The productivity slowdown: implications for the Treasury’s forecasts and projections

The world has been experiencing a productivity slowdown, from which New Zealand has not been exempt. This matters because sustainable improvements in our living standards depend upon productivity. Productivity is also a key driver of the Treasury’s economic and fiscal forecasts and long-term fiscal projections, which underpin its advice about fiscal policy and fiscal sustainability. This Treasury Paper is an exploration of recent trends in productivity and the potential drivers of the slowdown. Both labour and multi-factor productivity (MFP) growth have been slowing since the turn of the century in advanced economies, and since the Global Financial Crisis (GFC) in emerging market and developing economies. For example, average labour productivity growth across the Organisation for Economic Co-operation and Development (OECD) countries was still close to 2% p.a. in the 1990s, before falling sharply to around 0.8% p.a. from the 2000s. Like other countries, New Zealand’s productivity performance has been slowing. Productivity for the whole economy averaged 1.4% p.a. between 1993 and 2013 but averaged only 0.2% p.a. over the last ten years. While New Zealand’s productivity growth has been weaker than expected over a long period of time, other factors contributing to GDP have been stronger than expected, which has broadly offset the impact of lower productivity on New Zealanders’ incomes. This paper provides a brief analysis of potential causes of the productivity slowdown to inform judgements about whether recent trends are likely to continue. It draws from the evidence that we are aware of, including insights from the Treasury Guest Lecture Series (TGLS) ‘Productivity in a Changing World’ theme, which we have hosted over the past year. It also draws on the New Zealand and global literature, although it isn’t an exhaustive review. It explores both the global and the New Zealand context as, given the global nature of the slowdown, it is likely that common factors are playing out across countries. It looks for evidence of recent trends in productivity drivers, given that a credible suspect of the productivity slowdown must align with the timing of the slowdown.