KEY POINTS:
Technical factors are temporarily exaggerating the size of an acceleration in labour productivity during the past year, Westpac economists say.
But the remainder of the improvement could be a belated payoff from high investment activity during the past few years, and could be more long-lasting.
Based on Statistics New Zealand's figures for gross domestic product and its Household Labour Force Survey, labour productivity had averaged 3 per cent annual growth over the past four quarters.
Westpac economists Brendan O'Donovan and Dominick Stephens said they were pleased to see that acceleration from growth that had been running at an "alarmingly low" rate of around 1 per cent a year from 2000 to 2006.
But half to three-quarters of the acceleration could be due to technical factors that were previously depressing productivity growth and were now temporarily exaggerating it, the economists said.
This country's labour productivity was low compared to many OECD countries, partly because New Zealand had less capital to work with, and partly because it used labour and capital inefficiently.
"Low labour productivity is the reason we work longer hours for lower incomes than the citizens of many other OECD countries."
During the past decade, rapid employment growth had been a key cause of low productivity growth, the Westpac economists said.
In the past year New Zealand had entered an employment downturn, a time when productivity tended to increase, because least productive jobs were terminated first.
The changing mix of industries also affected productivity growth, with construction - a low-productivity industry by its nature - being one of the biggest sources of employment growth between 2000 and 2006.
At the same time, some of the productivity boost in the past year could be a belated payoff from "very strong" investment activity that started in 2004.
Investment was elevated as a proportion of GDP for a good four years, so the productivity boost must have some way to run, which was encouraging, the Westpac economists said.
While expecting business investment to decline this year, they were more optimistic about investment in 2009 and beyond, as they expected New Zealand's terms of trade and exchange rate to remain elevated in the foreseeable future.
Measured labour productivity growth would remain high over 2008, with the factors that had been exaggerating the growth - falling employment and a downturn in construction - likely to intensify.
The factors were expected to wane over 2009 and 2010, meaning labour productivity growth could moderate a little during that period, the economists said.
Despite that, they expected labour productivity growth during the next five years to exceed the last half-decade's "miserable" performance.
The tendency for higher productivity growth to allow more GDP growth without generating inflation was always a welcome development, no more so than now.
"New Zealand is staring down the barrel of an aging population that will have the opposite effect, tending to reduce our potential GDP growth," the Westpac economists said.
"Productivity growth is essential if we are to maintain our living standards while fewer of us work."
- NZPA
