RBNZ Chief Economist’s Gloomy Economic Outlook Forecast
In a recent online presentation, the Reserve Bank’s chief economist, Paul Conway, delivered a sobering assessment of New Zealand’s economic future. Conway highlighted weak productivity, low investment, and a lack of skills as key factors contributing to the country’s lackluster growth performance. According to him, New Zealand’s economic standing has been on a downward trajectory for decades, trailing major trading partners and even emerging economies.
The Road to Recovery: Factors Affecting Economic Growth
Conway emphasized that a combination of factors, including productivity levels, private sector and government decisions, central bank interest rates, and more, would play a crucial role in determining the country’s growth potential in the coming years. He projected potential output growth to hover between 1.5 percent and 2 percent annually over the next three years, marking a significant decline from previous levels. This subdued outlook, as Conway explained, stems from anticipated ongoing weaknesses in productivity growth and reduced net immigration.
The chief economist attributed the country’s poor economic performance to a range of issues, from sluggish international trade and foreign investment to inadequate investments in research and development, education, and corporate skills. When asked about the likelihood of New Zealand reclaiming its status as a “rock star” economy, a term coined by HSBC’s chief Australia and New Zealand economist in 2014, Conway expressed skepticism. He noted that New Zealand had never truly reached that status since the 1950s, with only occasional glimpses of exceptional economic performance.
Interest Rates and Growth: Navigating the Economic Terrain
Conway delved into the role of the official cash rate (OCR) in steering economic growth and maintaining inflation within the Reserve Bank’s target band of 1-3 percent. Currently, the OCR remains above neutral, indicating room for further rate cuts, as hinted in the November monetary policy statement. Conway pointed out that easing domestic pricing intentions and a recent decline in inflation expectations create opportunities for additional monetary policy adjustments.
While the neutral OCR level typically falls in the range of 2.5 to 3.5 percent, Conway expressed doubts about a return to the ultra-low rates seen during the pandemic era. He emphasized the need for caution and adaptability as the OCR approaches the estimated neutral level, underscoring the importance of navigating economic uncertainties with prudence.
In conclusion, Conway’s economic outlook paints a challenging landscape for New Zealand, with productivity, investment, and skills deficits posing significant obstacles to robust growth. As policymakers and businesses grapple with these challenges, the path to economic recovery may require innovative solutions and strategic interventions to overcome the prevailing headwinds.