In the May Monetary Policy Statement was a special feature on exports.
It highlighted a stark trade-off. Constrained export growth means resources are deployed elsewhere. That redeployment and less growth from agriculture (a 2% productivity year industry) is likely one factor contributing to slower productivity growth, which means slower growth in living standards.
Exports of goods have declined as a share of GDP. New Zealand’s goods exports as a share of the economy have been on a downward trend over the past decade, from their 2013 peak of 22% to about 18% at the end of 2023.
The Reserve Bank of NZ notes that export growth has gone from 4-5% per year in the late 1990s and early 2000s to 2.5-3.5% in the 2010s. That’s barely above inflation.
That means resources such as labour and capital are being deployed away from exports into other parts of the economy such as domestic demand, and particularly housing. We can see that in a bank lending statistic that shows home lending has gone from around half of all lending in 2010, to 63% now. Home lending has gone from 57% of bank lending to 63% in the past five years, partly driven by banks being required to hold more capital. That has simply encouraged them to write more loans on assets the banks need to hold less capital against.
Goods exports are dominated by agriculture, which has seen multi-factor productivity growth (the combined efficiency of labour and capital) on average of just under 2% from 2008-2023 compared to 0.2% for measured sector of the economy in aggregate.
Primary sector productivity is good; food, beverage and tobacco manufacturing productivity is not, with negative average multifactor productivity growth from 2008 to 2023. Construction sector productivity has averaged -0.1% per year.
I noted last month in my Farmers Weekly column that productivity for the New Zealand economy averaged 1.4% per annum between 1993 and 2013 but averaged only 0.2% per annum over the past 10 years. We have relied on migration for growth, which of course stokes demand for housing.
The Reserve Bank revised down its outlook for exports in May, citing the outlook for free trade agreements, slower growth in China and the impact of environmental protections. China’s growth per year over the coming six years is expected to be roughly half (3.9%) what it experienced between 2010-2019, which was 7.7% each year.
Contrast that with the government’s aspiration to double exports.
The real kicker, though, is what poor export performance means for our living standards if exports continue underperform the general economy, meaning resources could continue to transfer to less productive areas. The RBNZ notes, “To the extent that this reallocation results in lower productivity growth, this contributes to lower potential GDP growth.” Aka, it makes us relatively poorer.
A low productivity economy cannot grow as fast as a high productivity one without generating inflation. It forces the central bank to apply the economic brakes.
One release valve helping exports is likely to be the NZ dollar settling in a low range. Slow growth in exports doesn’t just constrain growth and productivity, it contributes to a wide current account deficit.
The RBNZ is projecting the current account (our national cheque-book with the rest of the world) will remain above 6% of GDP (in the red) over the coming two years. A wide “current account deficit increases the risk of a depreciation of the real New Zealand dollar exchange rate over the medium term”.
Deteriorating export performance is of increasing concern. Goods and service exports have fallen from 31% of GDP to 25%. The finger cannot be pointed at tourism, which has largely recovered post covid. The decline has largely come through the exports of goods.
We are not the small open trading nation we claim to be, seventh from the bottom of the OECD in total exports as a share of GDP. We slipped below the OECD average in 2015 and the gap is now around eight percentage points.
Constrained export growth, via slower growth in China, environmental restrictions or rising protectionist vibes, are subset of a lot of issues. Disruption caused by the effects of climate change another, though water storage, if we can accelerate it, can help manage some of that risk. Water could be a huge enabler.
The NZD/USD has been above its four-decade average for almost three-quarters of the past 10 years. The NZD is only now settling consistently more in exporters’ favour, with the exception being the NZD/AUD that is still above estimates of fair value.
There are a host of infrastructure bottlenecks that need addressed, including Port of Tauranga’s capacity and State Highway 29. We need to be focusing more on such examples of supply-side factors. A trade-deal is worthless if you can’t supply the product.
That includes getting bank regulatory settings right.
Declining education attainment, low managerial capability and under-investment in research and development were identified in the OECD’s Economic Survey of NZ as key issues.
Exports are a key driver of economic growth and living standards. The trend in exports is not getting the attention it deserves, nor are the downstream implications of resource redeployment into less productive areas.
