Ageing society stunts growth

By JIM EAGLES business editor

New Zealand's economic growth is on a long-term downward trend, due to the ageing of the population and lack of investment in improving productivity, says an Institute of Economic Research report.

At about the time Finance Minister Michael Cullen was restating the Government's commitment to "returning New Zealand to the top half of the OECD in terms of GDP", the institute was announcing its projections that GDP growth will average "a mere 1.4 per cent" over the next 30 years.

Fortunately, the institute forecasts growth to be rather stronger in the immediate future, averaging 2.6 per cent between now and 2006.

Its report, New Zealand Industries and Regions, predicts that Southland, Taranaki, Auckland and Manawatu-Wanganui will be the powerhouses over that period.

And it forecasts that communications, transport and chemicals manufacturing, and services such as health and education will be the boom sectors.

In its analysis of the regions, the institute acknowledges that Auckland, because it makes up 32 per cent of the national economy, holds the key to growth.

The report predicts that Auckland will average GDP growth of 2.8 per cent over the next five years, fuelled largely by strong inward migration and, as a result, activity in the retail, construction and services sectors.

But it also acknowledges that for the country to get the best out of the Auckland economy, the region's traffic problems will have to be solved.

"A key factor for the long-term growth of the region will be the development of its infrastructure," it says.

"In particular, its roading and public transport systems require a huge amount of investment in order to reduce traffic congestion, lessen transport costs and hence improve the productivity of individuals and industry."

The report forecasts that Southland will be the fastest-growing region of all, averaging 3.8 per cent a year over the study period, thanks to the continued boom in its primary industries.

Taranaki is predicted to expand at an average of 3.4 per cent, due to growth in its petrochemical and dairy-processing industries.

Manawatu-Wanganui is expected to match Auckland's average of 2.8 per cent, thanks to its emergence as a centre for transport and education.

The regional laggards, says the institute's analysis, will be Northland (forecast to average just 1.2 per cent growth), Bay of Plenty, Gisborne/Hawkes Bay and the upper South Island (2.2 per cent) and the Waikato (2.4 per cent).

In its sector analysis, the institute forecasts the communications industry, with average growth of 6.3 per cent, will continue to be the boom industry.

"The mobile phone and courier services sub-sectors are likely to show the most rapid growth, reflecting the growing importance of businesses being able to contact both employees and other businesses in a hurry," says the institute.

The transport sector, which is forecast to average growth of 4.2 per cent, is described as "vital to its economic development" because of the country's scattered population and the distance from world markets.



The chemicals manufacturing industry is forecast to expand by an average of 3.4 per cent, mainly because of a continuing strong demand from agriculture.

But the report forecasts that agriculture, with forestry and wood products, will "suffer in the short term as global demand slows and commodity prices ease but will rebound strongly as the world economic recovery gathers momentum".

Over the five-year period, agriculture is expected to match the national figure with average growth of 2.6 per cent, forestry will do a little better, averaging 2.8 per cent, and wood products better again, at 3 per cent.

But pulp and paper manufacturing is forecast to continue to languish with average growth of just 0.5 per cent a year.

The textiles and clothing industry is expected to do even worse, declining by an average of 0.4 per cent, although the institute believes there will be good opportunities for niche products such as possum fur fabric, Maori designed clothes, high fashion and sporting apparel.

Other industries expected to have low average growth over the next five years are electricity, gas and water (0.1 per cent), fishing (0.3), mining and quarrying (0.7) and, interestingly, Government services (0.2).

Looking further ahead, to the period 2005 to 2031, the institute sees the whole economy gradually sliding to that level of growth.

It forecasts that GDP growth will steadily fall so that it averages "a mere 1.4 per cent" over the 26 years.

One big factor in that downturn is a slowdown in labour force growth, which is predicted to average 0.5 per cent a year over the period and to actually fall in 2021.

The other is a decline in the rate of increase in GDP per capita, which is expected to fall from the 1.8 per cent a year seen in the past 10 years to 1.1 per cent in the future.

"The rate of GDP growth will inevitably decline over the next 30 years," the institute concludes, "constrained by the slow growth in the labour force.

"The only way to improve growth prospects is to increase the growth in labour productivity, which implies increasing the application of capital.

"Yet this would need to occur at the same time as the population is ageing, and hence running down its holdings of wealth."

The only consolation the institute has to offer is that "other countries are also in this situation and facing a similar outlook for growth".