Abstract
While New Zealand’s economy has begun to recover more rapidly from COVID- 19-related lockdowns than most advanced economies, the pandemic is nonetheless likely to have a long-lasting impact on New Zealand’s potential output. Reduced migration, lower capital accumulation, and reduced productivity growth are expected to take a toll. To minimize scarring effects of the pandemic and lift medium-term growth, New Zealand should embark on reforms to address long-standing weak productivity and the infrastructure gap and accelerate product market reforms.
How Fast can New Zealand Grow After the Pandemic? Challenges and Opportunities 1
While New Zealand’s economy has begun to recover more rapidly from COVID- 19-related lockdowns than most advanced economies, the pandemic is nonetheless likely to have a long-lasting impact on New Zealand’s potential output. Reduced migration, lower capital accumulation, and reduced productivity growth are expected to take a toll. To minimize scarring effects of the pandemic and lift medium-term growth, New Zealand should embark on reforms to address long-standing weak productivity and the infrastructure gap and accelerate product market reforms.
A. Introduction
1. The pandemic is likely to have a sizable impact on medium-term output. Previous recessions in advanced economies have had long-lasting impacts on potential output. Similarly, despite a strong, initial post-lockdown recovery in the second half of 2020, supported by strong pent-up demand, we expect the pandemic to have a sizeable medium-term impact on New Zealand’s potential output. The impact will be driven by lower inward migration due to the border closure, reduced capital accumulation, and reduced productivity growth.2 A strong policy focus on addressing pre-existing structural issues and limit scarring effects are warranted.
2. This paper analyzes the medium-term impact of the pandemic on New Zealand’s potential output and discusses policy options to mitigate this effect. Section B discusses New Zealand’s potential output before the pandemic. Section C analyzes the lessons from previous recessions in advanced economies, to give historical context to the 2020 recession. Section D discusses the impact of the pandemic on New Zealand’s medium-term potential output. Section E takes a closer look at New Zealand’s structural reform opportunities and discusses policy options to lift medium-term potential output.
Potential Output Growth in New Zealand Was Relatively High Before COVID
(Average potential output growth in 2017–19, %)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: IMF staff calculations.Potential Output Growth in New Zealand Was Relatively High Before COVID
(Average potential output growth in 2017–19, %)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: IMF staff calculations.Potential Output Growth in New Zealand Was Relatively High Before COVID
(Average potential output growth in 2017–19, %)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: IMF staff calculations.B. Drivers of Growth in New Zealand Before the Pandemic3
3. Before the pandemic, the growth of potential output was driven by strong population growth. New Zealand’s potential output before the pandemic and the fundamental drivers of its growth are analyzed by a multivariate model that incorporates a Phillips curve and Okun’s law (Blagrave and others, 2015). While New Zealand’s potential output growth in recent years was relatively high compared to peer advanced economies, with an average growth rate of 2.9 percent over 2017–19, it was largely driven by strong working age population growth due to a surge in net migration. By contrast, productivity growth slowed down markedly over the past decade and has been low compared to peers.4 By 2019, it only contributed 0.2 percentage point to potential output growth.
4. Capital accumulation was weak compared to population growth. Although it picked up in recent years before the pandemic, the pace of capital accumulation in New Zealand was slow compared to strong population growth boosted by migration, resulting in slower capital deepening. Capital shallowing or slowdown of capital deepening was observed in some sectors, which weighed on labor productivity growth in those sectors.
Productivity Slowdown Was Masked by Strong Population Growth
(Contributions to potential output growth, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Bars are contributions to potential output growth.Sources: Stats NZ and IMF staff calculationProductivity Slowdown Was Masked by Strong Population Growth
(Contributions to potential output growth, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Bars are contributions to potential output growth.Sources: Stats NZ and IMF staff calculationProductivity Slowdown Was Masked by Strong Population Growth
(Contributions to potential output growth, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Bars are contributions to potential output growth.Sources: Stats NZ and IMF staff calculation
Population Growth Was Boosted by Migration
(Contributions to population growth, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Sources: Statistics New ZealandPopulation Growth Was Boosted by Migration
(Contributions to population growth, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Sources: Statistics New ZealandPopulation Growth Was Boosted by Migration
(Contributions to population growth, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Sources: Statistics New Zealand
Capital Deepening Had Slowed
(Contribution of capital deepening to potential output, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Sources: IMF staff calculations.Note: Capital deepening is defined as the change in capital stock per unit of potential labor input.Capital Deepening Had Slowed
(Contribution of capital deepening to potential output, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Sources: IMF staff calculations.Note: Capital deepening is defined as the change in capital stock per unit of potential labor input.Capital Deepening Had Slowed
(Contribution of capital deepening to potential output, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Sources: IMF staff calculations.Note: Capital deepening is defined as the change in capital stock per unit of potential labor input.Capital Shallowing Was Observed in Some Sectors
(Average capital deepening by sector, percent)
Capital Shallowing Was Observed in Some Sectors
(Average capital deepening by sector, percent)
| 1996–2009 | 2010–2019 | Difference | |
|---|---|---|---|
| Accommodation and food services | 2.4 | -2.3 | -4.6 |
| Electricity, gas; water and waste services | 3.2 | -0.4 | -3.6 |
| Information media and telecom. | 5.2 | 2.9 | -2.3 |
| Other services | 40 | 1.7 | 23 |
| Manufacturing | 23 | 0.0 | -2.2 |
| Retail trade | 3 3 | 1.3 | 20 |
| Health care and social assistance | 22 | 0.3 | 19 |
| Transport postal, and warehousing | 26 | 11 | 15 |
| Rental, hiring, and real estate services | 1.0 | -0.2 | -1.3 |
| Professional, scientific and tech. services | 2.7 | 1.6 | -1.1 |
| Arts and recreation services | 0.3 | -0.3 | -0.6 |
| Construction | 1.1 | 0.5 | -0.6 |
| Agriculture, forestry, and fishing | 2.1 | 1.5 | -0.6 |
| Administrative and support services | 11 | 09 | -0.2 |
| Wholesale trade | 16 | 16 | -0.1 |
| Financial and insurance services | 41 | 45 | 04 |
| Education and training | 1 3 | 1.8 | 0.5 |
| Mining | 13 | 23 | 10 |
Capital Shallowing Was Observed in Some Sectors
(Average capital deepening by sector, percent)
| 1996–2009 | 2010–2019 | Difference | |
|---|---|---|---|
| Accommodation and food services | 2.4 | -2.3 | -4.6 |
| Electricity, gas; water and waste services | 3.2 | -0.4 | -3.6 |
| Information media and telecom. | 5.2 | 2.9 | -2.3 |
| Other services | 40 | 1.7 | 23 |
| Manufacturing | 23 | 0.0 | -2.2 |
| Retail trade | 3 3 | 1.3 | 20 |
| Health care and social assistance | 22 | 0.3 | 19 |
| Transport postal, and warehousing | 26 | 11 | 15 |
| Rental, hiring, and real estate services | 1.0 | -0.2 | -1.3 |
| Professional, scientific and tech. services | 2.7 | 1.6 | -1.1 |
| Arts and recreation services | 0.3 | -0.3 | -0.6 |
| Construction | 1.1 | 0.5 | -0.6 |
| Agriculture, forestry, and fishing | 2.1 | 1.5 | -0.6 |
| Administrative and support services | 11 | 09 | -0.2 |
| Wholesale trade | 16 | 16 | -0.1 |
| Financial and insurance services | 41 | 45 | 04 |
| Education and training | 1 3 | 1.8 | 0.5 |
| Mining | 13 | 23 | 10 |
C. Lessons from Previous Recessions in Advanced Economies
5. This section analyzes the experience of advanced economies in past recessions to provide some historical context to the possible medium-term effects of the COVID crisis. While the current global recession is undoubtedly unique in its characteristics, analysis of previous recessions can provide useful reference points. We examine whether GDP losses during recessions tend to be permanent or whether output losses are recouped after the end of the recession. In addition, the medium-term dynamics of the output components (labor, capital stock, and productivity) are also studied.5
6. Past recessions in advanced economies have had long-lasting effects. An analysis of previous recessions suggests persistent effects on medium-term output, and the persistent decline is driven by a productivity slowdown and reduced capital accumulation and labor input. On average, medium-term output remains 4½ percent below its pre-recession trend after the crisis. For large recessions, which (unlike the COVID-19 shock in New Zealand) often accompany financial crises, the impacts are much larger, with output remaining 11 percent below compared to pre-recession trends. Total factor productivity (TFP) is almost 6 percent below trend, and the capital stock is about 7 percent below trend in this case.
7. New Zealand also suffered from scarring after recessions. Like many advanced economies, New Zealand’s growth trend was severely affected by the global financial crisis, and output did not return to its pre-crisis trend, even after several years, with output per capita remaining nearly 20 percent below the pre-GFC trend by end-2019.6 Slower capital accumulation, shorter hours worked, and weaker productivity growth contributed to the loss in medium-term output (Lienert and Gillmore, 2015).
Recessions Have a Long-Lasting Impact on Output, Productivity, Capital Stock, and Employment
(Deviation from pre-recession trend after 5 years, percent decline, advanced economies)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Error bands indicate 90 percentile confidence interval. Recessions are identifed by Martin and others (2015). Recessions are considered as large if they are in the top quartile (peak-to-trough GDP decline above 4.25 percent).Source: Bannister and others (2020).Recessions Have a Long-Lasting Impact on Output, Productivity, Capital Stock, and Employment
(Deviation from pre-recession trend after 5 years, percent decline, advanced economies)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Error bands indicate 90 percentile confidence interval. Recessions are identifed by Martin and others (2015). Recessions are considered as large if they are in the top quartile (peak-to-trough GDP decline above 4.25 percent).Source: Bannister and others (2020).Recessions Have a Long-Lasting Impact on Output, Productivity, Capital Stock, and Employment
(Deviation from pre-recession trend after 5 years, percent decline, advanced economies)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Error bands indicate 90 percentile confidence interval. Recessions are identifed by Martin and others (2015). Recessions are considered as large if they are in the top quartile (peak-to-trough GDP decline above 4.25 percent).Source: Bannister and others (2020).D. Impact of the Pandemic on New Zealand’s Medium-Term Output
8. The pandemic is expected to have a sizable impact on New Zealand’s medium-term output. Although GDP rebounded strongly in the second half of 2020 after a sharp decline in the first half, supported by strong pent-up demand, the pandemic and the continued border closure are expected to have a medium-term impact on output. The pandemic is likely to adversely affect all main drivers of potential output, including labor inputs, capital accumulation, and productivity growth, with the largest effect likely stemming from reduced inward migration amid the border closure.
New Zealand’s Growth Trend Has Curved After the GFC
(Log real GDP per capita, 1991Q1=100)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Pre-COVID trend is based on average growth rates over 1992–2007.Sources: Statistics New Zealand and IMF staff calculations.New Zealand’s Growth Trend Has Curved After the GFC
(Log real GDP per capita, 1991Q1=100)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Pre-COVID trend is based on average growth rates over 1992–2007.Sources: Statistics New Zealand and IMF staff calculations.New Zealand’s Growth Trend Has Curved After the GFC
(Log real GDP per capita, 1991Q1=100)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Pre-COVID trend is based on average growth rates over 1992–2007.Sources: Statistics New Zealand and IMF staff calculations.9. Lower migration and, to a smaller extent, higher structural unemployment will reduce labor input. Working age population growth is likely to slow significantly, due to reduced net migration as a result of the border closure. Net migration, which accounted for about 70 percent of working age population growth before the border closure, declined sharply and is expected to remain low while border restrictions are in place, contributing to potential output losses by 1.5 percentage point in the medium-term. In addition, the natural rate of unemployment (NAIRU) is expected to increase as a result of skill mismatches induced by uneven sector-level adjustments, which is expected to contribute 0.1 percentage point to the potential output losses in the medium term.7 In total, reduced labor input is expected to contribute to the potential output loss by 1.6 percentage points in the medium term.8
Net Migration Dropped sharply After the Border Closure
(Net migration, persons per month)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: Stats NZNet Migration Dropped sharply After the Border Closure
(Net migration, persons per month)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: Stats NZNet Migration Dropped sharply After the Border Closure
(Net migration, persons per month)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: Stats NZ10. Productivity within sectors is expected to slow down, partially offset by the reallocation of workers to more productive sectors.9 Internationally, productivity growth tends to slow after recessions. While the trajectory of productivity in this recession remains uncertain, the expected shortage of skilled workers caused by muted migration is likely to adversely affect productivity trends within sectors. Although this slowdown is likely to be partially offset by the shift of workers out of less productive service sectors, on net, aggregate productivity is expected to slow down, which will contribute to the loss of potential output by 0.8 percentage point.10
11. As in previous recessions in advanced economies, capital accumulation is expected to be slow. In previous recessions in advanced economies, the slowdown of capital accumulation has played a central role in output losses. In the longer run, capital accumulation in New Zealand is expected to follow an endogenous balanced growth path, where capital accumulation is determined by growth in productivity and labor input. Thus, it is expected that trend capital accumulation will decline due to reduced labor supply and weaker productivity growth. In addition, heightened uncertainty will adversely affect firms’ investment behavior. In total, the slowdown in capital accumulation is expected to contribute to the potential output loss by 1.3 percentage points.
12. Taken together, potential output is likely to remain below the pre-COVID trend in the medium term. Although the impact on medium-term potential output is somewhat smaller than previously estimated, the pandemic is expected to have a lasting impact on potential output, with potential output remaining about 3¾ percent below pre-COVID trend by 2026. The medium-term impact is driven by reduced labor input, weaker capital accumulation, and reduced productivity growth.11
13. Given uncertainty around the baseline, alternative scenarios are analyzed. There is high uncertainty about the trajectory of the medium-term growth trend. To analyze the possible growth trajectory under different assumptions, both upside and downside scenarios are analyzed, focused on uncertainty related to productivity.
In the upside scenario, the pandemic will induce firms’ efforts to adopt new technologies, including information and communication technology (ICT) investment, which would boost productivity in the medium term. Under this scenario, a shift to a more productive, digitalized economy will fully offset the slowdown in productivity growth within sectors, and there will be moderate within-sector productivity gains (about 0.5 percent) in the medium term.
In the downside scenario, weaker productivity spillovers from other advanced economies and lost innovation due to muted migration and subdued innovative investment will result in even more sluggish productivity growth.12 Under this scenario, slowdown in productivity within sectors will be about twice larger than the baseline scenario.
14. The alternative scenarios illustrate uncertainty around the baseline projection. Under the downside scenario, potential output for New Zealand in 2026 will remain well below pre-COVID trends and the baseline projection, with potential output five percent lower than pre-COVID trends. Under the upside scenario, the loss of potential output is estimated to be smaller than the baseline projection, with potential output 1½ percent lower than pre-COVID trends.13
Lower Labor Input and Weaker Capital Accumulation Lead to Loss of Potential Output
(Deviation from pre-COVID trend, percent, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Pre-COVID trend is projection without the impact of COVID-19 based on data up to 2019. The left bar shows potential output loss in 2025 estimated in Bannister and others (2020) and the right bar shows the loss in 2026 in the latest assessment.Sources: IMF staff calculationsLower Labor Input and Weaker Capital Accumulation Lead to Loss of Potential Output
(Deviation from pre-COVID trend, percent, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Pre-COVID trend is projection without the impact of COVID-19 based on data up to 2019. The left bar shows potential output loss in 2025 estimated in Bannister and others (2020) and the right bar shows the loss in 2026 in the latest assessment.Sources: IMF staff calculationsLower Labor Input and Weaker Capital Accumulation Lead to Loss of Potential Output
(Deviation from pre-COVID trend, percent, percentage points)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Pre-COVID trend is projection without the impact of COVID-19 based on data up to 2019. The left bar shows potential output loss in 2025 estimated in Bannister and others (2020) and the right bar shows the loss in 2026 in the latest assessment.Sources: IMF staff calculations
Potential Output Is Expected to Remain Below Pre-COVID Trend in the Medium Term.
(Potential output, 2015=100)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Pre-COVID trend is projection without the impact of COVID-19 based on data up to 2019.Sources: IMF staff calculationsPotential Output Is Expected to Remain Below Pre-COVID Trend in the Medium Term.
(Potential output, 2015=100)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Pre-COVID trend is projection without the impact of COVID-19 based on data up to 2019.Sources: IMF staff calculationsPotential Output Is Expected to Remain Below Pre-COVID Trend in the Medium Term.
(Potential output, 2015=100)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Note: Pre-COVID trend is projection without the impact of COVID-19 based on data up to 2019.Sources: IMF staff calculationsE. Policy Options to Address the Medium-Term Fallout of the Pandemic
15. Strong policy support and structural reforms are key to lift medium-term potential output. First and foremost, maintaining adequate levels of fiscal and monetary policy stimulus until the handoff from public to private demand is firmly entrenched will be important to mitigate output losses, limit scarring, and render the economic recovery durable. In addition, New Zealand should 1.5 percent lower than the pre-COVID trend under the downside scenario. See Bannister and others (2020) for other possible upside and downside risks, including stronger migration after border reopening and lower labor force participation rate. Sense Partners (2020) analyzes the possible medium-term impacts on output under resurgence scenarios. embark on structural reforms to lift the economy’s medium-term growth potential. As reforms typically take significant time to take hold, the time to start is now to support medium-tern growth and living standards. While the overall institutional structure of New Zealand is well designed and the country performs well among advanced economies in many factors of competitiveness and business regulation, there are some areas that the country can improve to render its growth trend more durable.
16. Productivity. Weak productivity growth has been a long-standing issue. To support productivity growth, New Zealand should relax product market regulations, improve its insolvency framework, scale up innovative investment, and promote high quality foreign direct investment.
Product market regulations. The literature points to positive effects of product market reforms on output and productivity, especially in the medium term (Bourlès and others, 2013 and IMF, 2016). While generally performing well in international comparison, New Zealand’s product market regulations are more restrictive in some areas and upstream network sectors, suggesting that there is a scope for improvements, such as streamlining administration burdens and simplifying regulations.14 Where state ownership is inefficient, reducing public ownership or efforts to improve state-owned enterprises are needed.15 Pro-competitive reforms would encourage firms’ innovation and investment, thereby supporting medium-term potential output.
Insolvency framework. Improving the insolvency regime would facilitate the reallocation of resources, thereby lifting productivity (McGowan and others. 2017). International structural indicators point to room for improvement in New Zealand’s insolvency framework.16 Compared to some advanced economies (for example, Ireland), it takes longer to resolve an insolvency case (World Bank 2020). The cost of the proceedings, such as attorney’s fees and receiver’s remuneration, tends to be more expensive than in some other advanced economies. Procedures tailored to SMEs would expedite the restructuring processes.
Innovative investment. R&D spending is associated with higher productivity, especially in high-tech sectors (Griliches, 1979 and Ortega-Argilès and others, 2010). New Zealand’s spending on R&D has been low compared to peer advanced economies, both in government and business spending. As intangible investment such as R&D is more susceptible to uncertainty, strong policy support is needed to boost private innovative investment under an environment with elevated uncertainty (Czarnitzki and Toole, 2011). New Zealand can scale up government spending on R&D and expand innovative capacities of Crown Research Institutes. Global collaboration would help technology diffusion. In addition, the R&D tax credit scheme, introduced in FY2020 to boost private sector innovative investment, can be expanded further.17
FDI and connectivity with the global market. Weak connectivity with the global market is often regarded as one of the factors contributing to weak productivity performance in New Zealand (e.g. New Zealand Productivity Commission, 2021). The literature finds that FDI can bring positive productivity spillover effects (Javorcik 2004, Haskel and others, 2007). FDI in New Zealand has been low compared to peer advanced economies. The ongoing reform of the Overseas Investment Act should focus on promoting FDI by reducing FDI-related regulation, which has been relatively restrictive.18
Trade facilitation. Trade can promote knowledge spillover and improve firms through exposure to global competition (Madsen, 2007). Although New Zealand’s trade facilitation performance is already strong in some areas, the economy would benefit from further improving in some areas to close gaps with the international frontier, including advance ruling; automation, such as electronic signature; information availability, such as customs hotlines; and external border agency cooperation. The time and costs associated with the logistical process of exporting and importing goods could be reduced.
There Is Scope for Improving Product Market Regulations
(Indicator; 0 to 3; 0 is best; as of 2018)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.There Is Scope for Improving Product Market Regulations
(Indicator; 0 to 3; 0 is best; as of 2018)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.There Is Scope for Improving Product Market Regulations
(Indicator; 0 to 3; 0 is best; as of 2018)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.
Regulations in Network Sectors Are More Restrictive Than International Frontiers
(Indicator; 0 to 6; 0 is best; as of 2018)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.Regulations in Network Sectors Are More Restrictive Than International Frontiers
(Indicator; 0 to 6; 0 is best; as of 2018)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.Regulations in Network Sectors Are More Restrictive Than International Frontiers
(Indicator; 0 to 6; 0 is best; as of 2018)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.
R&D Spending Has Been Relatively Low
(Gross domestic spending on R&D, percent of GDP)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD..R&D Spending Has Been Relatively Low
(Gross domestic spending on R&D, percent of GDP)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD..R&D Spending Has Been Relatively Low
(Gross domestic spending on R&D, percent of GDP)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD..
Government and Private Sector Can Scale Up Innovative Investment
(R&D spending; percent of GDP; 2018 or latest)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD..Government and Private Sector Can Scale Up Innovative Investment
(R&D spending; percent of GDP; 2018 or latest)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD..Government and Private Sector Can Scale Up Innovative Investment
(R&D spending; percent of GDP; 2018 or latest)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD..
FDI in New Zealand Has Been Relatively Low
(Inward FDI, percent of GDP)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.FDI in New Zealand Has Been Relatively Low
(Inward FDI, percent of GDP)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.FDI in New Zealand Has Been Relatively Low
(Inward FDI, percent of GDP)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.
FDI Regulations in New Zealand Are Restrictive
(Indicator; 0 is open; 1 is closed; as of 2019)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.FDI Regulations in New Zealand Are Restrictive
(Indicator; 0 is open; 1 is closed; as of 2019)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.FDI Regulations in New Zealand Are Restrictive
(Indicator; 0 is open; 1 is closed; as of 2019)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.
There Is Scope for Improving Trade Facilitation
(Trade facilitation index, 0 to 2, 2 is best)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.There Is Scope for Improving Trade Facilitation
(Trade facilitation index, 0 to 2, 2 is best)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.There Is Scope for Improving Trade Facilitation
(Trade facilitation index, 0 to 2, 2 is best)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: OECD.Costs Associated With Trade Are Relatively High
(Trading across borders, Doing Business)
Costs Associated With Trade Are Relatively High
(Trading across borders, Doing Business)
| NZL | OECD high income | |
|---|---|---|
| Time to export: Border compliance (hrs) | 37 | 12.7 |
| Cost to export: Border compliance (USD) | 337 | 136.8 |
| Time to export: Documentary compliance (hrs) | 3 | 2.3 |
| Cost to export: Documentary compliance (USD) | 67 | 33.4 |
| Time to import: Border compliance (hrs) | 25 | 8.5 |
| Cost to import: Border compliance (USD) | 367 | 93.1 |
| Time to import: Documentary compliance (hrs) | 1 | 3.4 |
| Cost to import: Documentary compliance (USD; | 80 | 23.5 |
Costs Associated With Trade Are Relatively High
(Trading across borders, Doing Business)
| NZL | OECD high income | |
|---|---|---|
| Time to export: Border compliance (hrs) | 37 | 12.7 |
| Cost to export: Border compliance (USD) | 337 | 136.8 |
| Time to export: Documentary compliance (hrs) | 3 | 2.3 |
| Cost to export: Documentary compliance (USD) | 67 | 33.4 |
| Time to import: Border compliance (hrs) | 25 | 8.5 |
| Cost to import: Border compliance (USD) | 367 | 93.1 |
| Time to import: Documentary compliance (hrs) | 1 | 3.4 |
| Cost to import: Documentary compliance (USD; | 80 | 23.5 |
17. Capital accumulation. To promote capital accumulation, New Zealand should scale up infrastructure investment, encourage FDI, and incentivize business investment.
Infrastructure gap. The government should focus on closing infrastructure gaps in areas such as telecommunications, electricity, and transportation.19 The planned increase in infrastructure investment is a welcome development, and the New Zealand Infrastructure Commission can play a central role in planning and pipeline management20
Business investment and financial policies. Firm-level analysis suggests that financial variables such as cash flow and uncertainty play an important role in firms’ investment decisions (Annex I).21 The government’s policies to aid business cash flow, such as the business tax loss carry-back scheme, Small Business Cash Flow Scheme, and Business Finance Guarantee Scheme are appropriate and can be scaled up if downside risks materialize. Product market reforms would also boost business investment through promoting competition (Annex II).
Infrastructure Gaps Remain in Some Areas
(Infrastructure investment gaps, percent of GDP)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: Oxford Economics and Global Infrastructure Hub.Infrastructure Gaps Remain in Some Areas
(Infrastructure investment gaps, percent of GDP)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: Oxford Economics and Global Infrastructure Hub.Infrastructure Gaps Remain in Some Areas
(Infrastructure investment gaps, percent of GDP)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: Oxford Economics and Global Infrastructure Hub.Financial Conditions and Uncertainty Affect Firms’ Investment Behavior
(Firm-level determinants of investment, NZ)
Financial Conditions and Uncertainty Affect Firms’ Investment Behavior
(Firm-level determinants of investment, NZ)
| Dependent Variable: | |
|---|---|
| Investment-to-Lagged Capital | |
| Cost of Debt (-1) | -0.124 (0.171) |
| Debt (-1) | -0.157*** (0.046) |
| Liquidity (-1) | 0.013* (0.007) |
| Uncertainty (-1) | -0.069*** (0.034) |
| Tobin’s Q (-1) | 0.044*** (0.007) |
| R-squared | 0.058 |
| Sample Period | 1990–2019 |
| Number of Observation | 1,443 |
Financial Conditions and Uncertainty Affect Firms’ Investment Behavior
(Firm-level determinants of investment, NZ)
| Dependent Variable: | |
|---|---|
| Investment-to-Lagged Capital | |
| Cost of Debt (-1) | -0.124 (0.171) |
| Debt (-1) | -0.157*** (0.046) |
| Liquidity (-1) | 0.013* (0.007) |
| Uncertainty (-1) | -0.069*** (0.034) |
| Tobin’s Q (-1) | 0.044*** (0.007) |
| R-squared | 0.058 |
| Sample Period | 1990–2019 |
| Number of Observation | 1,443 |
Product Market Reforms Would Boost Investment
(Responses of business investment to product market reforms, percent, advanced economies)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: IMF staff calculations.Product Market Reforms Would Boost Investment
(Responses of business investment to product market reforms, percent, advanced economies)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: IMF staff calculations.Product Market Reforms Would Boost Investment
(Responses of business investment to product market reforms, percent, advanced economies)
Citation: IMF Staff Country Reports 2021, 089; 10.5089/9781513572956.002.A003
Source: IMF staff calculations.18. Labor market. As sectoral reallocation induced by the pandemic is likely to lead to a skill mismatch in the labor market, the government should focus on policies to facilitate sectoral reallocation. The authorities should support workers severely affected by the pandemic, including youth, to minimize scarring and promote long-term human capital accumulation. The government policy agenda, transitioning from wage subsidies to active labor market policies such as training and targeted hiring subsidies, will appropriately support reallocation of labor in the medium-term. The scale and scope of active labor market policies can be further expanded, as spending in this area has been relatively low in New Zealand in international comparison.22
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Annex I. Firm-Level Determinants of Business Investment
For the firm-level analysis of business investment in Section E, the following panel regression model, a Tobin’s Q model augmented with firm-level financial variables and uncertainty, is employed:
where Ii,t denotes firm i’s capital expenditure at time t, Ki,t-1 denotes firm i’s capital stock, and Xi,t includes a set of firm-level variables. Xi,t includes the debt level (debt-to-asset ratio), firm-level uncertainty (measured as firm-level stock volatility), the cost of debt (interest rate expenditure-to-debt), liquidity (current-asset-to-current-liability ratio), and Tobin’s Q (measured as the sum of market value of equity and book value debt divided by book value of asset).1 The regression includes firm-level and time fixed effects, and firm-clustered robust standard errors are estimated. All explanatory variables are included with a one-year lag to preempt endogeneity issues. Firm-level data are an unbalanced panel at annual frequency, with total observation of 1,443 over 1990–2019, obtained from the IMF Corporate Vulnerability Unit Database, which is based on the Worldscope database. Firms in the financial sector are excluded from the sample. Estimated parameters are reported in Section E.
Annex II. The Effect of Product Market Reforms on Business Investment
Section E reports the effect of product market reforms on business investment. To analyze the impact of product market reforms, a panel local projection model focused on advanced economies is employed following IMF (2016):
Ii,t+k – Ii,t-1 = αi + γt + βkRi,t + θkXi,t + εi,t
where Ii,t denotes business investment in country i at time t (in logarithms), Ri,t denotes a dummy variable for product market reform, which takes a value of 1 in the year(s) when a reform takes place and 0 otherwise. Xi,t denotes a set of control variables, including contemporaneous and lagged variables of other structural reforms (such as reforms of unemployment benefits and employment protections), lagged product market reform dummies, and crisis event dummies. The definition of product market reform events follows IMF (2016), which identifies reform events based on OECD Economic Surveys and country-specific sources. The data covers a sample of 18 advanced economies from 1990 to 2016. In the panel regression, both country fixed effects and year fixed effects are included. Clustered robust standard errors are estimated.
Prepared by Yosuke Kido. The chapter benefited from valuable comments by the Treasury of New Zealand, Reserve Bank of New Zealand, and participants at a virtual seminar.
Unless specified otherwise, the term productivity in this paper refers to total factor productivity.
The analysis in sections B through D draws on Bannister and others (2020).
See Conway (2016) for an international comparison.
We use a standard cross-country local projection model with recession dummies taken from Martin and others (2015). The sample covers the period from 1970 to 2017. See Bannister and others (2020) for methodological detail.
Pre-GFC trend is calculated as the average per capita growth over 1992–2007. Using OECD Economic Outlook data, Ball (2014) calculated that projected potential output loss in New Zealand in 2015 due to the global financial crisis was about 7½ percent.
The impact of skill mismatch on NAIRU is estimated by analyzing the relationship between the sectoral reallocation observed in the stock market and sectoral unemployment (see Bannister and others (2020) for detail). Compared to Bannister and others (2020), the medium-term impact from increased NAIRU is expected to be smaller, as the persistence of sectoral reallocation is assumed to be lower.
This is based on the assumption that net migration will remain below pre-COVID trend (approximated by the average over 2015–19) over 2021–23, by 90 percent in 2021, by 37 percent in 2022, and by 12 percent in 2023, before reaching to pre-COVID level in 2024.
The impact of sectoral reallocation can be different from previous patterns (e.g. Meehan, 2014) as, unlike other recessions, less productive sectors have been affected more severely in this recession. That said, the impact from sectoral reallocation in the medium term is expected to be smaller than what is assumed in Bannister and others (2020), as persistence of sectoral reallocation is likely to be lower than previously anticipated.
With cross-country evidence, IMF (2020) finds that migration is positively associated with productivity growth. However, Fry and Wilson (2020) argue that the impact of migration on productivity in New Zealand is limited. Productivity slowdown assumed in the baseline is somewhat smaller than the what was observed in previous recessions in advanced economies (discussed in Section C).
In labor productivity terms, potential level is expected to remain about 1.1 percent below the pre-COVID trend in the medium term.
IMF (2020) finds that a one percent decrease in the migration-to-employment ratio would lead to 0.6 percent lower total factor productivity after five years, which is somewhat larger than what is incorporated in the baseline case.
Labor productivity will be 1.0 percent higher than the pre-COVID trend under the upside scenario and will be
The observation on product market regulations relies on the Indicators of Product Market Regulation compiled by the OECD based on a questionnaire to national authorities. It should be noted that this cross-country database may not necessarily capture factors specific to New Zealand.
New Zealand Productivity Commission (2018) argues that state-sector productivity in New Zealand is persistently low compared to the private sector. Chan and others (2018) report that state ownership is associated with labor intensity in New Zealand, which implies that state-owned enterprises on average experience excessive employment compared to private firms. They also find state ownership is negatively associated with firm profitability.
New Zealand’s insolvency regulatory framework is ranked relatively low among advanced economies in the World Economic Forum’s Global Competitiveness Report. New Zealand’s performance scores close to the OECD average according to the OECD indicator of the efficiency of insolvency regimes.
See IMF (2016) for fiscal policies to boost innovative investment.
The ongoing reform aims to improve screening processes, possibly by simplifying requirements and narrowing the criteria used, while maintaining control to sensitive areas. The new national interest test should be used sparingly to avoid the potential impact on high quality FDI.
The infrastructure spending gap is estimated to be between 8 and 23 percent of GDP.
Infrastructure investment would also reduce regional dispersion in New Zealand. See Muir (2018) for discussion.
A similar pattern is found in other advanced economies (IMF, 2015). For New Zealand, at the aggregate level, Ratcliffe and Tong (2021) find that uncertainty and financial conditions exert significant influence on business investment. However, at the micro level, employing an Euler-equation model, Nolan and Nolan (2021) argue that the impact of cashflow on investment is insignificant.
Wage subsidies played an important role in cushioning the economic impact of the lockdowns but could delay reallocation of workers if they were provided for an extended period. In that respect, the authorities’ shift from wage subsidies to active labor market policies is welcome. See Chapter 1 for a broader discussion of labor market policies.
The specification here is similar to that in IMF (2015). The other possible approaches include adding the lagged dependent variable to the equation, but it is not considered in this exercise as the specification will cause Nickell bias and the generalized method of moments (GMM) has poor small sample properties.
