Saturday, 5 April 2008

New Zealnd .. so far, so good ... but the future?

New Zealand has enjoyed almost continuous economic growth for the past nine years. The current economic cycle is now the longest and strongest in about 60 years, according to the Reserve Bank.

Having said that, the strong growth has seen several big imbalances develop such as the buoyant housing market, a tight labour market, the incredibly high level of the New Zealand dollar and a surge of imports. The result has been a rapid increase in the account deficit.

Three things are holding NZ back. Firstly, inflation, (currently about 3.5 per cent). Secondly, there is a very high current income deficit - in other words, they spend too much.

Thirdly, it's the productivity story. If they don't turn that productivity around, NZ will not be able to take the opportunities being presented.

New Zealand has weak productivity growth across the board particularly in construction, retail and business services. Productivity growth at the moment is 1.3 per cent, half of what it was in the 1990s.

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