Post-COVID recession leaves lasting scars
New Zealand’s post-COVID downturn has left the country’s wage growth lagging behind most of the world, with incomes ranking near the bottom of global comparisons.
When comparing real GDP per capita adjusted for purchasing power parity, New Zealand ranked 25th out of 43 countries for growth over the past decade and 37th over the past two years. Only Germany, Canada, Luxembourg, Austria, Ireland and Estonia ranked lower in the most recent period.
Infometrics chief forecaster Gareth Kiernan (pictured left) said this weakness was the payback for COVID-era stimulus, RNZ reported.
“We can’t expect activity to go back to those levels any time soon,” Kiernan said. “That’s why the economic recovery is taking so long to get going and why next year’s growth figures don’t look that exciting in the context of how poorly the economy has performed since 2023; or why the construction industry is being naïve in hoping that a residential consent rate of 34,000pa will be the bottom of the cycle.
“We went up such a long way during the pandemic, borrowing growth from the future through ultra-low interest rates and massive government borrowing and spending, that the return to ‘normal’ levels of activity means that current conditions feel terrible by comparison.”
Labour market cooling faster in NZ
BNZ chief economist Mike Jones (pictured centre) said New Zealand’s weaker income growth reflects its position in the global economic cycle.
“We’ve gone from having one of the tightest labour markets anywhere through 2022 and 2023 to now being a little out of step in the other direction, with labour demand weaker and consequently spare labour market capacity more obvious here than the likes of the US, Australia, or even the UK,” Jones said. “Wage growth has consequently come off the boil a little faster in NZ.”
He added that the weakness was showing up in advertised vacancies too.
“I saw the other day that the Seek advertised salary index puts NZ at 2.2% year-on-year, below the US at 2.4%, Australia at 3.3% and the UK at 5.9%,” Jones said.
Global comparisons and productivity challenges
Jones said longer-term structural issues were also weighing on incomes.
“It's hard to go past low productivity growth,” he said. “That’s something many of our peer countries have been grappling with over the past few years but certainly NZ has grappled more than most.
“There are some signs this might be starting to improve but NZ has nonetheless spent the past few years more at the low end of international comparisons. So, I think for things to improve we need to see the economy find its feet, such that employers have the confidence to get back into hiring mode, utilising some of the labour capacity that's out there. Longer-term I think it's about productivity.”
Westpac chief economist Kelly Eckhold (pictured right) noted that other countries have experienced similar patterns.
“The only standout exception is the United States, which has actually had consistently stronger GDP per capita than everyone else,” Eckhold said. “So, we went up more between 2020 and 2022, and now we've tended to go down a bit more than, for example, Australia and the UK since then… all of these economies in the last few years have had a weak per capita GDP growth because of the tightening cycle required to bring inflation down.
“New Zealand has started to improve in the last couple of quarters, like in Q4 and Q1 this year, we had increasing per capita GDP. That's a bit better than, for example, you saw in Australia and the UK. And I would sort of suspect that’s related to the fact that we're a bit further through our easing cycle than both of those countries.”
He added: “Low levels of productivity growth… you know, that obviously sheets home to growth in real incomes and standards of living. And most of those things have got very little to do with monetary policy, more to do with the sorts of factors that you think might boost productivity.”
Eckhold also pointed to uneven performance across sectors.
"There’s decent parts of the CPI that seem impervious to a weaker output gap, because, you know, they're just not as market sensitive,” the Westpac economist said. “And then one of the factors in the play of that is that they’re just not as competitive. There’s also obviously issues to do with our distance that we are from the rest of the world and major markets that puts us at a disadvantage to certainly most European jurisdictions.”
Eckhold contrasted New Zealand’s situation with the United States.
“I personally think they have a very competitive economy and it's very flexible as well,” he told RNZ. “Their labour market is extremely flexible.
“You know, for example, my wife was working there, and her contract was fire at will. If there was just a change in business needs, well, then that’s kind of how that economy operates. And there are some benefits to that, although there are also costs as well… but it does mean they can really generate some quite strong productivity growth. They’ve also got a lot of these big tech firms in there where there’s been some pretty exceptional things happen in that sector in the last few years, even in the last six or nine months despite things like Donald Trump turning up and really overturning parts of the economy.”
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