outperformer on the global stage.

Now we’re getting into the factors that I find less convincing. Our free trade agreement with China in 2008 was certainly world-leading. But the sheer scale of China’s economic expansion means that many countries have been able to dramatically increase their exports to that country, and even by 2014 I’m not sure that our first-mover advantage counted for much.

Tax reform? Yeah, nah. Even the proponents of the 2010 tax switch (lower income tax, higher GST) didn’t claim that it would supercharge the economy, and there isn’t any evidence since then to support that.

On the whole, I don’t see much from the 2014-2019 experience that’s repeatable. Most of what drove our high growth rates through that period were one-offs or cyclical factors; those that were more enduring are no longer in their high-growth phase.

So it’s understandable that Paul’s current suggestions have more of a structural flavour to them - using the current downturn as an opportunity to reset our longer-term path, rather than trying to juice up GDP in the short term. (That will happen naturally at some point - economies often experience rapid growth as they come out of a recession, because they’ve accumulated a lot of runway to do so.)

I’m going to present his ideas here mostly without comment. (I should say that I don’t have the full report, so I’m just going off what was quoted on Interest.) Each of these on its own is a fairly massive topic that could take several posts to address:

• Continue to focus on the rising Asian middle class, where incomes are rising, diets are changing, and their appetite to see the world is growing.

• Grow agricultural output through a focus on land-use intensity, including a shift to products such as poultry, aquaculture, or plant-based foods.

• Lift local productivity and lower local costs to make us a more attractive investment destination, including for foreign capital.

• Address the infrastructure deficit, by attracting foreign investment and ensuring a longer-term, better-coordinated approach to delivery.

• Encourage more competition in the domestic market by improving general competition law and reducing barriers for entry for businesses such as natural resource and zoning regulations.

• Strengthen plans for reducing greenhouse gas emissions, including tightening up the Emissions Trading Scheme and bringing agriculture within scope.

The only point I’ll add is that many of these things are ‘good to do’ but probably won’t send us back to the top of the charts in terms of GDP growth rates. That’s OK; stardom is as much to do with longevity as it is with fame and fortune in the moment. And while there’s no formula for long-term success, a band like AC/DC shows us that it pays to understand your strengths and get the basics right.

So what do you think? Does this list fit that bill?