Kiwis will work longer for a productivity pay rise
There is plenty of good news for the Government in NZIER’s latest set of quarterly predictions, released this week, although we may have to start working longer before we get a productivity pay rise. Thomas Coughlan reports.
NZIER’s quarterly predictions for February present a positive picture for the new Government, as business confidence appears to moderate from its initially pessimistic outlook, although businesses are still less positive than the historic average. The retail and manufacturing sectors remain pessimistic, possibly due to fears that Labour’s minimum wage increases and scrapping of the 90-day trial period will affect them disproportionately.
NZIER now predicts annual average growth to sit below three percent over the next five years. This is a slight downgrade. A year ago NZIER’s March 2017 predictions put the growth outlook at over three percent on average for the next five years. The downgrade is largely due to signs of a slow down in population growth that were seen at the end of 2017.
“More expansionary fiscal policy will provide stimulus to the economy, but growth will moderate as population growth slows in the next few years,” said Principal Economist Christina Leung.
“Net migration has been very strong in recent years, but looks to have turned. Given the lagged effects of strong population growth, we expect demand to remain supported for the next year. Beyond that, the easing in net migration will accelerate and demand will soften in areas such as retail spending and construction,” she said.
NZIER predicts some wage inflation as the result of labour supply shortages driven by the Government’s decision to lower net-migration. Pay-equity agreements, following last years landmark aged care ruling, will help drive wages up.
The slowdown in migration will improve New Zealand’s outlook for per capita GDP growth, but only slightly. It will lift to about 1.3 percent on average, up from Statistics NZ’s figure of 0.9 percent last year. Unfortunately for workers, while GDP per capita does indicate people are getting richer, NZIER predicts that labour constraints will see them working longer hours.
“Given the reasonably high rate of under-utilisation in the labour market, employers can more readily increase output by getting their staff to work more hours, rather than committing to large scale investment," Leung said.
“This is particularly given wage growth is still contained so more cost effective and flexible for employers to change staffing,” she said.
Statistics NZ reported the under-utilisation rate, which includes people who are working part time and want more hours, rose from 12.0 to 12.1 percent in the December quarter. The total number of under-utilised workers rose 6000 to 343,000, suggesting there is still plenty of slack in the economy before we reach full employment, where inflationary pressures start to bite.
“We would expect that as wage growth starts to pick up to a greater degree employers will start to turn their focus more towards labour-saving investment," Leung said.
Paul Conway, director of economics and research at the Productivity Commission, said forecasters should be careful in making links between migration numbers and productivity.
“Migrants are creating demand pressure as well as being part of the labour supply," Conway said.
“It’s not clear to me that a cut to migration would necessarily mean that New Zealanders would have to work longer hours to achieve the same level of income per capita; you need to know what sort of migrants are being cut and if they’re skilled then from what areas? How is the domestic market going to respond? How’s the education system going to respond? It’s clear that New Zealand needs more skilled workers in some parts of the economy," he said.
NZIER has echoed the Reserve Bank’s projection of a slight increase in the Official Cash Rate in early 2019. It projects that the OCR will track upwards to about four percent, where it will level out. This is far short of OCR’s of six to eight percent from before the GFC. Leung said that given higher levels of household debt, the OCR will not need to go as high as before the GFC to achieve the same effect.
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