Business editor-at-large Liam Dann talks about GDP and explains why it matters. Video / Corey Fleming
THREE KEY FACTS:
GDP contracted 0.2% over 12 months to June 2024 compared with the year ended June 2023.
On a per capita basis, GDP was down 2.7% compared to a year ago
Forecasts predict net migration may slow to zero by 2025, impacting economic growth significantly.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.
OPINION
There’s a lot of talk about per capita GDP right now.
That’s about to resolve itself. But it might not be a good thing.
Per capita GDP – like our per capita medal haul at the Olympics – is a simple maths equation. We divide GDP by population and compare it with previous periods. And, of course, it looks worse if the population has grown because there is a smaller share of GDP per person.
GDP contracted 0.2% in the June quarter. GDP fell also 0.2% over 12 months to June 2024 compared with the year ended June 2023.
Per capita though, it was down 0.5% compared to the previous quarter and compared to a year ago, per capita GDP was down 2.7%.
That’s a lot worse.
But is important to keep GDP per capita in context. A rising population props up GDP. But it is better than having a falling population during a downturn. A rising population still creates an environment of growth that can provide opportunities for all long-term residents.
GDP is a macroeconomic statistic that tells about the state of the overall economy. It doesn’t necessarily reflect our personal financial position.
GDP per capita does a slightly better job of adding context but it is still an aggregated macro-economic statistic. It doesn’t necessarily offer a better reflection of your personal experience.
I think we should be wary of putting too much weight on it.
A simple way to look at it is to consider what happens when the population falls.
Things don’t get better. Fewer people means less economic activity. We shouldn’t expect fewer people to mean we get a larger slice of the GDP pie, because (unless something radical happens to New Zealand’s productivity rate) the pie is going to get smaller, not bigger.
As I mentioned last week, our net migration rate is falling off a cliff. Kiwis are leaving in record numbers. There was a net migration loss of 55,800 New Zealand citizens in the year to July, exceeding the previous record (before 2023 and 2024) of 44,400 in the February 2012 year.
Meanwhile, arrivals – which pushed net migration to a record 136,000 new residents in October 2023 – are falling. The net migration gain to July was 67,000, but it is coming off fast.
Looking at the latest monthly figures and projecting ahead, Westpac senior economist Michael Gordon forecasts that we’ll see net migration slow to zero for the 2025 calendar year, with the monthly figures likely to turn to net outflows by early next year.
Michael Gordon, Westpac chief economist Westpac.
That would see our topline GDP growth rate fall into line with the per capita GDP growth rate.
Problem solved... yeah right.
That will have a huge impact on our economy. It will provide headwinds for our housing market and retail sector.
New immigrants need places to live, they need cars. Just consider what car sales look like with the population rising at 100,000 a year, compared to zero growth.
There may be upsides to a period of low or zero population growth. It will likely benefit house-hunters and renters.
Some economists also argue that high net migration rates have made it too easy for the nation to ignore low productivity rates.
Low or zero population growth could put the squeeze on businesses to invest more wisely and upskill the existing workforce. It could force policymakers to get education settings right.
There may be something to that over time. But it won’t feel good in the short term.
The Labour/NZ First Government hoped to implement a low immigration strategy to boost productivity before it was upended by Covid.
When closed borders caused acute worker shortages Labour loosened policy, leading to the record population gains that now make per capita GDP look so bad.
But we shouldn’t forget that all those arrivals propped up our real economy, helping us to avoid the kind of dramatic slump we saw after the Global Financial Crisis (GFC).
As wearying as this long period of low growth has been, unemployment hasn’t come close to rivalling either the GFC period of 2008-2010 or the early 1990s.
In my opinion, New Zealand’s worst economic downturn in living memory occurred during the period from 1976 to 1992.
This era of economic turmoil kicked off with a long recession of seven quarters. We had recessions again in 1982, 1983 and through 1987 and 1988. Then in 1991, we had another recession. Unemployment hit levels not seen since the Great Depression.
The cumulative effect was that it felt like one long recessionary era.
In that period from 1976 to 1992, New Zealand didn’t have a problem with GDP per capita because net migration was in negative territory for most of the time. That’s when the term “brain drain” was coined.
It would take a pretty terrible economic run from this point to rival that era. Most economists don’t see that happening.
However, the fall in net migration poses additional risk.
The Government has to get the fiscal balance just right. It wants to keep spending constrained to deal with a structural deficit. But if it is too tight, New Zealand will be at risk of Japanese-style deflation and economic stagnation.
There are ways to grow an economy without population growth – but it is hard work.
Perhaps like every Government, this one will use policy settings to encourage more immigration. But settings are already favourable.
Migrants have stopped coming because there are no jobs.
Perhaps the Government will have to lean into currently unfashionable Keynesian ideas, spending big on infrastructure to stimulate demand. A recent report suggesting 25,000 more construction workers were needed to implement the Government’s roading plans raised serious questions. Perhaps that will kickstart another wave of migration.
Lower population growth certainly means that monetary policy will have to do more heavy lifting.
International group Capital Economics last week forecast that the Reserve Bank will need to cut the Official Cash Rate to 2.25% - much lower than the current consensus of around 3%.
“With the economy in the most drawn-out recession since the GFC, and spare capacity set to keep rising over the next couple of years, we think there’s a compelling case for the RBNZ to err on the side of looser policy,” its economists wrote.
That might sound good to mortgage holders but it doesn’t bode well for the wider economy.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
