28 January 2005
The Reserve Bank today emphasised that if we want to see New Zealand's GDP per capita grow at the same rate over the next decade as it did in the previous ten years, we will need to lift our labour productivity.
Speaking to the Canterbury Employers' Chamber of Commerce on New Zealand's potential growth rate, Reserve Bank Governor Alan Bollard outlined that "New Zealand's growth performance over the last ten years has been particularly strong, with GDP growth averaging 3.4% per annum. This was amongst the highest average growth rates in the OECD.
"Partly as a result of this performance, in recent years the Reserve Bank has raised its estimate of New Zealand's potential growth rate. However, despite this higher potential we have been growing at unsustainably high levels over the last year or two. We can't keep growing near 5 per cent without putting excessive pressure on resources.
"Growth in real GDP per capita, has also been high over the past decade. GDP per capita is a broad measure of living standards and is the measure that really matters. Growth in real GDP per capita averaged 2.2% per annum in the 1994-2004 period, compared to 0.7% per annum in the previous decade.
"The factors that affect GDP per capita are labour utilisation (average hours worked per person) and labour productivity. Over the last decade both labour utilisation and labour productivity have increased strongly. The rise in labour utilisation has been driven by rises in participation rates and a long term decline in unemployment. Labour productivity growth has averaged around 1.2% per annum over the last decade, compared to 0.7% in the previous decade, and is now running close to 1.5% per annum.
"Looking ahead to the next decade, growth in labour utilisation is expected to slow. With participation rates already very high, future rises in participation are unlikely to be large. From around 2010 many baby boomers will be retiring, tending to reduce the overall participation rate. Further, given that the unemployment rate is already low, we won't see the same falls in unemployment that occurred over the last 10 years.
"Given this lower growth in labour utilisation, we will need to focus on lifting labour productivity if we want to see GDP per capita grow at the same rate as it did over the last decade. Indications are that we would need to lift our labour productivity growth from around 1.5% per annum to around 2% per annum to achieve this.
"In order to increase labour productivity, we will need to look at increasing the amount of capital equipment in production, and at implementing technological improvements. We will also need to keep reorganising and redirecting resources to more productive uses, wherever we can.
"Responsibility for making gains in labour productivity - and lifting potential output - will rest largely with the business sector, provided that the government continues to maintain a competitive and stable economic environment.
"A review of research on the links between monetary policy and growth indicates that high inflation, or even moderately high inflation, is harmful to growth. Hence the Reserve Bank's role in terms of promoting long term growth will be in continuing to maintain price stability, to allow the business sector to get on with its job. The Bank's other major role - that of maintaining financial stability through oversight of the financial system - will also be a fundamental part of maintaining a stable economic environment that is conducive to growth."
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